Carbon exchanges across the Asia Pacific are getting ready to compete. Governments and business groups in the Asia Pacific are jockeying to establish the best- placed carbon trading hub in the region, in anticipation of substantial growth in both the voluntary and compliance carbon markets.
In the past few months a handful of new ventures have been created to establish formal trading facilities. The region’s leading securities and commodities exchanges are also looking at their options.
Singapore, Australia and New Zealand appear to be the most active in trying to establish carbon hubs, although exchanges and business groups in Hong Kong, India and Japan are also studying the issue.
For the moment, the bulk of the world’s carbon trading takes place in Europe, particularly London, because of the emissions scheme established by the European Union, which generated about $30 billion in trades in 2006.
However, Asia is expected to play an increasingly important role in carbon trading in coming years, particularly as a source of carbon credits from recognised abatement schemes. These schemes include UN accredited Clean Development Mechanism projects and the recently launched Voluntary Carbon Standard, a new standard for voluntary carbon credits endorsed by the International Emissions Trading Association .
“Asia is going to be the largest exporter of carbon, and the US and Europe will be the largest buyers,” says Michael Molitor, a former global head of the climate team at PricewaterhouseCoopers and now an independent consultant.
Molitor says about $4 billion of carbon credits have already been developed through the Kyoto protocol’s Clean Development Mechanism. “Most of the world’s low cost abatement opportunities are in Asia,” he says.
That is presenting opportunities for hedge funds and private investors to establish carbon funds. Inevitably, he and others say, the opportunities will be presented to establish a carbon trading hub in the region, and the competition for pre-eminence will be intense.
Australia claims to have established one of the first carbon trading schemes in the world, with credits generated by the country’s Mandatory Renewable Energy Target beginning to trade in 2001 and from the NSW Greenhouse Abatement Scheme in 2003.
However, because the country is not (yet) a signatory to Kyoto, its market has stagnated and opportunities to link with international schemes are extremely limited.
Nevertheless, the country’s first carbon exchange opened on July 23 2007, when the Perth-based Australian Climate Exchange (ACX) began trading voluntary carbon credits generated by abatement projects verified by the government-sponsored Australian Greenhouse Office.
The first trade of 600 tonnes CO2 was bought at a cost of A$5,000 ($4,250) by listed Australian telecommunications company M2, which saw it is a good opportunity to boost its reputation. “It’s a statement that we care for the environment,” says M2 managing director Vaughan Bowen.
Total trades since then have totalled just 5,000 tonnes.
The key is demand but he is encouraged by a recent announcement from companies such as Qantas Airways to use the Australian Greenhouse Office’s Greenhouse Friendly scheme to offset its emissions. “We’ve just got to make sure there are no bottlenecks in supply,” he says.
In September 2007 the Sydney-based Financial and Energy Exchange, the brainchild of hedge fund trader Brian Price launched, with the help of Al Gore, a new stock market index for clean tech stocks, FEX Sustainability and Cleantech investment market.
The company hopes that FEX SIM will attract 70 companies. FEX expects to move into trading carbon products as early as next year. “The biggest challenge will be to build liquidity,” says FEX managing director Fiona Waterhouse.
The Australian Stock Exchange, meanwhile, has done some preparatory work on carbon trading, including futures contracts, but will not undertake any carbon trading until a government-mandated emissions trading scheme is introduced.
“We are waiting for something more formal and concrete from the government,” an Australian Stock Exchange spokeswoman said. “But we want to be ready to move quickly.”
Across the Tasman Sea, the New Zealand Stock Exchange has joined forces with other businesses to create a new venture called TZ1 (Time Zone one) that expects to begin carbon trading in the second quarter of 2008.
Joanne Silver, the programme director for TZ1, says New Zealand has several advantages over Australia because it is a signatory to the Kyoto protocol. It is also home to one of only two Kyoto registries to be created in the Asia Pacific region that issue tradable UN Certified Emission Reductions (CERs) under the Clean Development Mechanism. The second registry is based in Tokyo.
New Zealand is the only Asia Pacific member of the recently launched International Carbon Action Partnership, a group of countries and regions that have implemented or are actively pursuing the implementation of carbon markets through mandatory cap and trade systems. Other members of the group include EU countries and US states with regional emissions trading schemes already in place.
Singapore has announced it will pass legislation enabling tax-free carbon trading, in an attempt to establish the city-state as a major carbon trading hub, as it has done with petroleum products.
Trade and Industry Minister Lim Hng Kiang told a conference in May this year that by creating such a hub, Singapore would become a centre for carbon-based consultancies and fund managers.
Singapore is the Asian base for Asia Carbon Exchange, a Dutch-based organisation that acts as a broker for voluntary and CER carbon credits throughout Asia. It will also play host to an Asian carbon trading expo in November.
Rest of Asia
Progress in other Asian countries is less developed. The Hong Kong Securities Exchange and a group of financial institutions have initiated a study of carbon trading, a similar course taken by the Tokyo Stock Exchange, and separately by the Japan Bank for International Cooperation.
A group of businesses in Kansai, Japan, have also discussed setting up a formal market for voluntary credits. In India, the Bombay-based Multi Commodities Exchange, one of the largest commodities exchanges in the country, is looking into the possibility of trading UN accredited CERs. A growing number of UN Clean Development Mechanism projects, issuing CERs, are based in India.
Whilst Australian markets will be domestically driven via national cap and trade schemes, the market for selling carbon credits in Asia is currently limited to the sale of carbon credits from Kyoto’s Clean Development Mechanism. Experts, such as Changhua Wu, China director of the international non profit organization the Climate Group, say there are simply not enough of these credits currently being generated to warrant a carbon trading market in Asia.
Post-Kyoto talks are expected to concentrate on opening doors for more prolific, less bureaucratic carbon credit generation under the UN scheme. Alternatively, if the newly launched Voluntary Carbon Standard is recognized by the voluntary cap and trade schemes in the US, such as the Chicago Climate Exchange, the flood gates for carbon credits from Asia may be opened, providing currency for an Asian carbon trading post within a couple of years or sooner.