Temasek sees carbon markets as critical to lowering climate action costs
Singapore’s state-owned investment giant Temasek is doubling down on its decarbonisation efforts and actively investing in the creation of a robust carbon market.
“Achieving long-term net zero is not possible without a functioning carbon market," Dr. Steve Howard, vice chairman of sustainability at Temasek, told AsianInvestor.
"These markets are incredibly helpful for us to get to the lowest cost of tackling climate change."
While compliance carbon markets emanate from national and international policy or regulatory agreements, buyers typically participate in the voluntary market for the fulfillment of their voluntary climate commitments.
These are trading systems in which carbon credits are sold and bought by companies or individuals in order to compensate for their greenhouse gas emissions.
Despite the most determined efforts to reduce emissions, residual unavoidable emissions will persist. To offset these, negative carbon emissions are necessary.
This can be achieved through various means, including direct capture technologies, extensive tree-planting initiatives, and the implementation of nature-based solutions.
“For these solutions to be viable and effective, it is crucial to have a well-functioning carbon market in place. This would provide the necessary incentives and mechanisms to drive investment and innovation in these critical areas,” Howard said.
“We understand that the most reliable indicator of our long-term financial success is economic growth,” Howard said, elaborating on Temasek’s vision in this space as a long-term asset allocator.
“We also recognise that the most sustainable economic growth is achieved when we address climate change. Therefore, it is our fiduciary responsibility to invest in this future.”
THE NEED FOR CARBON FINANCE
An issue for carbon markets revolves around how the global economy catalyses finance to facilitate decarbonisation at scale. Carbon finance is a critical part of the capital stack used to finance projects that reduce or remove greenhouse gas emissions.
Even a modest carbon price can significantly impact the viability of these projects or investments. This is because a carbon price can provide additional revenue or cost savings, making the project more financially attractive.
Despite its logical foundation, carbon finance remains challenging to implement, according to Howard.
The carbon finance landscape is constantly evolving, requiring continuous adaptation and expertise to navigate it effectively.
“Temasek has set its internal carbon price of US$65 per tCO2e, which we expect to increase to US$100 per tCO2e by 2030,” Howard said. “Externally, carbon prices vary widely, ranging from hundreds of dollars in some markets to close to zero in others, highlighting the lack of a unified pricing system.”
“For investors, high liquidity markets that are broadly connected are desirable,” he added.
The numbers tell the story. The World Bank suggests that a carbon price ranging from $50 to $100 per metric ton of carbon dioxide is needed by 2030 in order to reach the temperature objectives of the Paris Agreement, which aims to limit global warming to well below 2 degrees Celsius above pre-industrial levels.
Only the EU, UK, and New Zealand currently have prices at or above this range, while other major markets fall significantly short.
PROS AND CONS
While there are positive signs in some nations, the overall rate of decarbonisation has slowed in 2022 and 2023. Energy market volatility, geopolitical tensions, and a host of other factors including the current economic environment seem to be prompting some companies and investors to slow the pace of decarbonisation.
An Accenture report released in November 2023 showed two in five (40%) leaders in global heavy sectors admitting they can't afford further investments in decarbonisation in the current economic climate, with 63% suggesting their priority decarbonisation measures won’t be economically attractive before 2030.
“Long-term confidence is crucial in the carbon market, and while I cannot predict its immediate trajectory, I believe it will mature,” Howard noted.
Meanwhile, Temasek is seeing a growing interest in carbon markets across the finance sector. “While the concept of carbon markets is not new, there is a sense of increasing immersion and learning among participants,” according to Howard.
“This interest is fuelled by developments such as the linking of carbon markets to UN frameworks and the establishment of country-to-country agreements, “he added.
Country-to-country agreements in the decarbonisation space enable mutual recognition between countries, enhancing traceability and paving the way for compliance markets.
To signal the importance of this market, Climate Impact X, a carbon exchange and marketplace, has been established by Temasek in partnership with SGX, DBS, and Standard Chartered.
“This platform is for individuals to participate in price discovery and gain insights into its complexities”, said the Singapore-based executive.