Asian bourses join billion-dollar race to launch new carbon exchanges

The drive to launch new carbon exchanges in Asia has reached new heights with Malaysia entering the fray, raising questions about how many will survive in a market that could be worth hundreds of billions in a few decades.

Bursa Malaysia Bhd. opened an exchange this month, joining more than a dozen that are under way or planned across the region. Thailand and Japan debuted their platforms in September, followed by Hong Kong a month later. Singapore has two fledgling bourses.

“We’re in another one of those mad dashes,” Thomas McMahon, co-founder of Singapore’s AirCarbon Pte, said in an interview. “We’ve seen this rush before, if you look at the early days of blockchain” and cryptocurrencies.

The exchanges enter a crowded voluntary offsets market that could soar over the next few decades but has so far gotten off to a slow start. Trading and prices have slumped, while concerns mount about how much offsets actually contribute to fighting climate change. 
 

What’s clear is that money in Asia is flowing into the space, with investors betting the flurry of climate pledges from countries and companies will drive growth. The exchanges have raised tens of millions of dollars, with powerful backers including sovereign wealth funds like Temasek Holdings Pte of Singapore and Abu Dhabi’s Mubadala Investment Co., along with banks such as Standard Chartered Plc and DBS Group Holdings Ltd.

Demand for offsets could grow 40-fold between now and 2050, to 5.2 billion tons of CO2 equivalent, or about 10% of global emissions, according to BloombergNEF. Prices could reach $120 per ton by then, making it potentially a $600 billion market.

Companies are drawn to the offsets market as a way to counter their emissions from burning fossil fuels. An offset is a promissory note that represents a ton of carbon dioxide emissions removed, or not added, to the atmosphere in return for a payment. Some regions, including the European Union and California, have mandatory programs imposed on some polluters, while many of the fledgling exchanges are voluntary markets.

Some of these new bourses are setting themselves up for what’s to come in the region, including additional compliance credit schemes that are set to grow, said Hannah Hauman, global head of carbon trading at Trafigura Pte.

“It’s a mix of national interest, capacity building, and that down the road, somebody could eventually have a lot of liquidity and win the game,” said Federico Di Credico, Asia-Pacific managing director at ACT Commodities.

Elusive Profits 
 

So far, it’s been far from lucrative. Existing platforms are struggling to attract enough transactions, with confusion over the integrity of carbon projects and a lack of clarity over how global trading of credits should work. Traders and analysts are also preparing for a bleak year ahead as polluters reduce buying amid inflation and recessionary fears.

For standardized contracts to be profitable, volumes would have to be “extremely high” and the market isn’t there yet, Singapore’s Climate Impact X CEO Mikkel Larsen said in an interview. “A lot of things have to improve in the market for all of us to make money.”

For now, profitability is “all in the primary market” as margins are higher, he added. In that market, buyers purchase carbon credits directly from project developers, such as through an auction. These can then be traded in the secondary market. CIX, which is backed by Singapore’s stock exchange and Temasek, has sold 420,000 credits through various auctions since it started.

AirCarbon, or ACX, which has transacted over 17 million carbon credits to date, aims to break even by 2025, McMahon said. Having raised more than $25 million from funders including Enterprise Singapore, Deutsche Boerse AG and Mubadala, it’s seeking another $50 million in a new round. ACX is targeting $33 million in revenue and 20 million credits transacted next year, McMahon said.

New Players
 

More platforms are coming. Indonesia’s bourse is looking to develop its own carbon exchange, while India is putting together a blueprint for a voluntary carbon market. Larsen and McMahon have talked to dozens of companies and countries interested in having their own exchanges. 

“Everybody decided in 2021, from a commercial perspective, that this would be a great area to build,” Peter Zaman, a Singapore-based lawyer at HFW, said in an interview. “For the current size of the voluntary market, especially in the latest weak demand environment, there are probably a few platforms too many.”

Experts meanwhile aren’t convinced the explosion of exchanges will have any meaningful impact on the climate.

“These sorts of exchanges might attract financial organizations, speculators, but maybe not so much buyers who actually want to use credits for their climate strategies,” said Gilles Dufrasne, global carbon markets lead at nonprofit Carbon Market Watch. “I don’t think that has the highest benefit for the climate.”