1

KeyTakeawaysfromInternationalSeminaron

“ConnectivityofAsianVoluntaryCarbonMarkets”

TheInternationalSeminaron“ConnectivityofAsianVoluntaryCarbonMarkets(VCMs)”tookplaceonAugust26thand27th2024inHongKong.InitiatedbyDr.MaJun,thisseminarwasco-hostedbyHongKongGreenFinanceAssociation(HKGFA),Capacity-buildingAllianceofSustainableInvestment(CASI),andMVGXHoldings(MGVX),withsupportfromtheInstituteofFinanceandSustainability(IFS).Theeventbroughttogetherover50VCMspecialistsfromregionsincludingMainlandChina,HongKongSAR,India,Indonesia,Malaysia,SingaporeandVietnam.Participantsincludedpolicyadvisors,regulators,andseniorrepresentativesfromstandardsettingbodies,marketexchanges,MultilateralDevelopmentBanks,privatesectorfinancialinstitutions,NGOsandserviceprovidersinvolvedinthevoluntarycarbonmarkets.Theseminar’sobjectivewastoestablishmutualunderstandingofchallengesandtoexchangeknowledgeandbestpracticesofdevelopingVCMsinAsiaandglobally,identifyingbarrierstoVCMdevelopmentintheregion,andexploringpathwaysforenhancingthequalityandinteroperabilityacrossAsia’svoluntarycarbonmarkets.

Thisnotesummarizesthekeyconclusionsfromtheseminar,whichincludeafewrecommendationsforpolicycoordinationandcapacitybuilding.

1.CurrentStateoftheAsianVoluntaryCarbonMarketDevelopment

AsAsia’seconomiesstepupinthemissiontodecarbonizeandadvancesustainabledevelopment,carbonmarketshaveemergedasanimportanttoolformobilizingfinanceandincentivizingclimateactions.Duringtheseminar,delegatessharedupdatesonthevaryingstagesofVCMdevelopmentintheirrespectivecountriesandjurisdictionsaswellasrelateddevelopmentswithintheirorganizations,showcasingdiverseeffortstoexpandthesemarketsaskeycomponentsofnationalclimatepolicies.Theyalsoshedlightontherealityofsiloedcarbonmarketdevelopment,witheachcountrydesigninganddeployingdomesticstandards,someofwhicharenotfullyalignedwithinternationalbestpractices.GeopoliticalandnationalinterestsalsocametothefrontwhileideatingonpossibilitiesofinterconnectivitybetweenVCMsintheregion.

.MainlandChina:TheNationalVCM(CCER)wasofficiallylaunchedinJanuary2024,linkingtothenationalETSthroughanoffsetmechanism.Administrativerulesareinplaceandprojectcategoriescontinuetoexpand,withthefirstbatchof

2

methodologiesincludingafforestation,mangrovecultivation,grid-connectedsolarandgrid-connectoff-shorewindpower.

.India:IndiaisexpectedtoseeitsVCMlaunchin2025incontinuationofcurrentPAT(PerformAchieveandTrade)schemeandthecountryhasalreadyinitiatedpolicyformations.Thecountryalreadyfeaturesprominentlyintheglobalcreditoriginationspace,yetregulationsarestillunderdeliberation.

.Indonesia:IndonesiaCarbonExchange(IDXCarbon)wasofficiallylaunchedasamarkettradingplatforminSeptember2023,tradingbothallowancesandcarboncredits.IDXCarboncurrentlytradesemissionallowancesforcompliancepurposesandmayfacilitatethetradingofinternationallyverifiedcarboncredits.Thenewgovernmentplanstoissuerulesoncross-bordercarbontrading,startingfromVCM,accompaniedby(a)thedevelopmentofanationalcarbonmarketthatwillbeintegratedwiththeinternationalcarbonmarket,(b)theharmonizationoflocalstandardsforcarboncreditsandinternationalstandards,and(c)thejurisdictionalpowersbytheMinistryofEnvironmentandMinistryofLand.

.HongKong:HongKongExchangesandClearingLimited(HKEX)launchedCore-Climate,aVCMtradingplatformin2022.Core-Climateaimstobeanewmarketplacethatconnectscapitalwithclimate-relatedproductsandopportunitiesinHongKong,MainlandChina,Asiaandbeyond.ItiscurrentlytheonlycarbonmarketplacethatoffersHKDandRMBsettlementforthetradingofinternationalcarboncredits.WhilstCoreClimatehasfacilitatedthetradingofGS-VERcarboncredits,ithasnotdevelopeditsownVCMstandardsyet.

