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🛒 As we were writing this issue, we found out that there’s apparently a “Carbon Market” in Southeast Asia that has literally nothing to do with trading carbon credits… The largest marketplace in Cebu City in the Philippines is called “Carbon Market”. However, in spite of its name, it’s not actually a carbon market but rather a marketplace for food & goods!

💹 In this issue, we are going to discuss the role of carbon markets in facilitating the exchange of tradeable credits for carbon dioxide (CO₂) and other equivalent greenhouse gases (GHGs).

🤿 It’s a pretty complex discussion so please take a deep breath and let’s dive in!

🪙 What’s the deal with carbon markets & credits?

First, a quick history lesson on the development of carbon markets…

⌛ Carbon market history & timeline

🧑🏻‍🏫 1960s-1980s: from academic theory to first proof of concept

📕 In 1960, Economist Ronald Coase published “The Problem of Social Cost”, which argues that—in the case of a factory whose byproduct leads to dirty air—the air pollution is a negative externality with an associated social cost that should be borne by the polluting entity. The related Coase Theorem suggests that assigning property rights to that negative externality and pricing it, is a way to leverage market mechanisms to incentivize managing such externalities. This is essentially the intellectual underpinning of the entire carbon market and the paper ends up becoming the most cited law review paper ever (University of Chicago Law, 2023)!

☁️ In the following decade, Physicist Freeman Dyson suggested that emissions from fossil fuels can be offset accordingly by planting trees as a way to prevent carbon dioxide levels from increasing accordingly in his paper “Can we control the Carbon Dioxide in the Atmosphere“.

🌴 Dr Mark Trexler was hired by the World Resources Institute to drive the first carbon offset project in 1988, leveraging a 52M tree reforestation project in Guatemala in order to offset the emissions of an energy company (Carbon Cloud, 2023).

🧑🏻‍✈️ 1990s-2000s: initial pilot and expansion

🧢 Under the Clean Air Act Amendments of 1990, the U.S. Environmental Protection Agency (EPA) develops a sulfur dioxide emissions cap-and-trade program to address the issue of acid rain, which is somewhat of precursor to modern carbon markets.

🤝 Seven years later, in 1997 the Kyoto Protocol, becomes the first international treaty to include carbon trading provisions. It establishes emissions reduction targets for developed countries and allows them to use CO₂ emissions trading towards these targets (notably however, the US was not a signatory to this).

💱 In 2003, the Chicago Climate Exchange became the first voluntary carbon market (VCM) in the United States; and just two years later, the European Union Emissions Trading Scheme (EU ETS) is launched, covering CO₂ emissions from various sectors in EU member states, becoming the world's largest compliance carbon market.

⏸️ It’s worth pausing here to briefly discuss the difference between compliance and voluntary carbon markets:

source: Bursa Sustain on Eco-Business, 2023

🌐 2010s-today: Global mainstreaming

🥐 The Paris Agreement, adopted in 2015, strengthens the role of carbon markets by allowing countries to use international carbon credits to meet their emissions reduction targets.

🌲 One major outcome of the Paris Agreement is the “REDD+” framework, which stands for “Reducing emissions from deforestation and forest degradation in developing countries” with the “+” standing for additional forest-related activities that protect the climate.

In Asia, the South Korea ETS launched in 2013 and is today the most mature carbon market in the region, covering around 73.5% of domestic GHG emissions.

❎ In 2021, Singapore launched Climate Impact X, a global exchange and marketplace for voluntary credits, focusing on nature-based solutions (NBS) in particular.

🌍 Currently, 39 countries around the world are covered by national or regional compliance carbon markets, the largest being the aforementioned EU ETS.

📈 Compliance markets dominate their voluntary counterparts: In 2020, the economic value of these markets was roughly $270B compared to $5.5B for VCM—nearly 50x higher! (Imperial College London, 2023). That being said, VCMs are growing rapidly and is expected to hit $40B by 2030 (BCG, 2023).

⛓️ The Value Chain of Carbon Credits & Markets

Bringing carbon credits to market takes a diverse set of actors:

1. 👷🏻 Project Development

🎯 A project developer identifies an opportunity to reduce greenhouse gas emissions, outlining the project’s details, methodology to measure emission reductions, projects of emissions reductions over time, etc.

➗ Carbon projects can be quite diverse but are generally split into two categories: emissions avoidance & emissions removal… Energy efficiency projects and avoided deforestation fall into the former category, while direct air carbon capture and reforestation fall into the latter.

2. 🕵🏻 Validation & Registration:

🔍 Independent auditors review the project's design, methodology, and projected emissions reductions to ensure they comply with the relevant standards, such as the Clean Development Mechanism (CDM) under the Kyoto Protocol or other standards.

⏺️ Once the project is validated, it is recorded on a registry to establish ownership, avoid double-counting, and facilitate trading, with carbon credits issued to represent the emissions reductions achieved by the project.

3. 💵 Sale and Transfer:

💳 Carbon credits can be sold in various carbon markets, including voluntary markets or compliance ETS markets. Buyers then purchase carbon credits from the project developer or other sellers (e.g. brokers), and ownership is transferred through the registry.

4. 🛰️ Monitoring, Reporting, Verification (MRV):

🖥️ Even after the initial issuance and sale of carbon credits, projects must undergo periodic MRV to ensure that emissions reductions are maintained:

1. The project operator continually monitors emissions reductions and gathers relevant data

2. Regular reporting conducted to regulatory authority

3. Independent third-party auditors verify the emissions reductions claimed by the project, assessing whether it adheres to the approved methodology with reliable data

5. 📴 Retirement:

🧓🏻 Carbon credits are retired to ensure double-counting is avoided and methodologies are refreshed.

