Asian Bourses Join the Billion-Dollar Racing to Tap Carbon Offset Boom

(Bloomberg). — Malaysia’s entry into the race to create new carbon exchanges in Asia is raising questions about their survival in a market with a potential value of hundreds of billions within a few decades.

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Bursa Malaysia Bhd. This month, Bursa Malaysia Bhd. opened an exchange. It joins more than a dozen currently in progress or planned for the region. In September, Thailand and Japan launched their platforms. Hong Kong followed a month later. Singapore has two fledgling stock exchanges.

“We’re in another one of those mad dashes,” Thomas McMahon, co-founder of Singapore’s AirCarbon Pte, said in an interview. “We’ve seen this rush before, if you look at the early days of blockchain” and cryptocurrencies.

The exchanges are entering a highly competitive voluntary offsets market, which could see prices soar in the coming decades. However, so far they have had a slow start. While trading and prices have declined, concerns abound about the contribution offsets make to combating climate change.

What’s clear is that money in Asia is flowing into the space, with investors betting the flurry of climate pledges from countries and companies will drive growth. The exchanges have raised tens of millions of dollars, with powerful backers including sovereign wealth funds like Temasek Holdings Pte of Singapore and Abu Dhabi’s Mubadala Investment Co., along with banks such as Standard Chartered Plc and DBS Group Holdings Ltd.

According to BloombergNEF, the demand for offsets could increase 40-fold between now 2050 to 5.2 billion tonnes of CO2 equivalent or approximately 10% of global emissions. It could become a $600 billion market if prices reach $120 per tonne.

As a way of reducing their carbon dioxide emissions from fossil fuels, offsets are attractive to companies. An offset is a promissory document that represents one ton of carbon dioxide removed or not added to the atmosphere in exchange for payment. California and the European Union have mandatory programs that some polluters must follow, while the majority of new exchanges are voluntary.

Some of these new bourses are setting themselves up for what’s to come in the region, including additional compliance credit schemes that are set to grow, said Hannah Hauman, global head of carbon trading at Trafigura Pte.

“It’s a mix of national interest, capacity building, and that down the road, somebody could eventually have a lot of liquidity and win the game,” said Federico Di Credico, Asia-Pacific managing director at ACT Commodities.

The Secret to Making Profits

So far, it’s been far from lucrative. Existing platforms struggle to attract enough transaction, and there is confusion over the integrity carbon projects and how global credit trading should be done. Analysts and traders alike are also anticipating a dark year as polluters decrease their buying in the face of inflation and other recessionary fears.

For standardized contracts to be profitable, volumes would have to be “extremely high” and the market isn’t there yet, Singapore’s Climate Impact X CEO Mikkel Larsen said in an interview. “A lot of things have to improve in the market for all of us to make money.”

For now, profitability is “all in the primary market” as margins are higher, he added. Buyers can purchase carbon credits from project developers directly, or through an auction. These credits can then be traded on the secondary market. CIX, which is backed by Singapore’s stock exchange and Temasek, has sold 420,000 credits through various auctions since it started.

McMahon explained that AirCarbon or ACX has sold over 17 million carbon credits so far and hopes to break even by 2025. Having raised more than $25 million from funders including Enterprise Singapore, Deutsche Boerse AG and Mubadala, it’s seeking another $50 million in a new round. McMahon indicated that ACX is targeting $33M in revenue and 20M credits transactions next year.

New Players

More platforms are on the horizon. Indonesia’s bourse is looking to develop its own carbon exchange, while India is putting together a blueprint for a voluntary carbon market. McMahon and Larsen spoke to numerous companies and countries who are interested in developing their own carbon exchanges.

“Everybody decided in 2021, from a commercial perspective, that this would be a great area to build,” Peter Zaman, a Singapore-based lawyer at HFW, said in an interview. “For the current size of the voluntary market, especially in the latest weak demand environment, there are probably a few platforms too many.”

Experts meanwhile aren’t convinced the explosion of exchanges will have any meaningful impact on the climate.

“These sorts of exchanges might attract financial organizations, speculators, but maybe not so much buyers who actually want to use credits for their climate strategies,” said Gilles Dufrasne, global carbon markets lead at nonprofit Carbon Market Watch. “I don’t think that has the highest benefit for the climate.”

–With the help of Ali Asghar

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