December 21, 2022
SINGAPORE – The drive to launch new carbon exchanges in Asia has reached new heights with Malaysia entering the fray, raising questions about how many will survive in a market that could be worth hundreds of billions in a few decades.
Bursa Malaysia opened an exchange in December, joining more than a dozen that are under way or planned across the region. Thailand and Japan debuted their platforms in September, followed by Hong Kong a month later. Singapore has two fledgling bourses.
“We are in another one of those mad dashes,” Mr Thomas McMahon, co-founder of Singapore-based AirCarbon Exchange (ACX), said in an interview. “We have seen this rush before, if you look at the early days of blockchain.”
The exchanges enter a crowded voluntary offsets market that could soar over the next few decades but has so far had a slow start. Trading and prices have slumped, while concerns mount about how much offsets actually contribute to fighting climate change.
What is clear is that money in Asia is flowing into the space, with investors betting the flurry of climate pledges from countries and firms will drive growth. The exchanges have raised tens of millions of dollars, with powerful backers including Singapore’s Temasek and Abu Dhabi’s Mubadala Investment, and banks like Standard Chartered and DBS Group.
Demand for offsets could grow 40-fold between now and 2050 to 5.2 billion tonnes of carbon dioxide equivalent, or about 10 per cent of global emissions, according to BloombergNEF. Prices could hit US$120 (S$163) per tonne by then, making it potentially a US$600 billion market.
Companies are drawn to the offsets market as a way to counter their emissions from burning fossil fuels. An offset is a promissory note that represents a tonne of CO2 emissions removed, or not added, to the atmosphere in return for a payment. Some regions, including the European Union and California, have mandatory programmes imposed on some polluters, while many of the fledgling exchanges are voluntary markets.
Some of these new bourses are setting themselves up for what is to come in the region, including additional compliance credit schemes that are set to grow, said Ms Hannah Hauman, global head of carbon trading at Trafigura.
Mr Federico Di Credico, Asia-Pacific managing director at ACT Commodities, said: “It is a mix of national interest and capacity building, and that down the road, somebody could eventually have a lot of liquidity and win the game.”
So far, it has been far from lucrative. Existing platforms are struggling to attract enough transactions, with confusion over the integrity of carbon projects and a lack of clarity over how global trading of credits should work. Traders and analysts are preparing for a bleak year ahead as polluters reduce buying amid inflation and recessionary fears.
For standardised contracts to be profitable, volumes must be “extremely high” and the market is not there yet, Singapore-based Climate Impact X (CIX) chief executive Mikkel Larsen said in an interview. “A lot of things have to improve in the market for all of us to make money.”
For now, profitability is “all in the primary market” as margins are higher. In that market, buyers purchase carbon credits directly from project developers, like through an auction. These can then be traded in the secondary market. CIX, which is backed by the Singapore Exchange and Temasek, has sold 420,000 credits through various auctions since it started.
ACX, which has transacted over 17 million carbon credits, aims to break even by 2025, Mr McMahon said. Having raised over US$25 million from funders, including Enterprise Singapore, Deutsche Boerse and Mubadala, it is seeking another US$50 million in a new round. It is also targeting US$33 million in revenue and 20 million credits transacted next year.
More platforms are coming. Indonesia’s bourse is eyeing its own carbon exchange, while India is putting together a blueprint for a voluntary carbon market. Mr Larsen and Mr McMahon have talked to dozens of companies and countries interested in having their own exchanges.
“Everybody decided in 2021, from a commercial perspective, that this would be a great area to build,” Mr Peter Zaman, a Singapore-based lawyer at HFW, said in an interview. “For the current size of the voluntary market, especially in the latest weak demand environment, there are probably a few platforms too many.”
Experts, meanwhile, are not convinced the explosion of exchanges will have a meaningful impact on the climate. “These sorts of exchanges might attract financial organisations, speculators, but maybe not so much buyers who actually want to use credits for their climate strategies,” said Mr Gilles Dufrasne, global carbon markets lead at non-profit Carbon Market Watch. “I don’t think that has the highest benefit for the climate.” BLOOMBERG