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South Pole’s regional policy director on how Asia is leveraging its growing carbon markets to raise climate ambition

In the wake of the world’s first Article 6 transaction between Thailand and Switzerland South Pole’s regional policy director Karolien Casaer-Diez reflects on how the rise of carbon markets in Asia, combined with effective regulation, may hold the key to reducing the region’s carbon emissions.

Bangkok city
Thailand became the first country in the world to transfer emission reductions under Article 6 in December 2023. Image: Waronont (Joe) at Unsplash

With Asia responsible for about half of global carbon dioxide emissions today, the region must decarbonise – and its carbon markets present an attractive opportunity to achieve this, says Karolien Casaer-Diez, regional director for climate policy, finance and carbon markets in Asia at South Pole. 

For one, carbon markets are key to incentivising corporations to invest in projects and solutions that reduce emissions, and allow countries to mobilise resources to help finance green projects. Carbon markets can also help countries to reach their national climate goals, or Nationally Determined Contributions (NDC). 

While the region’s carbon markets may not be as large as Europe’s – the world’s largest compliance carbon market as a result of its Emissions Trading System (ETS) – Asia’s carbon markets have doubled in size over the last three years.

“On the voluntary market, Asian carbon projects supplied half of the credits sold in 2022. This makes it the world’s largest credit-producing region,” said Casaer-Diez, citing data from a report from non-profit organisation Ecosystem Marketplace.

Asia is now emerging as the world’s primary hub for cooperation under Article 6 – a clause in the Paris Agreement that encourages collaboration to reduce emissions – with the region home to the most buyer and seller countries.

Karolien Casaer-Diez

Karolien Casaer-Diez is the regional director for climate policy, finance and carbon markets in Asia at South Pole.

“I’ve lived in Asia for over 10 years and the surge in climate leadership we are seeing of late is impressive,” noted Casaer-Diez, who oversees South Pole’s advisory work for public and private sector clients relating to carbon policy, climate finance, Article 6 and compliance carbon markets in the region. 

South Pole – a carbon finance and corporate decarbonisation consultancy founded in Switzerland in 2006 with Asia offices in Singapore, Thailand, India, Indonesia, Japan, China and Australia – aims to develop and implement emission reduction projects and strategies for companies, governments and organisations.

In this interview with Eco-Business, Casaer-Diez, who has 18 years’ experience in climate and development finance, speaks about the ever-changing carbon market landscape and the impact of stepped-up regulations in Asia.

Let’s start with the basics – what is Article 6 and why is it so transformational for the international carbon market?

We know that carbon markets have a crucial role to play in helping the world reduce emissions and tackle climate change. To support and scale that impact, global frameworks are being established to set the rules for how countries engage in carbon markets.

One clause in the Paris Agreement on Climate Change, known as Article 6, provides the guidelines for emission reductions that take place in one country to be counted towards a different country’s national climate targets. 

In some parts of the world, financing emission reductions is more expensive than in others. Article 6 transactions offer a way for countries to reduce more carbon emissions abroad compared to what they could achieve domestically with the same investment.

Acquiring countries can count these “Internationally Transferred Mitigation Outcomes” or ITMOs, towards their NDCs. For host countries, new low-carbon solutions receive financing they would otherwise not have been able to access. This creates benefits well beyond carbon: jobs, cleaner air, health benefits and more.

Research by the International Emissions Trading Association shows that using carbon markets at scale can reduce the global cost of delivering emission reductions identified in NDCs by about 30 per cent by 2030, and by more than 50 per cent by 2050.

If we reduce the cost of climate action, we can achieve more.

What impact does Article 6 have on Asian countries and companies engaging in carbon markets? What are the pros and cons of countries using carbon markets to meet their Nationally Determined Contributions (NDCs) to the Paris Agreement?

Article 6 transactions can help some countries in Asia meet their NDCs more efficiently, so therefore buy-side countries can be more ambitious in their targets. Article 6 also presents opportunities for corporates, as they can use ITMOs to meet compliance requirements, for example, the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Some corporate buyers may even buy ITMOs voluntarily.

For countries hosting Article 6 projects, an ITMO represents a trade-off. The sell-side country cannot count these emission reductions towards their NDCs. It needs to make sure it has other affordable abatement options available to meet its commitments.

In terms of challenges, governance systems for Article 6 transactions are quite demanding and can be complex for a government to put in place – governments need a carbon registry and strong monitoring, reporting and verification capacity, for example. This means the supply of ITMOs has been slow to pick up, but momentum is growing. 

As someone who has worked in development and climate finance for most of my career, I can only be enthusiastic about the transformational potential of this new mechanism and the way it creates new financing channels for climate projects. Article 6 also gives firm control to host countries over the kind of climate action they wish to see funded by international players.

How are governments across Asia stepping up regulations on emissions and carbon market initiatives?

Attention to Article 6 and pressure to implement NDCs is leading to increased regulation, and we see countries setting up or strengthening carbon pricing schemes in Asia.

South Korea has a well-established ETS, while China is looking at expanding its ETS to new sectors. India, Indonesia, Malaysia, Vietnam and Thailand, for example, are at various stages of creating or revisiting domestic carbon schemes and regulations for carbon markets. This is no easy feat, as a high bar must be set on environmental integrity, human rights and safeguards, and the technical complexities of carbon can be daunting. Changing regulations may initially cause some nervousness and confusion, but once rules are set, they create new markets and opportunities.