⚠️ Criticisms of carbon markets

😠 Carbon markets, offsets, and credits have attracted their fair share of critics, including comedians John Oliver, who covered the topic in an entire episode last year, and Kal Penn, who covered the topic on Bloomberg.

📰 Scandals have also rocked the industry, including a viral article from the Guardian earlier this year, which claimed that Verra—a certifier of carbon credits—had issued more than 90% worthless rainforest offsets. A more recent in-depth piece from The New Yorker criticized South Pole—a carbon finance consultancy—for marketing fake credits.

🧑🏻‍🔬 To truly make a difference, carbon offsets must follow the AVID+ criteria:

🌏 Southeast Asia’s role

Even though ASEAN has a relatively low CO₂ emissions per capita profile at only 3.9 tonnes of CO₂ (tCO₂) per capita (less than a quarter of the US’s at 14 tCO₂) it is one of the most climate vulnerable regions in the world (ASEAN, 2023). Regardless, it has a big role to play in carbon markets due to its geography: ASEAN holds nearly a quarter of the world’s potential for natural climate solutions with an estimated 58% of threatened forests (about 114M hectares) in the region as viable carbon credit projects (Fulcrum, 2023).

Indonesia alone has the potential to offset all of its current emissions with nature-based solutions alone: currently Indonesia contributes to around 2-3% of GHGs globally yet boasts a potential of 1.4B tonnes of CO₂ sequestration in NBS (McKinsey, 2022).

Overall, ASEAN sees massive economic upside in seizing this opportunity with over $5T in value that can be generated through decarbonization initiatives by 2050 (ASEAN, 2023).

📚 Want to learn more about this topic?

1. ⌛ “Timeline: The 60-year history of carbon offsets” from Carbon Brief

2. ⬆️ “Voluntary Carbon Markets in ASEAN: Challenges and Opportunities for Scaling Up” from Imperial College London

3. 💱 “Understanding the voluntary carbon exchange landscape” from Bursa Sustain on Eco-Business

📢 Shout-out to Fairatmos!

🌏 Natalia Rialucky is the Founder & CEO of Fairatmos, a platform that finds, verifies, and connects carbon projects with businesses looking to reduce their carbon footprint. Fairatmos is the first climate technology company in Southeast Asia to discover, develop and deliver high quality carbon offset projects at scale.

🗞️ Recent News

👍🏻 Good News

✨ Singapore releases quality criteria for seeking UN-aligned carbon credits (Eco-Business, 4 October 2023)

🚀 Indonesia launches first carbon exchange (The Jakarta Post, 26 September 2023), with Jokowi claiming that it holds a Rp3,000T potential (Jakarta Globe, 23 September 2023).

🗺️ ASEAN charts course for a sustainable future with ambitious ASEAN Strategy for Carbon Neutrality (ASEAN, 19 August 2023)

👎🏻 Bad News

📉 Malaysia’s “Bursa Carbon Exchange” sees low trading volume, with the environment minister urging corporations: “put your money where your mouths are” (Eco-Business, 6 October 2023)

📢 Other Voices

🌟 “The Untapped Potential of Carbon Credit Trading in ASEA” by Renard Siew (Fulcrum, 8 Aug 2023)

🦧 “Indonesia can lead the world in nature-based solutions for climate change” by Vivek Lath and Deepak S. Moorthy (The Jakarta Post, 14 July 2023)

🎙️ Interview with Tara & James of Bumiterra

💡 Why were you initially inspired to tackle environmental issues through reforestation?

🪵 We both didn’t really have a rude awakening when we started Bumiterra — we just felt like it was the right thing to do. Fun fact though, James’ family was rooted in logging during the early 70's, so we’ve come full circle restoring a lot of the Earth’s lost ecosystems.

🛠️ How exactly is Bumiterra solving it?

🪓 Climate change exists because businesses, who are responsible for production and manufacturing, extract more from the earth than they are giving back. In other words, the cost of Earth’s natural capital is not properly accounted for, the way other types of cost such as manpower, logistics, and production are naturally accounted for. Bumiterra enables companies to account for this cost by restoring and regenerating Earth’s valuable natural ecosystems as a service in a simple, intuitive, and hassle free way.

🧑‍🤝‍🧑 What exactly is it like working alongside your partner?

💓 It sure is tough — we’re still working on effectively communicating ideas. One thing’s for sure though, we come out of each challenge stronger each time, and have full trust in each other.

🎬 What actions can readers take now to support your cause?

🪴 Restore and regenerate a plot of forest with Bumiterra! We serve businesses and individuals who would like to pay back to Mother Nature and quantify its impact — from amount carbon sequestered, biodiversity regenerated, to livelihoods impacted, we are transparent in all our processes.

🦸🏻 What do you do when you’re not saving the world?

🏃🏻‍♂️🏃🏻‍♀️ We both love to exercise, cook vegan food, and doing anything that is natural to mother earth. While James loves to play FIFA on the weekends, Tara is definitely a lot more social and can be seen out and about in Jakarta, hyping up herself and the people around her.

⏭️ Next week, we’ll be continuing this topic by discussing the carbon accounting & MRV in more detail.

❓ Did you enjoy this week’s issue? If yes, please do forward to your friends who would enjoy the read as well. Also, feel free to let us know what you thought by giving us feedback at [email protected].

🌊 SEA you next week!

Karina & Massimiliano