Commentary: The Merits of Singapore’s New Carbon Trading Market

SINGAPORE: Singapore took another important step in promoting the Green Agenda last month.

The country announced on May 20 its intention to position itself as a carbon services hub.

Climate Impact X (CIX) is a joint venture between the Development Bank of Singapore, Singapore Exchange, Standard Chartered Bank and Temasek Holdings.

First conceived by the Alliance for Action on Sustainability of the Emerging Singapore Taskforce, CIX will provide a market for carbon credit trading from the end of 2021.

READ: The new global carbon exchange will be headquartered in Singapore

Singapore is well suited to host a carbon market. It is an ideal base for multinational companies working on projects that generate emission credits in the region.

As a regional leader in commodities trading, Singapore also deals with many majors and energy traders who will constitute a large part of the ancillary services customer base of the carbon market.

There are already around thirty companies here offering carbon consultancy services, which include the development of low-carbon projects, consultancy and verification for the registration of certified emission reduction credits, measurement of carbon footprint, project financing and legal services.

Launching a carbon market can attract more of these consultants to a key growth industry.

(What will CIX bring to the carbon trading and climate action table? Read up on The Climate Conversations.)

A WELCOME ADDITION TO SINGAPORE’S CLIMATE ACTION INITIATIVES

CIX is a welcome addition to the suite of emissions reduction initiatives and institutions in Singapore that are helping the country accelerate its peak and net zero emissions timelines.

Under the Paris Agreement, Singapore’s nationally determined contribution is to peak emissions of 65 million tonnes of carbon dioxide equivalent by 2030. Singapore is also seeking to halve maximum emissions to 33 million tonnes by 2050 and achieve net zero emissions as soon as possible in the second half of the year. of the century.

A key innovation of CIX includes provisions for the commerce of nature-based solutions.

Nature-based climate solutions like mangroves, wetlands and forests can absorb large amounts of carbon dioxide from the atmosphere.

A recent study by researchers at the NUS Center for Nature-Based Climate Solutions estimates that reforestation in Southeast Asia can contribute to 3.4 gigatonnes of reduced carbon dioxide emissions per year. Reforestation, combined with transparency of the supply chain and harmonized standards for carbon offsets, can result in an immediate source of carbon credits.

As an exchange focused on these carbon credits, CIX will enhance the climate finance ecosystem in Singapore and expand the range of mechanisms for companies to manage and price their carbon externalities. Google, Microsoft and Amazon are said to be in talks to use CIX in their journey to become net zero emitters.

In addition, it offers Singapore another way to expand the international reach of its environmental management activities.

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THE RIGHT PRICE OF CARBON

CIX can help adjust Singapore’s carbon tax – which went into effect in January 2019 – by expanding the range of tools used for carbon pricing in Singapore.

This will allow the Singapore government some freedom to discuss a future, possibly upward, review of the current tax, as local businesses will have the option of defraying their “carbon costs” from others. means.

The current tax rate of S $ 5 per tonne of CO2 can be challenged for three reasons. First, the costs of abatement are generally considered to be much higher, and ideally the price of carbon would reflect the cost of abatement. A World Bank report released in May notes that a price of US $ 40 to US $ 80 (S $ 50 to 100) per tonne of CO2 is needed to meet the 2 degree Celsius target..

Second, the S $ 5 price may not fully capture the carbon embedded in international supply chains and trade.

This sparked a debate on the need for carbon border adjustment mechanisms – a tool to ensure that domestic and imported goods assess their intrinsic emissions equally, thus discouraging trade with heavily polluting countries that do not have effective carbon pricing mechanisms.

A fully loaded container ship waits outside a container terminal in Singapore on February 9, 2017 (Photo: AFP / ROSLAN RAHMAN)

Third, Singapore’s carbon pricing is arguably not a sufficiently liquid mechanism because it changes infrequently.

The government plans to increase the tax rate to between S $ 10 and S $ 15 per tonne by 2030. The level and path of taxation after 2023 will be reviewed by 2022, in consultation with industry and groups. experts in order to give businesses and the opportunity to adapt to changes.

It makes sense to introduce market-based mechanisms to facilitate the pricing process and allow emissions pricing in business decisions.

In the absence of such a mechanism, finding the right price for carbon is complex. This requires striking a balance between reducing the carbon footprint of industries and increasing the costs of doing business, which can negatively impact the competitiveness of Singapore’s economy.

However, with the pandemic still evolving, the success of Singapore’s carbon services hub should not be taken for granted. An increased and quantifiable demand for carbon offsets also suggests an upward trend in emissions-intensive activities in the short term.

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get companies to play ball

The CIX is also a first step in getting companies to play Singapore’s climate bond game.

The demand for carbon offsets could come from several sources. Companies that currently pay carbon taxes can purchase credits to meet their carbon tax obligation.

Likewise, companies or other speculators can buy credits to exchange them later for a bounty, if this is allowed under the carbon pricing law.

We can also expect a retail business of individuals looking for socially responsible investment options.

However, Singapore should not forget that there are no mandatory reduction targets at the industry level. Many of the carbon commitments of companies in the region are currently voluntary, which can limit market participation.

A view shows buildings in Singapore's financial district

A view shows people against buildings in Singapore’s financial district on April 14, 2021. (Photo: AFP / Roslan Rahman)

Regulation can ensure strong market participation. With the rapid global expansion of climate finance, compliance concerns have also increased due to “greenwash” – when companies over-inflate the environmental credentials of their projects.

The devil is in the details. Regulators must provide strong mechanisms for verifying, monitoring and enforcing project compliance, not only to prevent greenwash, but also to ensure fair benchmarking of all projects.

This could be initiated by industry, where providers of carbon credits and offsets commit to co-develop and implement methodologies for quantifying and reporting greenhouse gases for their respective sectors. Regulators will then be able to assess methodologies that improve transparency in carbon credit transactions.

Recognizing the complexity of scaling up global carbon markets, the Global Institute on Finance’s Scaling Voluntary Carbon Markets Task Force launched a consultation on building ‘high-end markets. integrity ”, which should end at the end of June. It seeks to establish “a threshold standard for high-quality credits, clear legal standards, and unite existing and fragmented carbon credit markets into one impactful and well-managed system.”.

READ: Commentary: The forces of climate action are reshaping finance in Singapore and around the world

READ: Commentary: Here’s how Green Bonds will take Singapore’s reputation as a finance hub to the next level

To ensure the integrity and quality of its credits, CIX will work with global partners, including the Voluntary Carbon Market Scaling Working Group and the Natural Climate Solutions Alliance.

It will also use cutting-edge data analytics, such as satellite monitoring, machine learning, and blockchain technology to ensure the environmental integrity of credits traded on CIX.

Global rating agencies could be asked to provide independent environmental assessments for nature-based projects that will issue carbon credits.

It is important that Singapore provides a well-managed and reliable market for carbon offsets while expanding efforts to reduce emissions.

However, to achieve its own national goals, companies must ultimately engage in less carbon-intensive production models and not simply “pay to play” by exploiting the offsets.

Melissa Low is a researcher at the Energy Studies Institute at the National University of Singapore. David Broadstock is a senior researcher and senior energy economist at the same institute.


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