.Singapore:TheSingaporecarbontaxwasimplementedin2024andisplannedforagradualhiketo$80/tonsby2030.SingaporeEconomicDevelopmentBoard(EDB)andIETAjointlyestablishedSingaporeCarbonMarketAllianceasaplatformfocusedonArticle6alignedcarboncredits.SingaporehassignedimplementationagreementofinternationaltransferofcreditalignedwithArticle6withmultiplecountriessince2023.

.Malaysia:BursaCarbonExchangewaslaunchedinDecember2022astheworld’sfirstSharia-compliantcarbonexchange.ThefirstauctiononBursaCarbonExchangeinvolvinglocalcarboncreditsfromSabahtookplaceinJuly.Malaysia’sSarawakstatehasenactedlegislationrelatedtocarbontradingandisintheprocessofestablishingacarbonregistryandstate-levelcarbontradingexchange.InMalaysia,thereisanemergingtrendoffederatedstatestakingtheleadinshapingcreditmechanisms.

.Vietnam:Vietnamisdevelopingalegalframeworkforthecarbonmarketthatincludesquotaemissiontradingsystemandcarboncredits.Thetradingplatformisexpectedtolaunchintopilotoperationduring2025-2027andofficiallylaunchedin2028.

.IntegrityCouncilfortheVoluntaryCarbonMarket(ICVCM):ICVCMintroduceditscoremissiontoprovidethemarketwithasetofprinciplestoidentifyhigh-qualitycarboncredits,theCoreCarbonPrinciples,anditsassessment,labellingandoversightschemetoinstillconfidenceininternationalcarbonmarkets.

3

.AIIB:AIIBintroduceditsstrongcommitmentinclimatefinance,underpinnedbytargettochannelcumulativeUSD50billionby2030inclimatefinance.InJune2024,AIIBapprovedtheClimate-FocusedPolicy-BasedFinancingaspartoftheBank'ssuiteofSovereign-BasedFinancinginstruments.

.IETA:IETAmissionistoaddresscarbonmarketdevelopmentissuesfacingeachregionthroughsupportingidentifyingchallengesandsolutions.IETApresenteditsglobalstudyonArticle6,denotingthepowerofinternationalmarketcooperationintermsoffinancialadvantageandincrementalemissionreductionpotentials.

.Financialinstitutions:FIrepresentativeshighlightedthechallengestoVCMmarkettransactionsowingtoconfusingpolicystancesandregulatoryuncertainty,aswellasgrowinggreenwashingrisks–duetothelackofuniversallyrecognizedstandardsanddatatransparency–thatundermineinvestorconfidence.

SeveralconsensusesemergedamongparticipantsontheneedtoenhanceconnectivityofVCMsintheregion:

First,delegatessharedacommoninterestinexploringpathwaystoenhanceconnectivityamongstAsianVCMs,andsettingclearguardrailstoensurequality,integrity,andtransparency.Regionalmarketswouldbenefitfrommoreefficientmatchingofsupplyanddemandbygreaterinteroperabilitybetweenmarketsandacrossjurisdictions.Ifimplementedeffectively,Asia’scarbonmarketscanpotentiallyseeincreasedtotaltransactionvolume,amoreefficientpricediscoveryofcarboncredits,andgreateramountofemissionreductionstosupportNDCtargets.ThisisfurthersupportedbyIETA’sArticle6ClimateModellingresultpresentedintheseminar,pointingtoapotentialUSD250billionsavingincostannuallyby2030thatcanbeachievedwhenimplementingNDCusingArticle6,allowingforcountriestoengageinvoluntarycooperationinvolvingcross-bordertransactionsofcarboncreditstomeetrespectiveNDCtargets.

Second,participantsrecognizedthatAsianVCMsholdauniquepositionduetotheregion'sdualroleasboththesupplierandbuyerofcarboncredits.ThisdynamicmakesAsiasuitabletoexploringtheinterconnectingmechanismacrossdifferentcreditingregimes,andpotentiallyprovidingexemplarpathwaysforfuturedevelopmentofinternationalcarbonmarket.DelegatesfrommultiplecountriesemphasizedthecriticalroleofgovernmentsinshapingdemandandensuringregulatoryframeworkstosupportVCMgrowth.

