The need to establish a regional carbon market in Southeast Asia


Authors: Alifia Sekar and Albert Nathaniel*

As the second-largest open market in the world, carbon market could be the last chance that ASEAN does not want to miss to obtain international financing. Since developing countries could no longer rely on grants from developed countries to finance their energy transition, carbon market could be an alternative to do so. On the other side, Southeast Asia  as a tropical region with the most complex ecosystem of rainforests, has potential to capitalise and developing its own mode of carbon market through its nature-based solutions (NSB). However, the lack of cohesive climate commitment, especially pointed by discrete policies among the member states, shows that ASEAN will not disrupt the competition on global carbon markets anytime soon.

The urgency for ASEAN to endorse carbon market

The rapid industrialization in Southeast Asia has been taken place since 1960, and as remarkable as its achievements, it also has inflicted negative consequences for the environment. ASEAN noted that since 1990-2018, emission intensity within the region had risen significantly, although the use of energy has been suppressed to a much lower level. Two sectors that contributed the most were fuel combustion and land-use change and forestry (LULUCF). Although in LULUCF the government has already demonstrated better regime of governance through several initiative such as REDD+, it is not the case with the energy sector.

ASEAN state members economic activity are still mainly driven by fossil fuels, and this trend is unlikely to be changed, following the skyrocketing demand for electricity. It is undoubtedly said that energy security has always been the highest priority for governments to support robust economic expansion and population growth. However, the step chosen by the governments has also led to the absence of radical change in energy policy. Despite always facing international pressure to accelerate the transition process, fossil fuels demand is likely to continue to grow until 2050, with the share in the primary energy mix standing at 81.7 percent  from 78 percent  in 2017.

The heavy dependence on fossil fuels correlates with the subsequent problem regarding weak incentives on renewable energy. To build renewable energy infrastructures, most ASEAN member states still rely on private and international financing as the primary resources. However, this has not been the case since high-risk perception still withholds the investors due to many irregularities shown by the government’s policies. The recent ASEAN Plan of Action for Energy Cooperation (APAEC) 2021-2025 could be a great example to depict the unclear commitment of the governments. Although ASEAN has set a more ambitious target to install 35% renewable energy in power capacity by 2025, this goal is never accompanied by rigid and tangible plans to pull out fossil fuels from electricity. Moreover, some of the largest electricity consumers, such as Indonesia and Vietnam, still support domestic coal with heavy subsidies to keep the prices lower than the global market from its domestic government.

The uncertainty in the long-term goals followed by conflicting policy signals (and the strong influence of a state-owned enterprise in Indonesia) has provided disincentives to renewable energy. Based on following scenarios, ASEAN member states are expected to fail to achieve renewable targets according to APAEC and will only reach 30% by 2040. It also shows that ASEAN needs more than just energy-efficient to put the brakes on emission levels, it requires a structural economic change like endorsing carbon pricing, to correct the market and demand.

Lack of current carbon market in ASEAN member states

Despite the enormous potentials that ASEAN member states can offer along with the urgency, they belong to the laggers in adopting carbon market compared to other regions. Thailand and Indonesia are the only countries that have launched a voluntary pilot project to introduce carbon market to the targeted industry before implementing a compliance market in the years ahead. The Philippines and Vietnam, meanwhile, are still considering examinations on the pros and cons of the same type of market.

On the other hand, Singapore took a different approach by operating carbon market below the private entities. By launching Climate Impact X in May 2021, Singapore has pledged its ambition to become a hub for the new global carbon voluntary market in Southeast Asia. When it comes to the regional level, ASEAN has also initiated some joint collaborations such as Regional Dialogue on Carbon Pricing (RediCap) with RCC Bangkok (2019) and ASEAN-ROK Carbon Pricing Dialogue with Korea (2020). Albeit it has stimulated a call to establish an ASEAN-wide carbon tax, the market form under national and private authorities remained prominent and ASEAN will not have such market in the near future.

Regardless of the positive gesture that several ASEAN member states have practiced, the current market will surely not be enough if they want to maximise the economic gain from the carbon-credit value chain. The national carbon market still provides latitude for policy inconsistency, the main problem of ASEAN, since states have full authority to make their regulations. Consequently, states that depend excessively on fossil fuels could still prioritize narrow economic interests over their climate commitments. This is what happened in Indonesia recently, where the government is still targeting the development of new 27 GW coal plantations by 2028, while simultaneously ratifying a carbon tax targeted for domestic coal industries.

