Asset owners urged to push for broader carbon markets
The potential impact of a fully functional carbon credit market is coming into focus in Asia, now that several countries have introduced carbon emissions trading systems (ETS) and carbon taxes.
While institutions including Singapore’s Temasek are at the forefront of enabling trading in carbon credits through its GenZero decarbonisation investment platform, the need for concerted effort has never been greater and will require significant investment.
That view was expressed by Hiromichi Mizuno, the former CIO of Japan’s Government Pension Investment Fund, at a recent online forum hosted by the Asia Investor Group on Climate Change (AIGCC).
“The profit motive is incredibly powerful and the carbon market can help with the price of something we have never fully accounted for in a corporate P&L statement or in a portfolio,” said Mizuno.
former GPIF CIO
“I encourage you (asset owners) to discuss with corporate leaders about how they can to use the carbon market and carbon credits.”
Carbon credits can be broadly thought of as permits that allow the owner the right to emit a certain amount of carbon dioxide, with one carbon credit representing one tonne of carbon dioxide.
They are most often generated via agricultural or forestry practices, although a credit can be created nearly on any project that reduces, destroys or captures carbon emission.
Trading in carbon credits could reduce the cost of implementing countries’ nationally determined contributions (NDCs) by as much as $250 billion in 2030, according to the World Bank.
The list of countries which have, or are in the process of introducing an ETS or a carbon tax includes Australia, China, India, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore and Vietnam.
PRICING CHALLENGE
Although the ETS market has doubled in size since 2020, a report by Bain & Co estimated that Asian carbon markets still represent only 14% of global emissions, in a region that produces half the global total.
ETS platforms tend to start with a relatively low price to allow participants to get comfortable with the process. But low carbon prices have failed to provide robust incentives for companies to decarbonise, say investors.
One thing that needs to change more broadly, is the price of carbon credits, in order to incentivise communities to adopt decarbonisation initiatives, according to climate project entrepreneur Sanjav Bansal.
“If you’re in a position where you’ve got to worry about food and shelter, you’re not thinking about what’s happening to the climate. So any project has to be financially driven. That’s why carbon credit prices need to be a lot higher,” Bansal told AsianInvestor.
AIGCC
The technology exists to decarbonise high-emission, high-demand sectors such as steel and concrete if investment is forthcoming, he added.
“Such partnerships and investments have great scope to grow exponentially, but only if investors are aware of the opportunities available.”
The challenge of reducing reliance on fossil fuels in a region with growing energy needs is recognised in the AIGCC research.
Director of Investor Practice Monica Bae said, “Investors are aware of the importance of scaling up alternative energy solutions. We recognise this is not an easy job.”
Bae said there is strong investor interest to allocate capital to clean energy and low-carbon solutions.
By far the most popular opportunity is renewable energy, followed by energy storage, low carbon transportation, low emissions fuels (e.g. hydrogen) and green infrastructure.