Third,delegateshighlightedtheneedforknowledgedisseminationandcapacity-buildingsupportforregulatoryframeworkformulation.ThiswillberelevantnotonlyforcountriesearlyintheirjourneyofestablishingdomesticVCMs,butalsoforallAsianVCMregimestounderstandinternationalstandardswhileestablishingmeasurestosafeguardtheintegrityofcarboncreditsthroughoutthelifecycle.Delegatescalledforneutraltechbackeddatasharingmechanismstobeestablishedforensuringcompliancewithstandardsandcredibilityfromprojectoriginationtotransaction.

4

2.ChallengesFacingAsianVoluntaryCarbonMarkets

Despitetheprogressinvariouscountries,severalmajorchallengeshinderthegrowthofvoluntarycarbonmarketsinAsia.Duringtheseminar,participantsidentifiedseveralkeybarriersthatneedtobeaddressedtoensurehealthymarketgrowthandestablishconnectivitybetweenAsiancarbonmarkets.

First,onaglobalscale,thereisalackofclearpolicysignalsfromgovernmentsand

internationalorganizationsregardingtheroleofcarboncreditasakeytoolforachievingglobalclimategoals,especiallyasatooltofacilitategreen/sustainablefinance.BothpublicandprivatesectordelegatesexpressedconcernsonconflictingpolicysignalsfromdifferentgovernmentagenciesandinternationalorganizationsontheusefulnessofVCMstotheglobalclimateagenda.Delegatesbelievethatthisambiguitycouldslowthedevelopmentofvoluntarycarbonmarketsbycreatinguncertaintyaroundthelegitimacyofthepurchaseandusageofcarboncredits,especiallythoseusedforcommercialandvoluntarypurposes.Ifleftunaddressed,thislackofclarityrisksfurtherdiminishingdemandforvoluntarycarboncredits,ultimatelymissingacriticalopportunitytochannelglobalclimatecapitalintotheregionsandsectorsthatneeditmost.

Second,Asianvoluntarycarbonmarketsaredevelopingrapidlywithoutsufficient

considerationforinteroperabilityofstandardsandmarketconnectivity.Fromthetop-downmarketdesignlevel,thereislackofbilateralormultilateralcommunicationandcoordinationamonggovernmentsonvoluntarycarbonmarkets.Onthemarketlevel,thereisadearthofcollaborativeinitiativestoimprovealignmentforstandardsandadministrativerulesthatgoverndifferentmarkets’operations,projectmethodologies,anddatatransparency.Keymarketinfrastructuresincludingregistryofinventorycreditsandcross-markettradingplatformisnotyetavailable.

Althoughnoformalgapanalysishasbeenconductedtoassesstheextentofdivergences,itisanticipatedthatdifferencesinaforementionedfeatureswillleadtomarketfragmentation,andmaycreatecomplexityforglobalbuyerstoassessthequalityofcarboncreditsindifferentAsianmarkets,andthusunderminetheirconfidenceinsourcingcreditsfromAsia.Thisisespeciallyimportantforinstitutionalinvestorswhoprefermorestandardizedcreditsthatwarranthigherdegreeoffungibilityandscale.

Third,thereisaneedtoexploremechanismstolinkcomplianceemissioncontrolregime—suchascarbontaxesoremissionstradingsystems(ETS)—withvoluntarymarketstostimulatedomesticdemandforvoluntarycredits,butmanyAsianvoluntarycarbonmarketscurrentlylacksucharrangements.DrawingfromtheexperienceofmarketsincludingSingapore,allowingcomplianceschemeparticipantstousevoluntarycreditstooffsetaportionoftheirtaxobligationscouldcreateastabledemandforcarboncreditsandenhanceliquidityacrossbothcomplianceandvoluntary

5

systems,inadditiontovoluntarycommitmentsfromtheprivatesector.

Fourth,thelackofclearpoliciesinAsiancountriesregardingcross-border

transactionsofcarboncreditsposesasignificantbarriertounlockingtheregion'spotential.Akeyinfluencingfactoriscountries’varyinginterpretationsofArticle6oftheParisAgreement,whichhasyettoenterimplementation.AscountriesannouncedNDCtargetsareexpectedtoscaleupfurther,incrementalemissionreductionincentivizedbyvoluntarycarbonmarketscanpotentiallycounttowardsmitigationoutcomeandwarrantsmoreregulatorycontrol.Exportingcarboncreditswithcorrespondingadjustment(CA),akeymeasureinArticle6toensurenodoublecountingofemissionreductionswhencarboncreditsaretradedinternationally,meansthatcountrieshostingthoseprojectscannotcounttherepresentedemissionreductionstowardstheirNDC.BothtransactingpartiescanalsoagreeonapurchaseofcreditswithoutCA,inwhichtherepresentedemissionreductionscancounttowardhosts’NDC.Asiancountries’attitudefacingthistrade-offbetweenopeningupforforeigninvestmentandregulatorycontroloveremissioncreditsisunclear,andsomecountriesareconsideringablanketbanorataxoncross-bordertransactions.Such“insulation”policiescancreateseriousbarrierstothegrowthandeffectivenessofVCMs,bylimitingthepoolofpotentialbuyers.

