The long anticipated 26th United Nations Climate Change Conference of the Parties (COP26) kicked off last week in Glasgow and we have been closely monitoring the events of the conference, particularly where Singapore and the wider Asia Pacific region are concerned. COP26 has been labeled as the “last chance saloon1” for averting disastrous climate change and delegations from countries around the globe are working tirelessly to reach agreement on key issues which, if resolved, have the ability to potentially assist in stemming the tide of global warming. Over the course of the first week of COP26, a number of significant announcements were made, which can be summarized as follows:
- Coal – The United Kingdom, together with the support of a 190-strong coalition of nations and organizations, launched a proposal to phase out coal power and end support for new coal-fired power plants set out in the “Global Coal to Clean Power Transition Statement” (the “Statement”). The Statement commits to:
- End all investment in new coal power generation domestically and internationally.
- Rapidly scale up and deploy clean power generation.
- Phase out coal power in the 2030s for major economies and by 2040 for the rest of the world.
- Ensure a just transition away from coal power in a way that benefits workers and communities.
While a number of countries and organizations appeared to support the Statement, with many issuing their own statements on ending international coal financing and phasing out coal-fired power generation during COP26’s Energy Day, fewer than 80 countries and organizations have actually signed onto the Statement’s binding commitments (the “Pledge”). Over the course of Energy Day, the COP26 parties amended through negotiation the four aspects of the Pledge in an effort to generate greater support. In a significant blow to the Statement’s ultimate impact, a number of the largest coal-producing countries—Australia, China, India and the United States—were notable in their absence by not supporting it. It is also worth noting that certain nations did not commit to all aspects of the Pledge, including Indonesia and the Philippines, which refused to endorse part 3 of the Pledge relating to the construction and financing (both domestically and internationally) of new unabated coal-fired power generation.
Crucially, the signatories diluted the timeline for transitioning away from unabated coal power generation. Now, the Pledge aims to achieve this transition for “major economies” in the 2030s (or as soon as possible thereafter), and for the rest of world in the 2040s (or as soon as possible thereafter).
In addition to the Statement, it was also announced that 28 new members had joined the Powering Past Coal Alliance, which carries some additional significance. Included within their ranks are nations such as Singapore, the first Asian nation to sign on to this alliance, as well as Ukraine, owners of Europe’s third largest coal fleet. Beyond the nation states, 11 new financial institutions made their commitment known—with banks such as NatWest, HSBC and Lloyds Bank contributing to the total of $17 trillion in assets newly signed on. Please see our previous articles discussing the Statement: COP 26 on Coal – The Developments So Far and Ambitious Coal Transition Pledge Not Fully Embraced at COP26.
- Methane – More than 100 countries (including Singapore, Indonesia, Vietnam and the Philippines from the Association of Southeast Asian Nations (ASEAN) region) have committed to cutting their methane emissions by at least 30 percent by 2030. This initiative, known as the “Global Methane Pledge” was launched by the United States and European Union in September 2021, when nine countries had signed the agreement (including the U.K. and Indonesia). Notably, China, India and Russia have not pledged to reduce their methane emissions.
- U.S. – China climate co-operation – One of the biggest surprises at COP26 has been the announcement that the world’s two largest CO₂ emitters, the U.S. and China, have pledged to work together to accelerate climate action over the course of this decade. The joint statement includes a focus on lowering methane emissions (which U.S. special envoy, John Kerry, described as the “single fastest and most effective way to limit warming2”).
- National pledges – Some nations have made individual pledges relating to climate change, such as India, which has announced that it intends to generate half of its electricity from renewable sources by 2030 and achieve net zero emission status by 2070.
- Forests – In the first significant announcement from COP26, more than 100 nations committed to ending and reversing deforestation by 2030. The pledge includes almost $19.2 billion of public and private funds. In addition, more than 30 of the world’s largest financial institutions (including the likes of Aviva and Schroders) have agreed to end investment in activities linked to deforestation.