It’s encouraging to see climate and carbon climb up the political agenda and to see the commitment from countries to meet their NDCs. I was involved in writing NDCs in the past and I am impressed at the level of determination countries in Asia are showing to deliver on these.

Which countries are doing well? 

Many countries are doing well, but I want to cite a few examples of countries I have worked with and found particularly inspiring. In December 2023, Thailand became the first country in the world to transfer emission reductions under Article 6, in a deal with Switzerland. The Bangkok E-Bus Programme, in which South Pole acted as the carbon finance consultant, will see about 2,000 electric buses introduced to the Bangkok Metropolitan Area, helping to avoid emissions and significantly improve air quality in a congested megacity. These emission reductions are sold by our client, Thai-based electric power generation company Energy Absolute, to the Zürich-based KLiK Foundation.

Singapore is a firm leader in carbon market innovation. For example, the city-state will allow the use of certain international carbon credits under its carbon tax regime. This pushes Singaporean corporates to invest in climate action across the globe. More broadly, Singapore has established itself as a trusted carbon services and trading hub for the region and world.

Vietnam is developing an ETS, which South Pole is supporting under the Southeast Asia Energy Transition Partnership programme. It will cover the steel, cement, and power sectors in the initial phase. The nation is also developing a national crediting mechanism and is negotiating bilateral cooperation under Article 6. 

When I first arrived in Asia in 2013, I worked in Bangladesh’s finance ministry. What I saw then was a tendency to view sustainability as an additional cost, or as a burden. The beauty of market mechanisms is that they allow developing countries to approach climate action as an opportunity. They present developing nations with a chance to access international and private sector financing when domestic public sector funding is scarce.

What incentivises private sector actors like South Pole to co-develop credit-generating projects?

One wants to see governments raising ambition with the goal of limiting global temperature rise to 1.5°C. Clear and forceful policies to that extent will drive green investment.

In developing carbon market regulations, business-friendly regulation can channel more climate finance to the region. Clarity and predictability – as opposed to uncertainty – will attract investors and project developers.

Host countries can seek international financing and investors – through Article 6 and other channels – for the type of projects that would otherwise remain out of reach. India, for example, plans to authorise Article 6 transactions with countries such as Japan with the goal of attracting funding for green hydrogen.

The next generation of NDCs will offer a chance for better investments. By better investment planning for NDCs, combining different sources of capital and engaging in multiple carbon markets, countries can hedge their risks, making their plans more ambitious and effective in fighting climate change. 

What types of carbon projects have the most potential in Asia to support decarbonisation? Should we be focused on nature-based solutions or technological solutions? 

It’s not about either-or. Staving off the worst of climate change is a race against the clock. We don’t have time to let the perfect get in the way of the good, and we don’t have the luxury of picking our favourite technologies; we need everything, everywhere, all at once.

Compliance markets under Article 6 and voluntary markets respond to different drivers and are therefore geared towards different types of projects. ITMOs will mostly be purchased for compliance reasons and buyers will look for high volumes, so may likely resort to hard-to-abate sectors and emerging technologies that haven’t been picked up by the voluntary carbon market.

What were the main outcomes from COP28 regarding the carbon market in the region?

COP overall had a number of outcomes worth celebrating – including the pledges to the loss and damage fund, which is an important victory for the most climate-vulnerable countries – many of which are in Asia. The call to “transition away from fossil fuels” was an important first for a UN climate conference.

With regard to carbon markets, it was encouraging to see key carbon standards come together and announce collaboration to enhance transparency and consistency within the market. This can allow ambition and finance to scale across sectors and countries.

That said, the fact that Article 6 negotiations remained inconclusive was a setback.

Article 6.2, which governs the transfer of emission reductions generated in one country to another country, is already operational, but we had hoped for some more top-down guidance from COP on certain topics, for example, government authorisations for transactions.

Article 6.4 relates to the establishment of a crediting mechanism – a body that will recognise methodologies for carbon crediting, register carbon projects and issue credits under the authority of the United Nations. In the absence of decisions at COP, we lose time in establishing this new UN crediting mechanism. That is a shame, as many countries in Asia and elsewhere are looking to Article 6.4 as their future crediting mechanism of choice. 

The lack of UN decisions means that we rely more on national authorities and on existing voluntary mechanisms and initiatives to shape operations in the market. It puts an increased responsibility on the shoulders of individual governments, also in Asia.

On a positive note, I was blown away at COP by how Asia is charting its future course. I spoke at a Vietnam government event where officials outlined their ambitions to make polluters pay and price carbon with their ETS. South Korea is readying its industries for the European Union’s Carbon Border Adjustment Mechanism, turning decarbonisation into a driver of competitiveness.  

Cambodia announced a target to lift its share of clean generation capacity to 70 per cent by 2030 and recently issued its Article 6 operations manual. Power giant ACEN Corporation, from the Philippines, announced a collaboration with The Rockefeller Foundation and the Monetary Authority of Singapore to shut down more coal, replacing it with renewable energy, with the help of transition credits.

Those are just a few illustrations of the level of ambition and innovation seen in Asian countries today, and that leaves me optimistic.

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