The loose space for policy inconsistency will indirectly affect the credibility of entire carbon markets in Southeast Asia, especially when international enterprises started to approach on a regional basis than country-by-country after the Asean Economic Community (AEC) in 2015. In addition, as Christiawan noted in Jakarta Post, legal uncertainty within regulations can reduce the economic potential of carbon market since most of its transactions are based on long-term contracts. Thus, without successfully proving their high environmental integrity, carbon markets in Southeast Asia will become less competitive than others whose system is more established, like China and South Korea.

Even if economic benefits are used as a trigger for compliance by ASEAN member countries, this is precisely what is absent from the newest development of carbon market creation in ASEAN. Regarding Singapore, the Taskforce on voluntary carbon market calculated that the value offered by the voluntary market is relatively much lower than the compliance ones. Its liquidity was estimated to only reach $5 and $50 billion by 2030, far below the contribution of regional markets such as the EU ETS that stood at 90% of the $277 billion for global carbon markets in 2020. Therefore, to reap the maximum benefits, ASEAN member states must unite in the same market compliance system.

The role of ASEAN to establish a regional carbon market

Carbon is just like the other commodity where unilateralism has no place to bloom in such a connected world. Following the finalisation of article 6 of the Paris Agreement at COP 26 last year, ASEAN should call all the member states to sit down and negotiate what adjustments they should make. In this case, forming a single market can kill two birds with one stone, by disciplining the fossil fuels industry at the domestic level while increasing ASEAN’s leverage in the global market.

However, it is essential to note that mimicking a market system like EU ETS does not mean that ASEAN member states must give their national sovereignty to a supranational entity. All regulations will be based upon consensus and consultation, however, ASEAN should think about this in the sense of economic integration, just like the spirit of AEC. As a consequence, that initiative will encourage ASEAN to reform its climate commitment in the long-term by encouraging discussions on how it will set the cap level emissions and plan the exclusion of fossil fuels, considering each member’s interests. It will offer a playing field for both fossil fuel-producing countries and importers to deliberate their ability to replace fossil fuels while at the same time adjusting to the global carbon market.

After determining the common goals, ASEAN can start its role by harmonizing the member state’s policy instruments and the design characteristics, mainly the standardisation of the measurement, reporting, and verification (MRV) system. Although this step cannot directly diminish the fossil fuels industries, cohesiveness in goals and actions will maintain buyers’ trust in the integrity of the ASEAN market. Once the member states can successfully build the trusts, the ASEAN carbon market will automatically foster its scale on the regulated entities and market liquidity. Additionally, establishing a single market can also justify the calculation of the social cost of carbon (SCC), an indicator for setting carbon pricing rates, based upon the sum of all member states. It will drive a higher price rate in the global market compared to when states are operating separately.

The establishment of a regional carbon market will indeed be challenging to achieve in the short term, given the status of ASEAN member states as new adopters. However, ASEAN still has to step up now by exhibiting an instrument that can protect yet also bridge the member states’ interests with international community to maintain its relevance as a regional institution. Moreover, with the increasingly assertive actions taken by other regions, such as the ratification of EU CBAM that might jeopardize the trading position of developing countries, ASEAN should conduct a more proactive and cohesive movement. For that reason, starting the discussion upon the single carbon market can help ASEAN to portray and strengthen its position amid the global competition.

In a world where climate crisis is inevitable, fossil fuels will certainly not have any place in the future’s energy. Hence, carbon market could be the last resort for developing countries like ASEAN to enhance international finance for the energy transition. Establishing a regional carbon market will offer the best scenario for ASEAN to gain economic value, besides gradually phasing out fossil fuels.

*Albert Nathaniel is an Regular Undergraduate student at Universitas Gadjah Mada, majoring in International Relations with a concentration issue at International Politics and Economic Development (IPED). Nowadays, he is interested in international collective action on the climate crisis and Carbon Cap-and-Trade topics as his main topic of studies.

Alifia Sekar
Alifia Sekar
Alifia Sekar is an undergraduate student at Universitas Gadjah Mada, majoring in International Relations with a concentration on International Politics and Economic Development (IPED).