Asia's Voluntary Carbon Markets Beyond the Storm: New Opportunities for Financial Services?

By Sebastian Sohn & Aicha Mauduit

There is considerable potential that voluntary carbon credits can become an asset class in its own right.

In 2024, voluntary carbon markets (VCM) are expected to incorporate the learnings from 2023’s controversies and are likely to experience a further evolution following COP 28, regional policy tailwind and increasing climate change awareness in APAC.

A growing group of already more than 30 Asia-based investment and asset management companies have committed to achieving net zero alignment by 2050, for which high-quality carbon credits could have contributing role going forward. South-East Asian financial institutions and exchanges are also exploring opportunities in VCMs beyond offsetting. 

Developments in 2023
In Singapore, Climate Impact X (CIX) launched its dedicated exchange and marketplace for voluntary carbon credit trading, followed by building partnerships for future interoperability of markets and cross-border trading. 

Similar initiatives have also been taken in other parts of the region and underpin the rising interest of governments, companies and financial institutions in voluntary carbon markets. In Hong Kong, HKEX launched the financial hub’s VCM with the aim of becoming one of Asia’s main carbon trading hubs. The Bursa Malaysia launched its Carbon Bursa Exchange (CBX) early 2023, aiming to become the first Shariah-compliant carbon credit exchange. 

VCM challenged by controversies and declining prices
Whilst carbon credit markets have been expanding and maturing in Asia with established exchanges and banks entering the market, a considerable part of the global VCM faced strong headwinds in 2023 resulting from controversies and declining market trust. Faced with a significant gap between issued and required credits, parts of the market have seen some of the worst prices collapses in the history of VCMs. 

One of the main events leading to the downfall of carbon markets occurred early 2023 when one the leading carbon credit certifiers and registries, Verra, was accused by the media of overstating emission reductions from preventing deforestation and forest degradation among some REDD+ projects. The prices continued to drop during the year when the reliability of Verra-certified cookstove projects continued to be questioned by experts and media. Significant impacts on carbon markets could be seen on both prices and annual volume of credits issued and retired. 

An S&P analysis published earlier this year showed that voluntary carbon credits prices slumped with a record hit by nature-based avoidance credits (Platts Nature-based Avoidance) dropping by 70% end of the year at 3.5 USD/mtCO2e and household devices dropping 40.6% reaching 4.75 USD/mtCO2 in December. 

The challenging year for VCMs closed with the COP28’s failure to adopt further guidance on Article 6 of the Paris Agreement that aims to facilitate and regulate a global trade in emission reductions. 

Outlook: VCMs are set to become more mature and regain trust
The past year was challenging for VCMs, but rather than seeing a year of collapse, many see a year of consolidation where, without any central regulatory body, shortcomings in quality criteria and additionality were addressed by key market participants: Standards like Verra reviewed existing methodologies to improve monitoring and enhance transparency. The Integrity Council for voluntary carbon markets (ICVCM) issued its core principles and the Voluntary Carbon Markets Integrity Initiative (VCMI) aims to create a high integrity carbon market. 

Therefore, 2024 can be the year where VCMs continue to mature, proof their reliability, and eventually regain trust from new, existing and estranged market participants. The entrance of new VCM marketplaces in the region, backed by established exchanges, and the implementation of standardized contracts (comparable with commodity markets) will help restore credibility and enhance benchmarking and market liquidity for eligible high-quality carbon credits.

In a move that is likely to boost the local high-quality VCM over the next years, Singapore will allow partial offsetting of companies’ carbon tax with eligible high-quality international carbon credits (ICC) for up to 5% of companies’ annual taxable emissions.  

An opportunity for financial services in Asia
Banks, investors and asset managers in the region have been using carbon credits mainly in the context of derivative transactions or for offsetting purposes. While demand for offsetting in the financial industry is expected to continue growing, carbon credits will also become an opportunity as an investment betting on rising carbon cost and for portfolio diversification purposes. 

As carbon prices in compliance markets range from around 6 USD/mtCO2e in South Korea to more than 70 USD/ mtCO2e in the EU, and estimates of the actual damage caused range from 51 to 190 USD/mtCO2e or even up to 340 USD/mtCO2e, some might see a significant upward potential for prices of trusted, high-quality carbon credits. 

Thus, there is considerable potential that voluntary carbon credits can become an asset class in its own right - beyond emission offsetting - with the opportunity for financial institutions to offer market access through investment and derivative products. Following pioneers in their industry, new funds may consider investing in real assets that generate or enhance returns by issuing, distributing and selling carbon credits. Banks and private debt funds may also grow the financing they provide to carbon credit-generating projects. 

Amidst maturing VCMs and their potential to (re-)build their position as a part of the solution for the world’s climate challenge, financial services should consider participating in Asia’s growing VCMs and explore the opportunities of carbon credits beyond offsetting.

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