Singapore is well represented at COP26, with a contingent of government officials, business leaders, academics and young activists making the trip to Glasgow. The delegation, led by Grace Fu, Minister for Sustainability and the Environment, is engaged in discussions covering a wide variety of topics, including one which holds particular relevance for Singapore—carbon markets. Ms. Fu delivered Singapore’s national statement at COP26 on Tuesday, calling for “urgent collective action to address the global climate crisis3.” The statement also called for other countries to set out more ambitious climate targets and low emissions strategies, as well as highlighting Singapore’s Green Plan 2030 (please see our previous article addressing the Green Plan 2030: Singapore’s Green Plan and Hydrogen) which sets out “concrete near-term plans” geared towards achieving its net zero ambition. Ms. Fu also took the opportunity to outline Singapore’s recent decarbonization initiatives, such as its plan to import renewable energy.
Singapore, and climate change
During October, in the lead up to COP26, the Singapore Energy Market Authority (EMA) held the latest Singapore International Energy Week (SIEW) conference, an annual event designed to provide a platform for energy professionals, policy-makers and commentators to share best practices and solutions in the global energy space4. The energy transition and sustainability took center stage at the latest SIEW, with Singapore making a number of announcements about the future of the energy sector in the “Red Dot”. In a speech at the opening of SIEW, Minister for Trade and Industry Gan Kim Yong announced that Singapore intends to import up to 4 gigawatts (GW) of low-carbon electricity by 2035, approximately 30 percent of its total supply, in a bid to diversify supply and enhance energy security in the island state. Singapore is proposing to commence trials next year, with up to 100 megawatts (MW) of electricity being imported from low-carbon sources in Malaysia (YTL PowerSeraya), a wholly owned subsidiary of Malaysia’s YTL Power International, recently announced that it had been appointed as the electricity importer under the trial scheme and will import the electricity from Malaysia via existing interconnectors), Indonesia (solar) and Laos (hydropower imported via Thailand and Malaysia). Meanwhile, Singapore’s Sunseap Group and Sembcorp Industries recently announced that they are developing solar and energy storage projects in Indonesia (located in the Batam-Bintan-Karimun region and wider Riau islands), with some of the electricity generated being earmarked for export to Singapore.
The announcements made during the course of SIEW form part of wider efforts being undertaken by Singapore in the battle to combat climate change, both at home and abroad. Singapore is a long standing advocate of action to tackle climate change, having ratified the United Nations Framework Convention on Climate Change (UNFCCC) in 1997, acceded to the Kyoto Protocol in 2006 and also ratified the amendments on the second commitment period (from 2012 to 2020) of the Kyoto Protocol in 20145.
Singapore launched its “Climate Action Plan” in 2016, setting out the government’s strategies to address the impact of climate change (e.g., implementing coastal and infrastructure protection measures). In addition, the Climate Action Plan sets out Singapore’s strategy for reducing carbon emissions through to 2030, including:
- Improving energy efficiency.
- Reducing carbon emissions from power generation.
- Developing cutting-edge low-carbon technologies.
- Responding through the collective action of government agencies, individuals, businesses and the community.
In 2018, Singapore established a dedicated Climate Action Package (CAP) under the Singapore Cooperation Programme, a scheme designed to aid developing countries in developing capacity in areas such as climate science, flood management and disaster risk reduction6.
In addition to the above, Singapore was also one of the first thirty countries to ratify the “Paris Agreement” on September 21, 2016, an international treaty setting out a global framework for the reduction of greenhouse gas emissions, adopted at the 21st Conference of the Parties to the UNFCCC (COP-21) in December 2015. Following the ratification of the Paris Agreement (and an extended period of negotiation), the signatories agreed to formalize the “Paris Agreement Work Programme” (PAWP), setting out the “modalities, procedures and guidelines7” for the implementation of the Paris Agreement. While the PAWP was broadly concluded during COP-24 in Katowice, Poland, in December 2018, a number of key points remain outstanding.
The Article 6 debate
Article 6 of the Paris Agreement, which relates specifically to the creation of a global carbon market system, has yet to be implemented, despite being discussed at every COP since Paris. The operative provisions of Article 6, insofar as they relate to carbon markets, can be summarized as follows:
- Article 6.2 – sets out an accounting framework for international cooperation (e.g., linking the emission trading schemes of two or more countries). The provision also permits the international transfer of carbon credits between countries.
- Article 6.4 – establishes a central UN mechanism to trade carbon credits from emissions reductions which are generated by specific projects.
