The momentum toward carbon trading in Asean has been growing over the past years, marking an important shift in the region’s climate strategy.
Key member states, including Indonesia, Malaysia, and Vietnam have launched or are advancing carbon market initiatives, alongside efforts to create a unified framework for cross-border trades with regional partners like Japan.
The Southeast Asian region holds vast potential for carbon trading, and particularly for generating carbon credits. It hosts some of the world’s most valuable investable carbon stock, and participation in these markets could provide the needed financing for renewable energy projects and ramp up environmental conservation efforts throughout the region.
It is estimated that potential offsets generated in the region may offer US$10 billion in economic activity annually by 2030.
As carbon trading initiatives gain traction, opportunities and challenges need to be navigated to ensure that the benefits are equitably shared while contributing to meaningful emissions reductions.
This will require overcoming technical, regulatory, and institutional hurdles to develop local and regional carbon trading markets in ways aligned with national and regional frameworks to curb emissions. Crucially, it will involve leveraging the strengths of–and addressing the disparities between–affluent and less affluent members to fulfil its environmental and economic potential.
Japan, China, and South Korea are some of the most carbon-intensive economies in the world and Asean’s most significant economic partners. They could benefit highly from cross-border carbon trading. Collectively, they account for a third of total global emissions.
Decarbonising their economies will profoundly impact global efforts to curtail emissions. Although all three have implemented national emissions trading schemes, a region-wide scheme could help enhance the effectiveness of national initiatives, allowing countries to capitalise on each other’s strengths and capabilities for emissions reductions.
Japan has much to gain from as well as to offer the region by way of technological expertise and financial resources that could be made to support Southeast Asia’s climate ambitions as well as its own. Given the carbon intensity of its economy, it is in Japan’s strategic interest to deepen cooperation with Southeast Asia.
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Creating the conditions under which carbon trading could be part of a coordinated regional approach, while producing widely shared benefits, will be a complex but necessary undertaking.
A regional trading scheme will provide access to a broader pool of emission reduction opportunities beyond what might be available locally, especially for hard-to-abate sectors like steel and chemicals that account for almost half of Japan’s industrial emissions. It also provides an opportunity to reset Japan-Southeast Asia relations on a greener and more sustainable footing.
Addressing challenges in the existing market infrastructure in both Japan and Asean is a crucial first step. Asean countries are faced with difficulties stemming from the nascent nature of carbon trading market mechanisms and the absence of robust monitoring, reporting, and verification (MRV) systems and net-zero targets.
Fragmented regulation further adds to the challenges. Singapore, Indonesia, and Malaysia are the most advanced in developing and expanding their carbon markets but they grapple with the challenges of low participation and market acceptance. Of the three, only Indonesia has both voluntary and compliance markets.
Cambodia, Lao PDR, and Myanmar have not yet incorporated carbon pricing in their climate change policies, while the Philippines has yet to set a net-zero goal (see Figure 1). In Japan, although carbon trading in the Tokyo Stock Exchange has officially launched in October last year, the volume of trades remains relatively low. Participation in the scheme is not mandatory as yet, thus limiting its impact.
Figure 1. Carbon Pricing among Asean Countries. Presentation on the “Potential of Carbon Pricing in ASEAN for Decarbonization of Energy Sector“, March 24, 2024. Chart: Zulfikar Yurnaidi (2024)
Establishing and strengthening carbon markets will require a strong regulatory framework that sets out clear guidelines for participation and integrates robust monitoring and reporting systems to ensure accountability. Carbon markets are highly complex, and lack of knowledge and growing public scepticism in recent years have hindered their development, including in more established markets like Singapore.
Media scrutiny of global voluntary carbon markets, which currently dominate the landscape, has found that most of the top 50 emissions projects are ‘junk’ and have overestimated their climate benefits. Carbon neutral claims have also come under fire in recent years as corporate greenwashing through emissions trading fail to deliver credible and measurable impacts and demonstrable shifts in corporate practice.
The growing preference for neutralising rather than cutting emissions highlight the need for stringent regulatory oversight to guarantee that emissions reductions are real, additional, and permanent.
Mandatory frameworks could also help ensure the inclusion of, and a more targeted approach towards, high-emissions sectors to better align with national and regional climate objectives. Indonesia’s approach exemplifies this potential, by making carbon trading mandatory for coal power plant operators.
Building regional carbon markets will require unprecedented coordination. Given the fragmentation in existing markets, regulatory frameworks and measurement and verification protocols should be harmonised to facilitate cross-border transactions.
One meaningful step taken in recent years is through the Joint Crediting Mechanism (JCM) between Japan and Asean, which enables Japan to support projects that generate carbon credits overseas that it can use to help meet its emissions targets at home.
As of February 2024, Japan has forged bilateral agreements with 29 partner countries including seven from Asean: Cambodia, Indonesia, Lao PDR, Myanmar, Philippines, Thailand, and Vietnam. Leveraging the JCM framework is expected to pave the way for enhanced cooperation through standard setting and shared rules to facilitate the creation of an integrated regional voluntary carbon market.
These initiatives must avoid worsening economic disparities or shifting environmental burdens between regions. Cross-border carbon trades risk simply moving emissions abroad, allowing high-carbon economies to continue emitting rather than reducing fossil fuel use. Carbon trading should be seen as complementary to, rather than a substitute for, reducing emissions at the source.
Developing economies in the region must also weigh the potential trade-offs of generating carbon offsets against broader developmental objectives. Carbon sinks have been shown to compete with other uses of land crucial for food security and economic livelihoods in rural Southeast Asia.
An optimal approach would take into consideration intraregional disparities, differing development pathways, and the particularities of local contexts and community needs. This would help prevent placing the burden of adjustment on those that have contributed the least to global emissions.
Genuine community involvement in planning, implementation, and monitoring of projects is crucial for making carbon trading environmentally and socially fair. Regulatory agencies should establish benefit-sharing arrangements as part of the criteria for assessing high-integrity carbon projects, ensuring they align with local needs and priorities.
Given nascent markets in the region, carbon trading must work in tandem with other national and regional initiatives to achieve carbon neutrality.
Aligning with national and regional plans, such as Nationally Determined Contributions and the Asean Strategy for Carbon Neutrality, could reinforce efforts to realise a swift transition. Creating the conditions under which carbon trading could be part of a coordinated regional approach, while producing widely shared benefits, will be a complex but necessary undertaking.
This article was first published in Fulcrum, ISEAS – Yusof Ishak Institute’s blogsite.
