Global carbon markets cover 23% of global emissions, with a combined value of nearly USD 1 trillion in 2023: An Opportunity for Indonesia
Over the past few years Indonesia and the world has seen many lives and livelihoods uprooted and devastated by many extreme weather events, making it all the more urgent to tackle climate change brought about by the annual accumulation of carbon in the atmosphere. Here, regulation remains a key consideration to bringing about a future of net zero emissions, where technology at its current innovative or economic stage is still insufficient on its own.
Indeed, there is no silver bullet in sight. But optimising decisions can be made to benefit all parties involved. For instance, a key aspect of emissions regulations are the regulatory mechanisms that can be selected: policymakers have a choice of using any combination of (1) direct regulation, (2) carbon taxes, and (3) instituting a carbon market.
Direct regulation mandates the cessation of activities like coal power stations for emissions reduction, albeit without generating revenue. Carbon taxes generate revenue but may not guarantee emission reductions. Carbon markets strike a balance, reducing emission with the advantage of significant revenue generation and technological neutrality, whilst still requiring sufficient liquidity to succeed.
Two recent developments are especially reassuring.
Firstly, over the past few years, the world has made great strides in emissions reduction via the carbon market. Presently, over 23% of global emissions are covered by 74 carbon tax and carbon market schemes implemented globally, of which the lion’s share of 18% is covered by Carbon Market, the rest covered by the carbon tax, and with Indonesia covering 0.5 percentage points of the 18%, with its carbon trading scheme still being planned/under discussion.
Secondly, the gap between compliance carbon markets and voluntary carbon markets is narrowing, as there are now around 11 compliance schemes that allow offsets in some form. Convergence would mean better quality and transparency in carbon offset investments, bolstering confidence among buyers and channelling more capital toward climate solutions.
Over the past decade, these markets have operated independently, but expanding compliance markets to include voluntary carbon credits will spur investment, innovation, and establish a strong incentive system for corporate climate action. Of the two, the voluntary carbon market is the smaller one, currently worth about USD 2 billion annually. In comparison, at present compliance markets are valued at approximately USD 800 billion annually.
In compliance markets, also known as cap-and-trade markets, emissions are capped and may be reduced annually, and carbon allowances are freely given to or auctioned to companies who can then trade these allowances. However, the availability of carbon allowances is controlled to stimulate emission reductions.
Conversely, in the voluntary market, organisations can trade certified carbon offsets verified by accreditation bodies to achieve their voluntary decarbonisation targets, in many cases in absence of centralised regulation. Carbon offsets can originate from projects such as reforestation, better forest management, renewable energy, amongst other things.
Such convergence brings about the adoption of compliance market standards in the voluntary market, as evidenced by initiatives like CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), which encourages airlines to account for a portion of emissions with carbon offsets from the voluntary market that adhere to specific standards. This higher quality in turn may lead to higher prices of carbon offsets.
The implementation of pivotal policies regarding carbon pricing is considered crucial to foster the development of new markets and the expansion of existing carbon market programs.
According to the BloombergNEF 2024 Report on the Long-Term Carbon Offsets Outlook 2024, the success of the carbon offset market will be determined by the strength of demand and credibility of offsets, with the price of carbon offsets contingent on whether the standards can be agreed.
The price of carbon offsets in 2030, under the high-quality scenario where integrity issues in the offset market are resolved, is anticipated to hover around USD 20 per metric tonne. This will sharply rise as net-zero goals approach, and by 2050 is predicted to hit USD 238/metric tonne and with a market valuation of USD 1.1 trillion annually.
However, despite of these positive trends, it is not inevitable that the price of carbon offsets will rise. In the voluntary market scenario where integrity issues are not resolved, prices are USD 13/metric tonne in 2030, by 2050 reaching only USD 14/metric tonne with a market value projected to peak at USD 34 billion annually, up from USD 2 billion today. This scenario is compounded by the spectre of greenwashing and integrity risks, which dissuade companies from engaging with offsetting initiatives, and could spark criticism of carbon credits as a "right to pollute" for heavy emitters.
The growth of the offset market is especially positive for Indonesia given its huge carbon sequestration and offset-production potential. However, given the challenges noted above, it is timely that the ASEAN Alliance on Carbon Market (AACM) convened its Southeast Asia Carbon Market Outlook 2024 webinar on 28th March 2024, to provide a global and regional outlook on both voluntary and compliance carbon markets, to promote the Carbon Knowledge Hub as an insight platform to navigate carbon markets, and to foster an ecosystem of market participants and regulators in Southeast Asia.
This webinar is co-hosted by KADIN Indonesia and BloombergNEF, in collaboration with AACM, supported by ASEAN BAC and Equatorise Advisory.