The specific issues relating to Article 6 that need to be resolved are, essentially:
1. Whether Article 6.2 should contribute to generating revenue for the “Adaptation Fund” (the fund is designed to finance climate change adaptation projects and programs based on the priorities of eligible developing nations and is financed by a share of the proceeds arising from Clean Development Mechanism developed under the Kyoto Protocol).
2. Concerns around the potential double-claiming of credits from emissions reductions under Article 6.4.
3. The eligibility of pre-2020 carbon credits for post-2020 nationally determined contributions (NDCs) (this is favored by emerging economies who are currently carrying significant volumes of credits from reductions in industrial emissions and forest conservation work).
4. The means by which Article 6 could support adaptation action through generating finance for added adaptation via Article 6.28.
Any failure on the part of the signatories to the Paris Agreement to effectively implement Article 6, which is seen as a critical aspect of the treaty, has the potential to derail global decarbonization efforts. We understand that Singapore and Norway are currently leading the charge in attempting to reach consensus on the application of Article 6 at COP26 and a variety of proposals are currently on the table, but an agreement has yet to be reached. For example, the Alliance of Small Island States (AOSIS) is pressing for a 5 percent levy on all international carbon transactions, a proposal which is opposed by developed nations which claim that the additional costs would inhibit trading9. While delivering Singapore’s national statement at COP26, Ms. Fu made the following comment in relation to Article 6: “Singapore will work with all parties in this final stretch to identify pragmatic solutions to achieve a credible and balanced package under this track that meets the needs of all parties, while safeguarding environmental integrity.”10
Creating a center for carbon trading
Agreement on the terms and application of Article 6 is critical to Singapore’s ambition to establish itself as a global center for carbon trading. Falling under the “Green Economy” pillar of the Green Plan, the creation of a carbon trading and services hub will encompass “green finance, sustainability, verification, credits trading and risk management.” Singapore is already at the forefront of global efforts to create a “carbon economy” and took its first steps towards price discovery in this field by introducing a carbon tax in 2019, the first nation in Southeast Asia to do so. Set at the rate of S$5/tCO2e (for the period 2019-2023), the carbon tax applies to “direct emissions from facilities emitting 25 ktCO2e or more in a year, covering carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons,” covering approximately 80 percent of Singapore’s total emissions11. It should be noted that the carbon tax does not apply to fuels utilized in land transport as they are already subject to excise duties designed to encourage reduction of their use. However, the carbon tax was not intended as a “standalone” policy, with the National Climate Change Secretariat (NCCS) (established in July 2010 under the Prime Minister’s Office to develop and implement Singapore’s domestic and international policies and strategies to tackle climate change) indicating that it forms part of Singapore’s “comprehensive suite of mitigation measures to reduce emissions, create green growth opportunities, and transit to an energy-efficient low-carbon economy.” Establishing Singapore as a carbon trading hub will be a key component of the “green growth opportunities” highlighted by the NCCS.
The Green Plan’s aim of establishing Singapore as a carbon trading hub is one that has been reinforced by the “Emerging Stronger Taskforce,” (EST) a group established under the Future Economy Council (FEC) during Singapore’s Circuit Breaker in May 2020. The EST was formed to examine the impact of the COVID-19 pandemic on Singapore’s economy and provide recommendations to the FEC as to how Singapore can remain resilient and create new sources of economic growth going forward12. The EST made five recommendations, one of which (Sustainable Nation – Seizing Growth Opportunities from Sustainability) focuses on the establishment of Singapore as a “Sustainability Hub to serve global demand, particularly in positioning Singapore as a carbon trading and services hub.13”
In its comprehensive report, the EST recommended that a concerted effort be made in this area, focusing firstly on developing a carbon marketplace “built on quality and trust that addresses gaps in the voluntary carbon market, establishing a one-stop solution for companies to measure, mitigate, and offset their carbon footprint, and convening partnerships to capture opportunities through research and innovation.” Perhaps the most significant criticisms currently levelled at the voluntary carbon market are that it is too fragmented to achieve its ultimate goal (i.e., reducing global CO₂ emissions) and accusations of greenwashing (which we considered in our previous article Singapore’s Green Finance Drive) are rife. The EST believes that Singapore can utilize its reputation for integrity and strength in professional and financial services (as well as commodity trading), to create a world-leading carbon marketplace while, at the same time, contribute towards Singapore’s own commitments relating to climate change14. The EST submitted its recommendations to the FEC in May this year and they were subsequently accepted for incorporation into the work being undertaken by the FEC15.
