The head of the world’s largest carbon credit certifier first made this passing remark in her keynote address to a room full of carbon projects developers, buyers, sellers and rating agencies at the GenZero Climate Summit held in Singapore earlier this month.
Following up with Eco-Business afterwards, she confirmed that “we are seeing a steady convergence between voluntary and compliance carbon markets around the world.”
Verra, for instance, has inked over 30 memorandums of understanding with jurisdictions and institutions globally, including Singapore, Thailand and Malaysia, to enable the use of voluntary credits for domestic carbon tax obligations or regulated markets, she said.
But with the first batch of Article 6.4 credits coming to market, after rules enabling the cross-border trading of offsets to meet the climate targets of companies and countries were finalised at last year’s COP29 climate summit, Rambharos also called for further alignment in global frameworks to reduce fragmentation, as the compliance-driven market grows.
Singapore’s manpower minister and second minister for trade and industry Tan See Leng, who also spoke at the GenZero summit, similarly urged for the harmonisation of standards as jurisdictions, like the European Union (EU), consider the use of Article 6 credits in existing compliance schemes.
Within Southeast Asia, several countries already have a compliance scheme in place, or are in the process of developing one.
Singapore – the first in the region to enact a carbon tax in 2019 – already allows the country’s largest polluters to use eligible Article 6 credits to offset up to 5 per cent of their taxable emissions. The levy is currently set at S$25 (US$19) per tonne of carbon dioxide equivalent, and will be raised to S$45 (US$35) next year, with the goal of reaching S$50-80 (US$39-62) by 2030.
The city-state has also been actively pursuing bilateral carbon trading deals to expand its pool of purchasable Article 6 credits, inking its sixth pact with Rwanda earlier this month.
Indonesia, which launched an emissions compliance scheme for its power sector in 2023, is looking to expand it to nine other industries by 2029. Meanwhile, Thailand and Malaysia are in the midst of rolling out carbon tax systems for their high-emitting sectors and are in talks to set up their own emissions trading schemes.
However, the voluntary markets continue to stall as it faces “a fragmented landscape of policies and standards,” said Tan.
“The VCM as more than 15 carbon crediting standards covering over 100 active methodologies today. These standards and methodologies are generally not interoperable with a compliance market, especially when countries set up their own national standards and their own methodologies,” he said.
Concurrently, international standard bodies, like the Science-Based Targets initiative (SBTi), have updated their guidelines addressing the use of carbon credits to offset the residual emissions of organisations.
“Their ongoing reviews and the lack of consensus put the markets on hold in the interim. This is therefore preventing more corporate buyers from participating in the carbon markets, out of the concern that the carbon credits they buy do not demonstrate credible climate action,” said Tan.
To address these concerns, Singapore released an initial set of recommendations, alongside Verra and Gold Standard, at COP29 to support countries looking to work with existing independent crediting programmes to implement Article 6, instead of creating their own domestic standards from scratch.
Last year, five major carbon market associations representing Malaysia, Indonesia, Singapore, Thailand and Asean also committed to develop a unified framework for carbon trading, though an integrated market is still nowhere in sight.
Since the start of this year, there have been reports circulating that the EU’s 2040 goal is likely to include Article 6 credits, which many carbon market developers in Asia are hoping would lead to a reversal in the ban of international credits in the EU’s Emissions Trading System (ETS).
The EU ETS, which caps the emissions of companies through the allocation of tradeable polluting allowances, was valued at EUR 183.6 billion (US$206.5 billion) in 2024. While it is the largest compliance market by transaction value, China’s emissions trading system – which only allows for credits from its domestic carbon offset scheme – covers the most operational emissions in the world.
Frederick Teo, chief executive of Temasek-owned investment platform GenZero, suggested that large existing compliance markets could open themselves up to international credits from elsewhere in the world.
“It’s not just about Asia developing our own compliance frameworks and markets, but also asking if there is a possibility that developed markets with compliance frameworks can open themselves up to accepting credits from the developing world as well,” said Teo on a separate panel at the event.
“It is not just about getting lower cost environmental attribute products into the market, but also a way of transferring financing from developed markets that typically will have a compliance kind of a programme, to developing countries where they typically are the source of some of these credits,” he said, adding that it could be an alternative to foreign development aid.
Demand in VCM softening
With the rollback of United States’ climate commitments under president Donald Trump, there are concerns that companies might be pressing pause on their emissions reduction goals, putting a further dent in the demand for voluntary credits.
