Repost: Why Asia is pivotal to future carbon market growth

A prolonged heatwave has cooked much of Asia during the month of April.

Temperatures climbed to 45°C in Myanmar, 44.5°C in India and 41.9°C in China, with Thailand and Laos breaking all-time high records. The oppressive weather has resulted in a surge in electricity consumption as air-con demand has surged, with many schools closed to avoid the worst of the health risks.

Only last August, factories across the Chinese province of Sichuan were ordered to stop production for 6 days to protect power supplies to residential consumers. This after a heatwave and prolonged drought prompted fears that the regions hydroelectric generation would not be able to supply sufficient power.

As this article from last summer demonstrates, Asia is particularly vulnerable to climate change, not simply because of the health risks to its population, but also to its future economic development. According to recent projections by the Asian Development Bank, climate change under a high emissions scenario could impose GDP losses of 24% in the whole of developing Asia, 35% in India, 30% in Southeast Asia, and 24% in the rest of South Asia by 2100.

The Association of Southeast Asian Nations (ASEAN), a bloc of ten countries in the region, are all parties to the Paris Agreement. Eight of its members have committed to net zero by 2050, while Indonesia is targeting 2060 or sooner, and only the Philippines yet to make a definitive promise. Many countries in the region are also heavily reliant on thermal coal power generation to power their economic development. But this isn’t stopping their governments from moving forward with climate policies including carbon pricing.

In February 2023, the Indonesia government launched the first phase of their emissions trading scheme covering coal powered electricity generators. At first only the largest coal facilities (those with a capacity of at least 100MW) will be covered by the scheme, before being rolled out to smaller coal and other fossil fuelled power plants at a later date.

As you’ll see, many countries in Asia are also in a unique position as a result of their immense carbon sinks (e.g. forests, mangroves, etc.) to benefit from global carbon credit trading under Article 6. Asia’s natural capital may soon start to be correctly valued - bringing a halt to deforestation and also helping to support local economies.

Given the extreme weather events of recent weeks, and the growing support from governments and investors for carbon markets and climate focused investing respectively, this article is perhaps more relevant than ever.

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Sometime it’s can be difficult for investors to see the potential in a market beyond their own immediate borders.

Investors in Europe, North America and other developed economies appear to be hardening their stance to investing in anything that feels like ‘ESG’. The proportion of company earnings calls mentioning ESG looks like it may have topped out earlier this year at 20-25%.

Carbon credits, by definition, sit under the ‘E’ in ESG. Like their ‘ESG’ brethren, the valuations of companies involved in the carbon credit sector have also been shaken to the core in recent weeks.

In recent articles I’ve highlighted some of the specific headwinds currently affecting the carbon credit sector. In particular, signs of resource nationalism as countries with bountiful natural capital understand the implications of global commitments (here), the impact of higher agricultural commodity prices (here), and concerns over energy security costs trumping those of energy transition (here).

It’s important to recognise the difference between short term and long term factors. And in the context of the current malaise over 'ESG’, its even more important than ever to take a broader, world-view of the problem carbon offset projects and the credits they generate are trying to fix, and the opportunity they may present.

Asia is particularly vulnerable to climate change. Asia is also blessed with significant natural capital. Protecting forests, peatlands and coastal zones at risk of deforestation help to conserve carbon stocks. Asia is experiencing the downside to climate change now.

Policies to support decarbonisation in the region are at a relatively early stage. However, there are no signs yet that investors are wavering, while funds exposure to ‘ESG’ remains low relative to Western levels. Commitment to climate action among Asia’s governments, corporates and consumers remains high, even though they are being buffeted by many of the same economic forces hitting elsewhere.

As carbon investors we need to recognise when shorter term factors make the long-term opportunity more attractive. Lets dive in.