Asia's booming carbon market - the road to net-zero or a minefield of risks?

This article was licensed through Dow Jones Direct. The article was originally published on the Business Times Singapore.

SINGAPORE in February announced planned increases in carbon taxes from 2024 in its 2022 budget, as part of efforts to realise its net-zero emissions targets by or around 2050.

Concurrently, the government also announced that businesses can use high-quality international carbon credits to offset up to 5 per cent of their taxable emissions, which will boost demand for Asia's voluntary carbon credits market (VCM).

Increasing carbon taxes and incentivising growth in VCMs are a step in the right direction in prompting businesses to reduce emissions.

However, these mechanisms are not without risks and could have unintended consequences for businesses.

Offsets boom

Although carbon credits can be generated from a wide variety of projects, their growing prominence as the primary market-based solution to reduce deforestation will boost investments in natural resource management in Asia.

In the coming years, much of the capital raised in Asia's burgeoning carbon marketplace will go towards forestry and land-use projects, the most popular type of offset available on VCMs (alongside renewable energy projects).

Governments in recipient countries across Asia are keen to tap into growing financing opportunities, including in VCMs, to boost post-pandemic recovery.

South-east Asia's VCM, for instance, will reportedly create US$10 billion in economic opportunities annually by 2030.

However, VCMs globally remain poorly conceptualised, weakly regulated, and lack the proper frameworks to validate prices and trade offsets.

Their rapid expansion without robust global standards, accurate accounting, and transparent monitoring will expose companies and investors to a plethora of challenges, including reputational, operational and litigation risks.

Greenwashing risks

Despite the surge in demand for offsets, such schemes' quality and integrity have been a critical concern for investors, exacerbated by the absence of internationally recognised standards for carbon offset accounting.

Instead, numerous not-for-profit groups, such as Verra and Gold Standard, check and approve offset projects.