Shinta Kamdani, Coordinating Vice Chair for Maritime, Investment, and International Affairs at KADIN; Chair of B20 2022 Indonesia; and CEO of Sintesa Group, said:
With the greater urgency to address the climate crisis, countries are pushed to level up the ambition to emission reduction and phase out fossil fuel. It is my pleasure to see that the ASEAN Alliance on Carbon Markets launched during Indonesia’s ASEAN Presidency last year continue to drive the dialogue on working together and on carbon market development.
Dharsono Hartono, Chairman of KADIN Net Zero Hub; President Director of PT. Rimba Makmur Utama, said:
We want to make sure that all the carbon credit projects coming from ASEAN Alliance will be high integrity and high quality. Thanks to BloombergNEF as our knowledge partner, this kind of webinar will help a lot of people in understanding what a good and high-quality carbon market project is, and more importantly help our region that is looking to decarbonise via developing the carbon market.
Benjamin Kafri, Global Head of Innovation, Client Relations and Partnerships at BloombergNEF, said:
These are very exciting and important times for carbon markets. We at BloombergNEF count more than 23% of global emissions are part of carbon pricing mechanism schemes around the world. We also count 74 carbon tax and market schemes implemented around the world globally. We see a great momentum also represented in a narrowing gap between compliance carbon markets and voluntary ones. In Indonesia in particular, we see a strong foundation building for a compliance carbon market, and we look forward to seeing the development of the Indonesian ETS.
Emma Coker, Co-head, Team Leader of the European Carbon Team at BloombergNEF, said:
We see carbon markets play a big role in achieving net zero targets. The first ETS began in 2005 and up until 2022 emissions have reduced by over 30%. I wish as a carbon market analyst I could say that was just because of the carbon market but of course there are other policies that were at play that really accelerated the transition. Given that, we very much hold our hope that discussions in COP29 in Baku and the COP30 in Brazil will have big focus a on carbon markets and the overarching infrastructure to set up a regulated global offsets market.
Steven Marcelino, Managing Partner of Equatorise Advisory, said:
Despite being less than a year old, I am pleased to see that our ASEAN Alliance on Carbon Markets is already getting a lot of good momentum. In terms of policy development globally, we see that the direction of travel is clear indeed, that many governments have net zero regulations and/or are currently ratifying regulations. In addition, the convergence of compliance and voluntary carbon markets is a welcome development. Looking forward, I do hope that this Alliance will inspire the next generation of project developers to support Southeast Asia Carbon Projects and help the world to meet its net zero emissions target.
About BloombergNEF
BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.About KADIN Net Zero Hub
KADIN Net Zero Hub empowers Indonesian companies to embrace and accelerate their journeys to achieve their net zero commitments. The Hub is an accredited UNFCCC Accelerator of the Race to Zero, the largest coalition of non-State actors taking rigorous and immediate action to halve emissions by 2030. Launched during COP26 in Glasgow, the UK; the Hub is Indonesia’s first private sector led body that supports its members with capacity building and technical assistance on industrial decarbonisation (i.e. GHG emission reductions. The hub collaborate with international organisations, business enablers and development agencies to support our ecosystem in embracing their net-zero transition. In 2024, KADIN Net Zero Hub will also focus on broader low-carbon economic development, including green EV ecosystem; renewable energy manufacturing and sustainable fuels. KADIN Net Zero Hub supported Indonesia’s ASEAN Chairmanship by launching ASEAN Net Zero Hub.About Indonesia Chamber of Commerce and Industry (KADIN)
KADIN is the umbrella organization of the Indonesian business chambers and associations. KADIN is focused on all matters relating to trade, industry and services, and is highly committed to tapping potentials and synergies of the national economy, offering a strategic forum for Indonesian CEOs. It is privately funded, hence an independent spokesperson of private sector interests. It is also the only nation-wide business organization mandated by Law No. 1/1987 to speak on behalf of private business, maintaining a privileged liaison to Government Officials and covering all relevant sectors. 34 regional Chambers (KADIN Daerah) and 514 district branches ensure national coverage. Because of this huge network, KADIN Indonesia is the preferred partner for foreign companies initiating their engagement in Indonesia become a member of KADIN Indonesia.
About Equatorise Advisory
Equatorise is an international advisory house supporting Indonesian corporates and institutions to seize opportunities in the UK and the EU as well as helping UK/EU based companies and institutions to unlock values and thrive in Indonesia, the rising powerhouse in the Indo-Pacific region. As a London-headquartered Indonesia market specialist, we have three focus areas; (1) Net Zero Sustainability Transition; (2) Digital Technology & Innovation; and (3) Global Health and Life Scienceto foster an ecosystem of market participants and regulators in Southeast Asia.