Fifth,thehighcostsassociatedwiththedevelopment,verification,validation,andregistrationofcarboncreditsrepresentasignificantbarriertoVCMmarketdevelopmentacrossAsia,particularlyindevelopingregions.Theseprocessesoftenrequiresubstantialfinancialresourcesandtechnicalexpertise,whichsmallerentities,suchasfarmersorlocalprojectdevelopers,maynothaveaccessto.Thissituationfurtherrestrictsparticipationfromthoseinruraloreconomicallydisadvantagedareas,effectivelyexcludingthemfromthecarboneconomyandlimitingtheirabilitytocontributetoemissionsreductions.Asaresult,thesebarriersexacerbateinequalityinmarketaccessandstiflethegrowthofdiverseandimpactfulprojectsintheAsianvoluntarycarbonmarkets.Inaddition,owingpartlytothediversityinstandards,noclearmechanismsforhedgingorinsuringprojectsareinplace,furtherpreventingeffectivedevelopmentofthemarket.

DiscussionalsoinvolvedotherissuesthathaveinfluenceoverthescalabilityandconnectivityofAsianvoluntarycarbonmarkets.TransparencyincreditpricinganddatasharingwerehighlightedassignificantchallengesfacedbyvoluntarycarbonmarketsinAsiaandglobally.

Regardingthepricingofcarboncredits,delegatesnotedthatthewidevariationincarboncreditpricesacrossdifferentprojectsraisedconcernsaboutmarketefficiencyandpredictability.Thispricedisparitymaybeduetothediversenatureofprojecttypesandregionalmarketconditions.Formarketregulators,thisvariabilitymaysignalinconsistenciesinmarketstandardsacrossjurisdictions.DrawingonthemechanismbetweentheEuropeanUnionandSwitzerland,harmonizedstandardsacrossAsianVCMscouldimprovemarketcoherence,whileallowingindividualmarketstosettheirownprices

6

thatbetterreflectlocalconditions.

Datasharingandtransparencywerealsodiscussedaslong-standingissuesthathaverecentlydrawnsignificantattentionduetocontroversiessuchas"phantomcredits,"wherecarboncreditswereissuedwithouttheemissionreductionsbeingfullyrealized.Whiledelegatesrecognizedthedifficultyoftrackingcarboncreditsthroughoutthefulllife-cycle,thislackoftransparencyhasunderminedtheconfidenceofmarketparticipants.Delegatesfurtheragreedthatdatasharingmechanisms,especiallyforcross-bordertransactions,isfundamentaltocross-countryVCMcollaborationandeffectivecarboncreditpricing,butsuchamechanismisnotinplaceyet.

3.ProposedSolutionsandOptionsforCollaboration

Delegatesagreedontheneedforongoingdialogue,potentiallyfacilitatedbyAIIBandotherregionalbodies,tofostercollaborationamongAsianVCMsandencourageknowledge-sharingacrossgovernments,institutions,andprivatestakeholders.Thefollowingrecommendationsemergedaspotentialpathwaystoaddresschallengesandtoenhancethequality,scale,interoperability,andinterconnectivityofvoluntarycarbonmarketsinAsia.

1)ClarificationofVCM’sroleindecarbonization

Inlightofthegrowingconfusionandpolicyinconsistencyaroundtheuseofcarboncreditsincorporatenet-zerostrategies,delegatesagreedthatitiscrucialforgovernmentsandleadinginternationalbodiessuchastheG20,COP,andUNFCCCtoissueclearstatementsreinforcingtheimportanceofVCMsinglobalclimateeffortsandasatooltochannelinternationalcapitaltowardsclimateprojects.Suchclarificationscouldenhancedemandforcarboncredits,giventhatvoluntaryclimatetargetsfromthecorporateworldremainamajorforcedrivingtheincreasingdemandforcarboncredits.Forexample,aunifiedframeworkshouldbeexploredtorecognizetheuseofcarboncreditsinaddressingScope3emissionsorincaseswheredirectemissionreductionsarenotimmediatelyfeasible.Theseactionscouldhelpaligncorporateclimatecommitmentswithmarketstandards,allowingcompaniesandinvestorstoeffectivelyleverageVCMstomeettheirsustainabilitygoals,whilealsosupportingclimateprojectsindevelopingregions.