In carbon markets, retirements are the strongest indicator of demand, which appears to have softened slightly this year, said Donna Lee, co-founder of carbon credits ratings agency Calyx Global. “As of the end of April, the industry has seen around 60 million credits retired across the big four registries. By comparison, by the end of April 2024, the figure was around 65 million.”
However, Lee said that a number of corporates have remain actively involved in the VCM to date. “The largest retirees of credits continue to be oil and gas majors. These are followed by large technology companies, such as Netflix and Salesforce. Others, such as Microsoft and Google, have also made big announcements with regard to advance purchase commitments.”
Avoidance credits, namely those generated through REDD+ forest protection projects and renewables development, continue to dominate issuance and retirement volumes in the VCM. However, removal-based credits, which focus on taking carbon directly out of the atmosphere via processes like reforestation or direct air capture and storage, “are growing faster and there appears to be strong interest from buyers to make them a part of their portfolio,” said Lee.
Additionally, Calyx Global’s price indices have shown steady improvements in credit quality among retirements, though overall integrity continues to be impacted by lower-quality credits. “Of the ten projects that retired over one million credits in April, half use methodologies rejected by the Integrity Council for the Voluntary Carbon Market (ICVCM),” it stated.
On the credits issuance side, Calyx Global saw an uptick in integrity in April, bolstered by large volumes of higher quality waste sector projects, including landfill gas and wastewater credits, but issuances also continue to be weighed down by lower-quality renewable energy credits, it said.
Reductions vs removals
While there was consensus among attendees of the summit that mandated demand for carbon credits will be required for the overall market to recover, debates ensued on whether net zero targets are better met through carbon removals, compared to reduction or avoidance credits.
In 2024, they fetched higher prices in the VCM irrespective of their actual integrity, according to a recent study by Calyx Global. For instance, some commercial tree plantations that “have questionable additionality” are commanding higher prices, likely because they represent removals, compared to many waste-related projects “that have a higher likelihood to be additional” which receive lower prices as they are reduction credits, it noted.
“This is unfortunate because the atmosphere is better off if companies purchase higher greenhouse gas integrity credits. The irony is that the money spent on lower-quality removal-based credits (e.g. above US$40 per unit) could be better used to purchase greater than eight times more high-quality reduction credits that sell for under US$5 per tonne,” Calyx Global stated.
Demand for removal-based credits has also been concentrated within a limited set of companies, based on analysis by Sylvera, another rating agency. Tech giant Microsoft alone accounted for 64 per cent of all purchased volumes last year, while Google and the Frontier coalition – an advance market commitment to purchase permanent carbon removals which counts multinationals like H&M Group, Stripe and Shopify among its members – made up nine of the top 20 purchases in 2024.
However, Singapore’s climate action ambassador Ravi Menon warned against pitting reductions and removals against each other, which presents a “false dichotomy”.
“You must all have read George Orwell’s Animal Farm: ‘four legs good, two legs bad’. We have that version in the carbon markets. Compliance is good, voluntary is bad. Removal is good, reduction is bad. Vintages can also be good and bad… These are oversimplications. What really matters is, are you sure you’ve removed or reduced one tonne of carbon dioxide,” said Menon.
“The more we can take a data-based approach to define what is a good credit, then I think we can get over some of these false dichotomies.”
Christopher Gebald, chief executive of Climeworks, a Swiss company specialising in direct air capture, agreed that reductions still have a role to play and that having a diverse portfolio of credit types is key to scaling the overall market.
“Over time, we have learned that the real customer need is to buy a portfolio of carbon credits, and we used to be one pillar of that… So several years ago, we started to jump into afforestation credits, biochar and enhanced weathering,” he said. “Very beautifully… it’s also scientifically proven that portfolios of carbon removals are more economical, require less land, energy and water, compared to single solutions.”
“We know that in current financial markets, you want to have uncorrelated assets in your portfolio,” he said, referring to investments that have little or no correlation with the performance of traditional asset classes like stocks and bonds. “We should appreciate and acknowledge that those being uncorrelated can also be a super important aspect in order to scale this whole industry.”
The SBTi and the EU ETS schemes are currently looking into including carbon removals, which Gebald applauded.
“We’re really hopeful that the next revision of the SBTi will land the permanent removals as a requirement by 2030,” he said. “If carbon dioxide removals are integrated in the EU ETS and some novel financing mechanisms… that would be an absolute gamechanger for this industry.”