In a timely development following submission of the EST’s recommendations, Singapore took a significant step towards realizing the goal of creating a carbon trading hub through the announcement of the establishment of Climate Impact X (CIX), a voluntary carbon marketplace, backed by the Singapore Exchange (SGX). The joint venture, comprising SGX, DBS Group, Standard Chartered Bank and sovereign wealth fund Temasek, aims to scale the voluntary carbon market by leveraging “satellite monitoring, machine learning and blockchain technology to enhance the transparency, integrity and quality of carbon credits that deliver tangible and lasting environmental impact.16” Expected to launch by the end of 2021, CIX will commence with the launch of two key distinct digital platforms to cater for the needs of both buyers and suppliers of carbon credits, namely:
- The Carbon Exchange – a digital platform that enables buyers and suppliers to trade significant volumes of high-quality carbon credits. It is intended that the exchange will cater primarily to buyers such as multinational companies and institutional investors. The standardized contracts entered into by buyers in the exchange will be defined by a set of terms and quality definitions against which the carbon credits can be delivered.
- The Project Marketplace – a digital platform for buying high-quality carbon credits directly from specific projects, ideally designed for custom purchases, with each project supported by risk and pricing data.17.
With the global carbon credit market predicted to grow upwards of $50 billion by 2030, Singapore has the ability to steal a march on potential rivals in this space (particularly in the ASEAN region and elsewhere in Asia) by launching initiatives such as CIX. Indonesia, Thailand and the Philippines have all taken steps towards establishing their own frameworks to trade carbon credits, while Vietnam’s revised Law on Environmental Protection purports to establish a carbon market as early as 202218.
There are, of course, significant challenges associated with the creation of a carbon market, most notably transparency, regulation, price volatility and liquidity. It is therefore crucial for any prospective carbon exchange to take these issues into consideration and create a platform which seeks to address them—this is where Singapore has an advantage over other countries looking to establish a market for trading carbon credits, given its existing status as a global financial hub, robust regulation of commodity trading and financial services, as well as its reputation for transparency. Moreover, Singapore can look to leverage strong relationships with major carbon emitters, such as the U.S. and China (who are both vying for dominance in Southeast Asia) to promote investment in its prospective carbon trading hub, in addition to decarbonization efforts across the ASEAN region.
There are a number of existing carbon exchanges, such as New York-based Xpansiv CBL, European Energy Exchange (the leading exchange for European power in both the primary and secondary market for carbon emission allowances under the EU Emissions Trading Scheme (ETS), the largest environmental market in the world19) and the Shanghai Environment and Energy Exchange. However, the case of the Chicago Climate Exchange (CCE) should serve as a cautionary example of the difficulties associated with establishing a successful carbon trading market. The CCE operated from 2003 to 2010 when it was forced to close due to a lack of interest from large-scale investors in a voluntary market who were more focused on the prospect of the U.S. government enacting a mandatory market. However, it should be noted that the interest in carbon markets has increased dramatically in the intervening period since 2010 and the prospects for CIX must be considerably more favorable than carbon exchanges that historically failed to make the grade.
In October 2021, CIX piloted a first-of-its-kind auction for a curated portfolio of high-quality nature-based carbon credits. The portfolio was comprised of eight recognized forest conservation and restoration projects located in Africa, Asia, Central and South America. The auction successfully cleared 170,000 carbon credits, supported by 19 buyers from across various industries including ENGIE, Trafigura, Boston Consulting Group and City Developments Limited, as well as the co-investors in CIX (noting that these entities purchased their carbon credits at the auction-clearing price instead of participating in the auction itself).
COP26 presents a real opportunity for both nations and the private sector to make firm commitments towards addressing climate change. While the announcements over the course of the first week of COP26 have certainly been positive, there are key issues which need to be closed out by the conclusion of the conference, most notably in relation to Article 6 which will be pivotal to the creation of a global carbon market system. We expect that Singapore will play a key role in the discussions over the course of this week, particularly given the island state’s ambition to establish itself as a center for carbon markets.