2)Enhancedcapacitybuilding

Delegatesemphasizedtheneedforcapacity-buildingservicesforAsianVCMs’regulatorsandkeyparticipants.Theseinitiativeswouldaimtoeducatepolicymakers,regulators,andmarketparticipantsontheimportanceofhigh-qualitycarboncredits,waystoalignwithinternationalstandardsandbestpractices,andoptionsforimprovingmarketconnectivity,andtofosterjointthinkingandresearchonhowAsiaasaregioncancontributetoachievingthegoalssetoutintheParisAgreementwithintheglobalcontext.

Theinvolvementofestablishedinternationalorganizationsandinitiativeswasproposed

7

askeytothiseffort.ICVCMandIETAwereencouragedtoworkwithNGOsandregionalorganizationstoenhancethedesignandimplementationofhigh-qualityVCMsinAsia.ICVCMandIETAalreadyhaveextensiveresourcesthatcouldbevaluabletoAsianmarkets,buttheseresourcesmaynotbewellknownintheregion.Aconcertedeffortshouldbemadetobetterintegratetheseorganizations’educationalmaterialsandprogramsintoAsia’sregionalcontext.

3)DevelopingoperationalrulesforimplementingArticle6

Toaddressthecomplexitiessurroundingcross-bordertransactionsbetweenVCMs,theseminarhighlightedseveralguidingprinciplesandproposedactions.ItwascalledforgovernmentstoclarifyrulesoncarboncredittransactionsandadoptionofCA,particularlydistinguishingcross-bordertransactionsusedforoffsettingpurpose(forcompliancemarketortaxobligations)fromothervoluntarypurposes.ParticipantsnotedtheimportanceofnotwaitingforthefinalizationofArticle6oftheParisAgreementasthetimelineremainshighlyuncertain.Instead,regionalmarketsshouldmoveforwardtofindsolutionsthatworkforthemwhileensuringcompatibilitywithfutureglobalstandards.

Twopossibleapproacheswereproposed,whichmaybeimplementedindividuallyorincombination,tofacilitateeffortsofcontinueddialogueforthisissue.Thefirstapproachsuggestsbilateralagreementsbetweencountriestoestablishsharedactionsandprinciples.Thesecondapproachbeginswithbilateraldiscussionsandallowsothercountriestojoinasobservers,includingthosethatareintheprocessofdevelopingdomesticmarkets.Thismethodcouldcreateascalablestructurethatprogressivelyexpandsasmorecountriesexpressinterestinjoiningthedialogue.

Somedelegatesdiscussedthepossibilityofadoptblockchaintechnologiesandlegalcontractstoenabletheseparationoflegalandbeneficialrightsofvoluntarycredits.TheformerreferstotheCAattachedtovoluntarycreditswhichcrossbordertransfersimpactsthehostcountries’NDC.Thelatteronlytransfersthecommercialoffsetsofvoluntarycreditsbyprivatesector,withoutCA.Suchseparationoflegalandbeneficialrightscouldallowimmediateflowandtradeofvoluntarycreditsbetweencorporatebuyersandprojectdevelopers,whilewaitingforgovernmentstofinalizeArticle6.

4)Establishmentofacross-bordertransactionmonitoringsystem

Delegatesagreedinprinciplethatratherthanimplementingablanketbanoncross-bordertransactions,itisbeneficialforAsianVCMstostayconnected.Adifferentiatedapproachtailoredtovarioustransactiontypescouldbeconsidered.ExpertssuggestthatnationalauthoritiesmightrequireCAforforeigncreditsusedforoffsettingpurposesofdomesticcarbontaxsystemorETS,followingexamplessuchasSingapore’spractices,whileallowingtransactionswithoutCAforthoseprivatesectorusageofvoluntaryoffsetting.

Thisapproachcouldbecomplementedbyasovereignmonitoringsystemtotrackallcross-bordertransactions.WhilenotnecessarilylinkedtoCA,thismonitoringsystemcanserveasthebasisforaflow-basedcontrolmechanismacti