Singapore well placed to be carbon trading centre

It can kick-start creation of regional carbon credit registries and formulate yardsticks
Catherin Wong Mei Ling, Business Times 18 Sep 09;

CARBON markets are here to stay and are likely to grow post-Kyoto 2012. In the run- up to December's United Nations Climate Change Conference in Copenhagen, pundits expect the Clean Development Mechanism (CDM) to continue to play a big role in the transition to the new low-carbon economy.

This was one of the projections made by Bindu Lohani, vice-president (finance and administration) of the Asian Development Bank (ADB), at a seminar organised by the Institute of Southeast Asian Studies earlier this month.

While China and India are steaming ahead and establishing a foothold in the rapidly expanding carbon market, South-east Asia's response has been laggard at best.

With 84 per cent of the primary CDM market share, China is rapidly developing its financial infrastructure to meet future demand. The Tianjing exchange announced recently its plans to launch China's first carbon market in 6-12 months' time, and has already started recruiting members for a cap-and-trade scheme.

The Financial Times also reported that half a dozen climate exchanges have been set up in China over the past year alone. The Beijing exchange is collaborating with Paris-based Bluenext to offer credits generated by Chinese renewable energy projects to potential European investors.

India's banks have also moved in on the carbon market. Banks like ICICI, the Industrial Development Bank of India Ltd (IDBI) and State Bank of India (SBI) have tie- ups with a host of local companies and international players like International Finance Corp (the private-sector arm of the World Bank) and Germany-based KfW Bankengruppe.

Vulnerable region

Since carbon trading in India took off in 2005, its companies have earned about US$500 million from carbon-credit sales and netted about 43 per cent of carbon credits issued so far by the CDM executive board.

South-east Asia, however, seems to have been bypassed in the midst of these developments despite the imperatives for the region to step up to a low-carbon economy. The region is one of the most vulnerable to the impact of climate change, according to the 2009 ADB regional review on 'The Economics of Climate Change in South-east Asia'.

The region is projected to lose 6.7 per cent of combined gross domestic product (GDP) each year by 2100 if nothing is done to curb global warming. The US, the world's second largest greenhouse gas (GHG) emitter, stands to lose only half of that (3.6 per cent of GDP) by the same year at status quo.

Nonetheless, the lack of activity also represents untapped opportunity, and Dr Lohani thinks Singapore is well placed to lead carbon trading in the region.

Singapore has the most mature capital markets in South-east Asia and can position itself to be the regional trading platform for carbon credits. In addition to its well established credentials in financial management and good governance, the city already has both the physical and the human capital to establish itself as the carbon trading centre of Southeast Asia.

Singapore is the fourth largest foreign exchange trading centre in the world and is home to many of the world's financial bigwigs. The trust and corruption-free factor has been a key competitive advantage of Singapore, not least due to the Monetary Authority of Singapore's (MAS) reputation for its stringent supervision of banking and financial activities.

The hardware is already in place for Singapore to tap on the carbon markets. What it needs now is the software in terms of a clear policy and regulatory framework for carbon trading, domestically and regionally. There is already talk of how the Association of Southeast Asian Nations (Asean) can play a role in facilitating a regional carbon market.

Maturing markets

With Singapore's experience in financial management, it can kick- start the creation of regional carbon credit registries and formulate yardsticks for clean energy project performance and best practices.

Sceptics say that there is little business incentive for a regional exchange because there are no buyers and only sellers. There are also few liquidity providers in the market for such investments.

But this is slowly changing. The carbon markets are gradually maturing, and the US could potentially come on board; a US House of Representatives committee voted in favour of a draft climate bill in May which, if passed into law, could lead to a US$3 trillion carbon market by 2020.

The global carbon market was worth US$126 billion in 2008 - twice as much compared to the preceding year despite the financial turmoil, indicating its resilience.

There is also a growing pool of international funds willing to provide grants and cheap loans for climate change projects in developing countries. Japan set up the Cool Earth Partnership in 2008, worth US$10 billion to fund reduction of GHG emissions in developing countries. The ADB's Carbon Market Initiative has two funds targeted to be worth more than US$300 million. Europe and the US have also set up a host of similar investment funds.

Granted, carbon markets are still relatively volatile due to lingering misconceptions about environmental investments. But it is clear that the social and political tides are shifting in this direction.

It is not too late for South-east Asia to play catch-up in the carbon markets. But if the region does not act soon, it may be too late when it finds its islands consumed by the sea, its forests depleted, and a growing population of displaced and jobless citizenry.

The writer is a research associate at the Institute of Southeast Asian Studies