Singapore and Chile signed an implementation agreement on carbon credits collaboration, under article 6 of the Paris Agreement.
The pact – similar to that Chile previously signed by with Switzerland and Japan – establishes a framework for the generation and transfer of carbon credits from carbon mitigation projects.
The move opens the doors for development of associated projects in Chile, which, in turn, can benefit from revenue from the sale of carbon credits.
Under the Paris Agreement, countries – to help meet their domestic emissions goals – can purchase carbon credits generated in other nations.
“This implementation agreement will unlock additional mitigation potential in Chile and will help Singapore to meet our climate target while bringing climate investments into Chile,” Singapore environment minister Grace Fu said in a recent statement.
According to investment research firm MSCI, the global carbon credit market could grow significantly by 2030, reaching between US$7bn and US$35bn, up from around US$1.4bn in 2024, with corporate emission-reduction efforts among drivers. For 2050, the estimated market size is between US$45bn and US$250bn.
To find out more about climate finance and dig a little deeper into the carbon credits market, BNamericas talks to Arturo Brandt, senior counsel at Chilean law firm Grupo Vial Abogados and strategic adviser at local energy trader Cinergia.
BNamericas: What are some climate finance options available for new projects in Chile seeking construction funding?
Brandt: A very important source is the carbon market, which seeks to finance certain types of projects that reduce greenhouse gas emissions. This market provides additional revenue to projects based on quantification, expressed in tons of carbon dioxide equivalent, or CO2e.
Another source is the so-called green bonds, which take into account the positive environmental impacts of a project, such as those related to the circular economy or energy efficiency. Essentially, they involve debt issuance by an issuer. This category also includes sustainable bonds, social bonds, blue bonds and sustainability-linked bonds.
It’s worth noting that over 40% of Chile’s sovereign debt is based on these so-called thematic bonds. Today, there are funds actively seeking this type of debt, as well as multilateral banks with mandates to subscribe to it.
BNamericas: What types of projects are we referring to? For example, power generation parks or desalination plants?
Brandt: In the case of the carbon market, it mainly refers to non-conventional renewable electricity generation projects such as solar, wind, biomass and small hydro, with batteries, along with electromobility projects, energy efficiency initiatives, and landfill methane combustion. To a lesser extent, nature-based solutions are also eligible, such as forestation, reforestation and conservation projects.
BNamericas: What are some of the pros and cons of these financing options?
Brandt: As mentioned above, the carbon market provides additional income beyond electricity sales for non-conventional renewable energy projects. This extra revenue improves the internal rate of return, or IRR, of a project, though it ultimately depends on the sale price of carbon credits, which varies depending on the market where they are sold.
However, one must be very careful with carbon credit buyers – it’s essential to thoroughly assess their payment capacity, financial history and credit rating, among other factors. Since this is not yet a fully mature market, speculators are present and caution is advised.
BNamericas: For energy projects seeking to participate in the carbon credit market, where they can generate revenue through credit sales, what types of projects are potentially eligible, and what are some typical conditions they must meet?
Brandt: Eligible project types have been described above, as well as some eligibility conditions. However, one key concept in the carbon market is ‘additionality.’ This refers to whether the income from carbon credit sales influences the decision to carry out the project and whether the project is considered ‘new’ or ‘first of its kind.’
The goal is to promote projects that are not part of common practice and that face technological, financial, that is, cash flow or other barriers that can be overcome thanks to revenue from selling carbon credits.
In terms of crediting periods, the duration during which a project can generate carbon credits varies. It depends on factors like the sale contract, which sets the payment timeframe, and the standard chosen by the project owner. This standard will determine the crediting period, typically ranging from 5-20 years.
BNamericas: Who are the potential buyers of carbon credits? For example, Chilean companies, foreign firms, etc.?
Brandt: This depends on the type of market in which the carbon credits are sold. In the voluntary market, companies that have measured their carbon footprint often seek to offset it, fully or partially, by purchasing these credits. Buyers here are motivated by their own climate goals and the price they are willing to pay.
Another option is Chile’s local carbon tax market, where companies that emit CO2 must pay US$5 a ton. These companies may also “comply equivalently” by submitting carbon credits.
The market that offers the highest prices is the article 6 market of the Paris Agreement, in which countries have committed to using carbon markets to meet their Nationally Determined Contributions, or NDCs. This happens through bilateral cooperation agreements.
Active buyer countries include Singapore, Switzerland, Japan, Norway and South Korea, which have signed agreements with potential seller countries such as Chile, Peru, Colombia and Mexico.
Also notable is CORSIA, the aviation carbon market, where airlines meet GHG reduction targets by purchasing carbon credits.
BNamericas: How important is the carbon credit market for Chile, and what is the outlook for the coming years?
Brandt: This market represents a significant opportunity for Chile, especially regarding the article 6 market of the Paris Agreement. Chile has already signed cooperation agreements with Japan, Switzerland and Singapore, offering very favorable pricing.
For renewable energy projects with battery storage, the income from carbon credits can increase the electricity sale price by US$1.50-9.00 per MWh, which is a strong incentive given current free market electricity prices.
It should be noted, however, that these agreements are currently valid until 2030, but it is expected that these timeframes will be extended through new commitments from signatories of the Paris Agreement.
