Climate change: with Biden in office and Chinese emissions trading scheme on way, a new air of optimism

Ahead of the United Nations Climate Change Conference (COP26) in November, global momentum for action is increasing as governments, businesses, experts and civil society seek common ground on reaching net zero carbon emissions by 2050. This is the first in a year-long series of stories by the SCMP Asia desk on the key climate issues up for debate.

After several delays, rules surrounding China’s national emissions trading scheme (ETS) will come into effect on February 1 – and climate change observers say this will add to the global momentum on addressing the crisis that has been building in recent weeks.

The optimism is largely due to the actions of the new US President Joe Biden, who in his first weeks in office has swiftly reversed much of the climate denialist policies of his predecessor Donald Trump, and made plans to host a summit on the issue in April.

In Asia, the first steps surrounding the Chinese ETS – while procedural at the onset – have been among the signs of a fresh push towards action on climate change.

Nonetheless, trading will not begin immediately on the new ETS, first mooted in 2017.

Instead, some 2,225 power operators and related entities that account for 14 per cent of the world’s carbon dioxide output will be allocated pollution allowances for the full year.

Trading – to be hosted on the Shanghai Environment and Energy Exchange – is expected to launch some time in mid-2021.

Then, the biggest participating polluters that are unable to immediately reduce emissions will be able to buy additional allowances from others that do not emit as much.

With the ETS coming online, the world’s biggest polluter will bring its emissions compliance closer to that of the European Union – which at the moment has the world’s most developed ETS.

Vietnam, Indonesia and the Philippines are among Asian countries that are considering enacting such schemes in the medium term.

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EYES ON CARBON CREDITS

For the likes of Thomas McMahon, co-founder of the Singapore-based AirCarbon Exchange, it is not just the momentum over ETSs that is adding to the buoyant mood.

Surging demand surrounding voluntary carbon credits was also boosting sentiment, McMahon said.

The carbon credits market is distinct from compliance mechanisms such as ETSs – or carbon taxes – in that they are voluntary.

Corporate entities participate in the carbon credit market mainly to satisfy internal carbon neutrality or reduction goals, and broader environmental, social and governance (ESG) objectives.

In a nutshell, carbon credits are generated by investment in projects, known as offsets, that reduce or remove emissions from the atmosphere.

Holders of each credit then give themselves the “right” to emit one tonne of carbon dioxide since they have invested in removing an equivalent amount of emission.

Data compiled by the Ecosystem Marketplace portal in 2019 showed that various voluntary carbon offsets had led to 104 million metric tonnes of carbon dioxide either being removed or prevented from entering the atmosphere.

That figure was a record, and six per cent above the 2018 figure.

And despite the Covid-19 pandemic, commentators believe trading in 2020 may have set a record. The voluntary carbon market must grow 15 times from current levels for the corporate sector to meet the emission slashing goals agreed in the 2015 Paris Agreement.

McMahon, whose firm is hoping to bring transparency by trading carbon offsets in the same way other commodities are traded, said the potential for carbon credits was vast owing to their “fungible” nature – the credits can be bought in one market and then sold in another, and vice versa.

McMahon said the hope was that the “basketisation” of various offset projects by the likes of AirCarbon would help in scaling carbon credit usage.

This involves creating credits that are based on a basket of different initiatives of a similar nature: for example, afforestation projects involving trees of different maturities and different regions.

With the surge in demand for carbon credits, it is these nature-based solutions that most companies seek to meet their internal targets.

“They are seen as a worthy investment … on the buy side you have hedge funds, industries that are dirty, [and] family office networks that are asking ‘how do I own carbon?’,” McMahon said.

A December report co-authored by Conservation International and three Singaporean entities – the National University of Singapore, DBS Bank and sovereign investment firm Temasek – said such carbon projects in Southeast Asia could generate a return-on-investment of up to US$27.5 billion a year.

NOT PLAIN SAILING

That said, unlike the case for government-led compliance mechanisms such as the ETS, it is not conventional wisdom that carbon credits will help cut the emission of greenhouse gases.

Activist groups’ negative views towards the concept came to the fore last week after a special task force comprising global oil, aviation and steel firms and led by the former Bank of England governor Mark Carney released recommendations to scale carbon credits.

Among its proposals was the setting up of “core carbon principles” that would specify criteria for what would entail a carbon credit, with a third party oversight body acting as a regulator.

Greenpeace slammed the recommendations as a means for companies to intensify their “greenwashing” activities, where piecemeal actions are undertaken for public relations purposes with no intention of cutting emissions.

“The initiatives on voluntary carbon markets … has shortcomings in principle and practice that could really jeopardise genuine climate change mitigation, and with it the Paris targets,” Jennifer Morgan, executive director of Greenpeace International, told a virtual audience during a session at this week’s Davos Agenda meetings.

Angel Hsu, an assistant professor of environmental policy at the University of North Carolina-Chapel Hill, in a commentary for the Singapore broadcaster CNA’s website this week, said experts and activists alike had misgivings about carbon credits.

“While in theory this market-based approach provides an elegant solution to address climate change, the reality is that many existing offsets are low-quality, short-lived, and underpriced so they don’t capture the full cost of emitting a tonne of carbon dioxide,” Hsu wrote.

While economists estimate the average economic damage of a tonne of carbon to be around US$100 to US$200 per tonne of carbon – with that estimate higher in 2018 at US$417 – the current average cost was only US$3 per tonne, Hsu noted.

“With such a low price, offsets cannot truly capture the full economic impacts of emitting carbon and provide little incentive for companies to change their polluting behaviour,” the climate scientist said.

McMahon, the Singapore-based entrepreneur, said the carbon credit trade was among several “environmental mechanisms” that would help make net zero by 2050 a reality.

“China is going to do it [through the ETS], and I think the rest of Asia has woken up too, knowing that they cannot continue to destroy their own environment. No one is going to put their hand up and say ‘we will help you clean up’. You have to do it yourself, and there are all these vehicles to help you do it,” he said.