7 July 2023
by Carlene Putri D
Southeast Asia has potential for carbon trading but faces obstacles like limited engagement, funding, expertise, data quality, and stakeholder participation. To succeed, ASEAN must improve policies, capacity, funding, data accuracy, and stakeholder involvement.
Hey, have you ever heard about carbon trading? Let me tell you what that means and how it works in Southeast Asia!
In a nutshell, carbon trading is an economic system in which businesses and organizations may purchase and sell credits representing a certain quantity of CO2 emissions. Carbon trading aims to minimize the quantity of CO2 emitted into the environment by providing financial incentives for businesses to lower their carbon footprint.
Carbon credits are the measuring units that are purchased and sold in the carbon trading system. Carbon markets trade carbon emissions voluntarily (voluntary carbon market) or by law (mandatory carbon market).
Before we dive further into the topic, let’s understand the history first…
In 1992, The Kyoto Protocol adopted the UNFCCC, a global treaty designed to stabilize greenhouse gas levels and combat climate change. Negotiations led to the Kyoto Protocol in 1997, setting binding emission reduction targets for developed countries (Annex I) to be executed during 2008-2012. The objective was a collective emissions reduction of at least 5% compared to 1990 levels.
The same year, 192 countries from the United Nations Framework Convention on Climate Change (UNFCCC) negotiated a global treaty to tackle climate change. Five years later, the 1997 Kyoto Protocol was signed. Developed countries (Annex I) were legally required to reduce and limit their greenhouse gas levels during 2008-2012, collectively at least 5% compared to 1990 levels. Until today, the 1997 Kyoto Protocol is the world’s only legally binding treaty to reduce greenhouse emissions.
Carbon trading began with the Kyoto Protocol, which established a system of limits and trades for reducing emissions (cap and trade system).
The first worldwide carbon market was launched in 2005 by the European Union called the EU Emissions Trading System (EU ETS) which is inspired by the Clean Air Act of 1990 in the United States that used a similar system to reduce sulfur dioxide emissions.
Given that ASEAN countries are not Annex I, have we done anything enough to participate in carbon trading? Maybe not yet. Then, how does this attractive carbon trading business have big potential in Southeast Asian countries?
Because of its quickly increasing economy and industrialisation, which has resulted in rising greenhouse gas emissions, Southeast Asia is an ideal region for carbon trading programmes. In other words, carbon trading can be used by ASEAN countries as a climate mitigation scheme. Why? By buying and selling carbon credits from the governments, companies can offset their emissions and invest in cleaner technologies or emission reduction projects. This scheme efficiently promotes emission reductions, contributing to the goal of limiting global warming and limiting climate change’s environmental impacts before it happens.
Moreover, the region’s energy consumption is expected to rise by 60% by 2040, and its carbon emissions might be worse by then if nothing is done. Southeast Asia also has some of the world’s most biodiverse and carbon-rich environments, which provides chances for carbon offset projects. Many SMEs in the region are flexible and adaptable, making them excellent participants in carbon trading efforts. In addition, all ASEAN members are signatories to the Paris Agreement with eight out of ten members having committed to achieving net zero emissions by 2050.
So, what are the Southeast Asian countries that have applied carbon trading other than Indonesia?
No | Country | Commitments | Net-zero target |
1 | Malaysia | ||
2 | Thailand | ||
3 | Vietnam | ||
4 | Singapore | ||
5 | The Philippines | ||
6 | Cambodia | In 2023, Singapore and Cambodia signed MoU to work together on carbon credits. |
Brunei has also investigated carbon trading methods but has not yet implemented carbon trading mechanisms.
However, various journals note that there are numerous challenges and barriers to the future of carbon trading in ASEAN. Here are some of them:
One major obstacle to carbon trading in ASEAN countries is the insufficient engagement of political leaders and the absence of policy frameworks that support coordinated efforts. Successful carbon trading requires collaboration among nations to set common goals, define emission reduction targets, and establish regulations for carbon markets. However, differing political priorities, conflicting national interests, and limited regional collaboration can slow down the development of coordinated policies and hinder the effective implementation of carbon trading.
Many ASEAN countries may lack the necessary capacity and expertise to effectively implement and manage carbon trading mechanisms. Setting up and operating a carbon market requires technical knowledge in areas such as emissions accounting, monitoring, verification, and enforcement. Some nations may struggle to build institutional capacity, train personnel, and develop the expertise needed to efficiently manage carbon trading schemes. This capacity gap poses a challenge to successfully implementing carbon trading in the region.
Developing a functional carbon trading mechanism requires significant financial resources. However, some ASEAN countries face difficulties in securing sufficient funding for establishing and operating carbon markets. Limited financial resources, competing investment priorities, and uncertainties around carbon market revenues make it challenging for nations to allocate funds to develop and sustain carbon trading mechanisms.
Accurate and reliable data on greenhouse gas emissions are crucial for the functioning of a carbon market. However, many ASEAN countries struggle with challenges in collecting and maintaining high-quality emissions data across different sectors. Inadequate monitoring systems, lack of standardized methodologies, and limited transparency in reporting undermine the integrity and effectiveness of carbon markets. Establishing a viable and trustworthy carbon trading system becomes challenging without robust data quality and transparency.
Effective carbon markets rely on active participation from diverse stakeholders, including governments, industries, financial institutions, and civil society. However, some ASEAN countries experience limited involvement from key stakeholders in the development and operation of carbon markets. Insufficient engagement and participation hinder the design, implementation, and functioning of a functional market, as collective efforts and support from all stakeholders are necessary.
Overall, Southeast Asia has great potential for carbon trading due to its growing economy and industrialization, leading to increased greenhouse gas emissions. Carbon trading can be used to offset emissions and invest in emission reduction projects, promoting the reduction of global warming and environmental impacts.
The region’s energy consumption is projected to rise significantly by 2040, contributing to carbon emissions. However, Southeast Asia also offers opportunities for carbon offset projects due to its diverse and carbon-rich environments. Small and medium-sized enterprises in the region are well-suited for carbon trading, and ASEAN member states have committed to achieving net-zero emissions.
Several Southeast Asian countries, including Malaysia, Thailand, Vietnam, Singapore, and the Philippines, have made progress in establishing carbon markets. Cambodia has collaborated with Singapore on carbon credits. However, some countries are still exploring carbon trading methods.
Challenges to carbon trading in ASEAN include the lack of involvement and appropriate policies from political leaders, limited capacity and expertise in managing carbon markets, insufficient funding, poor data quality and transparency in emissions reporting, and limited stakeholder engagement. Overcoming these challenges will be crucial for successful carbon trading implementation in the region.
(Edited by Bryan Yong)
Carlene Putri D. is a young and cheerful content creator who loves traveling, eating, cooking, and is passionate about development issues. She loves to learn new things and explore the world.
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