Temasek's GenZero: Carbon finance's big opportunity for EMs
Well-designed carbon projects and trading mechanisms can mobilise funding and help emerging markets decarbonise, a senior investment executive from Temasek-owned GenZero told AsianInvestor.
"Carbon credits and the carbon markets are tools that allow the exchange of a unit of emissions reductions between a carbon-emitting entity and a project that seeks to remove or reduce the amount of carbon emissions in the atmosphere," said Hoon Ling Min, director in the investment group at GenZero.
"As many economic activities that generate emissions often occur in developed markets, carbon finance enables the global North to support the global South where a lot of natural resources exist in emerging markets such as Latin America, Africa and Southeast Asia."
With a mechanism like carbon credits, activities such as forest conservation or restoration can occur in emerging markets where it might not have originally occurred due to the lack of capital, she added.
Hoon leads the company’s investments in nature-based solutions and carbon ecosystem enablers. She was previously a director in Temasek’s international sustainability group.
GenZero is the decarbonisation investment platform of Singapore's state-owned Temasek. It was launched in mid-2022.
PUSH FOR CARBON TRADING
Carbon markets incentivise climate action by enabling parties to trade 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) [an action plan to cut emissions and adapt to climate impacts] by more than half – by as much as $250 billion in 2030, according to the World Bank.
Singapore is making a big push towards promoting carbon credits and trading.
It started implementing a carbon tax that is set to rise to SGD25 ($18.5) per tonne of emissions from SGD5 a tonne now.
It will climb to SGD45 per tonne in 2026, and eventually between SGD50 and SGD80 per tonne by 2030.
The city-state has also inked a string of memoranda of understanding with countries such as Colombia, Indonesia, Morocco, Peru, Papua New Guinea, Vietnam, Ghana and Fiji on developing carbon credit projects.
Supporting those efforts, GenZero announced in July that it will participate in a landscape restoration project in Ghana to generate carbon credits which businesses in Singapore could use to offset a portion of their carbon tax.
Putting a price on carbon will provide a strong economic incentive to reduce emissions, and by implementing carbon pricing in the form of carbon markets, finance can be channelled to the most cost-effective abatement opportunities, a white paper titled Carbon Markets 2.0: Addressing pain points, unlocking impact by GenZero noted.
PERCEPTION CHANGE NEEDED
Yet carbon markets – and credits – have had their fair share of setbacks and challenges, making several investors sceptical about the effectiveness of the carbon trading ecosystem.
"The carbon market has had its fair share of controversy and as with any emerging industry, you can expect that there will be a fair amount of scepticism, especially among people who don't understand the market mechanisms fully,” said Hoon.
“It’s healthy to have a certain level of query and criticism as that helps the industry to innovate and progress. It’s also how standards and methodologies become more robust,” she added.
Recent macroeconomic conditions, combined with increased global scrutiny and a lack of regulatory clarity, have significantly dampened demand for carbon trading.
“This uncertainty is particularly pronounced around Article 6 and its implications for national commitments. Furthermore, variability in credit quality and a lack of standardisation have exacerbated these challenges, impeding the market’s growth and credibility,” GenZero's white paper noted.
Article 6 of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs.
Still, with more regulatory requirements coming in for companies to consider climate risk and mitigation in their businesses in several regional markets, carbon markets will have no choice but to evolve and improve.
Image credit: Shutterstock
CARBON MARKETS 2.0
“We see carbon credits as being very much integral to carbon markets, which we believe is one of the levers that will encourage some of the changes we need to promote decarbonisation,” said Hoon.
Ushering in carbon markets 2.0 will require clear guidance on the usage of credits, aligning market participants on quality benchmarks, enhancing market transparency and liquidity, and garnering government support, according to GenZero’s whitepaper.
The ultimate goal is to fundamentally decarbonise carbon-emitting industries as much as possible.
"Practically speaking, we may not be able to completely phase out fossil fuels in the short term. It is likely that the phase-out will be a gradual process," she noted.
It's no surprise, therefore, that the emissions and funding gaps are set to continue for a while. “We can augment those efforts [to bridge those gaps] with carbon finance and carbon markets,” Hoon said.
“We need to fundamentally decarbonise, and we need to support the carbon markets, so as to mobilise resources and funding towards natural capital."
"In due course, we can potentially even ascribe ratings to carbon credits – similar to what happens in financial markets. We are already starting to see startups emerge in this space," she added.