Southeast Asian nations need to incorporate rules governing carbon market mechanisms under Article 6 of the Paris climate agreement in their domestic emissions trading systems (ETSs), as their economies will depend on external finance and crediting to decarbonise, according to a policy paper from the Global Green Growth Institute (GGGI).
The organization presented its findings on Friday at the UN COP 31 climate conference in Antalya, Turkey.
The GGGI reported that emerging markets like Thailand, Indonesia, the Philippines, and Vietnam—which are currently at various early stages of establishing local ETS frameworks—lack the “luxury” available to larger regional economies like China, Japan, and South Korea, where carbon systems benefit from dedicated decarbonisation funding.
While Japan supports its companies with transition bonds worth about ¥20 trillion ($126bn) and South Korea has introduced transition loans and facility support, Southeast Asian nations currently face higher barriers to entry.
Market Leakage Risks for Potential Suppliers
The GGGI warned that countries like Thailand and the Philippines risk losing high-quality carbon credits to overseas buyers. Because international markets often offer higher prices, domestic companies may find the high-quality credits they need for their own compliance targets move overseas.
“International carbon credit sales should therefore be ‘carefully’ measured against quantified national emissions targets before being authorised by the prospective exporting country, so that they are not treated as ‘unrestricted’ export opportunities,” the GGGI said, noting that South Korea expects international emissions cuts to contribute to 12.8pc of its reductions by 2030.
Regulatory Priorities for Domestic ETS
According to the GGGI, Southeast Asian governments have typically prioritized energy security and competitiveness over the implementation of more robust carbon pricing and stricter limits on allowance supplies. While current strategies—such as providing offsets, linking allowances to historical emissions or output, and offering free allocations—reduce industry costs, they simultaneously diminish the impetus for decarbonization.
The policy paper recommended specific regulatory shifts for the region:
- Vietnam and Indonesia: Restore predictable allocations and tighten power sector benchmarks used to calculate free allocation levels.
- The Philippines: Implement a carbon levy on major emitters to ready the country for an ETS while simultaneously building up its domestic monitoring, reporting and verification (MRV) sector.
- Thailand: Align fuel taxes, carbon taxes and its ETS to streamline carbon pricing.
Closing MRV Gaps Through Regional Cooperation
Closing monitoring, reporting, and verification (MRV) gaps remains a priority for the coming years. The GGGI identified 2027–28 as a critical window for Vietnam to resolve its MRV gaps and for Thailand to use its 2027–28 data collection to establish verified baselines.
Indonesia is encouraged to extend its reporting to its captive coal and industry.
The institute suggested that early cooperation between regional ETS “newcomers” and established markets could lead to compatible accounting formats. Such alignment would strengthen both domestic compliance and voluntary markets while also supporting Article 6 transfers against quantified national mitigation budgets.
Carbon Revenue and Market Stability
To assist newcomers in gearing up for mandatory compliance, the GGGI suggested that these nations release multi-year sector allowance budgets that are consistent with their climate goals—or nationally determined contributions (NDC)—under the Paris Agreement. The paper pointed to South Korea’s NDC-aligned cap method as a potential model for the region.
Furthermore, the institute advised governments to reinvest auction and carbon tax proceeds into grid infrastructure, industrial decarbonisation, market administration, and social protection transfers for vulnerable households, while also planning for a future decrease in revenue as emissions are reduced.
The GGGI also said that Southeast Asian ETSs could utilize Japan’s GX-ETS reference prices to create a gradually increasing price corridor, complete with a market stability reserve, vintage rules, and defined banking limits.
Why Article 6 Integration Matters for Southeast Asian Economies
Why is Article 6 integration important for Southeast Asian economies?
The GGGI states that these economies depend on external finance and crediting to meet their decarbonization goals. Integrating these mechanisms ensures that carbon transfers are accounted for against national mitigation budgets.
What is the primary risk for countries like Thailand and the Philippines?
These nations risk “exporting” their high-quality carbon credits to international buyers who pay higher prices, which could leave domestic firms without the credits needed to meet their own local compliance targets.
What specific step is recommended for the Philippines before launching an ETS?
The GGGI recommends that the Philippines introduce a carbon charge on large emitters to help prepare the market and develop its internal monitoring, reporting, and verification industry.
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