Carbon Pricing And Taxes In ASEAN

Facing the Climate Challenge

Climate change. It is undoubtedly one of the foremost challenges of modern humanity, with impacts that have the potential to reach every part of society as we know it. Greenhouse gas (GHG) emissions produced by human activities across industries ranging from energy to agriculture have been the leading cause of global temperature rises and the present consensus within the scientific community is that it needs to be capped at 1.5 degrees Celsius between now and 2030 if we are to avoid the onset of major climate events and weather disasters in the years to follow. Damage to infrastructure and energy systems, disruptions in access to clean water and nutritious food sources, and the compounding impact of these situations on human health and safety provide more than sufficient justification and impetus for governments and society to act towards reducing emissions and preventing climate change from becoming unmanageable.

Over the past few decades, there have been movements at the international level to create better global awareness on the potential impact and severity of climate change, with discussions taking place on how to create workable strategies and cooperative initiatives aimed at reducing global emissions. The Kyoto protocol, which was adopted in 1997, was perhaps the first internationally agreed upon commitment towards climate change strategies and emissions reduction efforts, setting targets and benchmarks for signatory nations to strive towards.

One of the strategies that was proposed in the Kyoto Protocol was for the creation of an emissions trading scheme. Under Article 17 of the protocol, countries would be allotted with a certain amount of greenhouse gas emissions that they are allowed to produce. If a country exceeds their allotted emissions cap, they purchase the emissions from countries that have excess amounts in store. As carbon is considered the principal greenhouse gas, it was taken as the central unit of measurement, and so carbon trading came into existence. This essentially signified the beginning of carbon pricing, a concept that would continue to gain prominence and momentum in subsequent years as a means of reducing emissions through economically viable means.

The Mechanism of Carbon Pricing

What exactly is carbon pricing though? Put as simply as possible, it is just as the name implies. Carbon pricing essentially means putting a price tag on carbon emissions. It is achieved when governments assess the external costs generated from greenhouse gas emissions, including the costs accrued from heat waves, droughts, floods and the corresponding damage to private and public property, and determine the associated price for a quantifiable amount of emissions.

Carbon pricing can occur in one of several ways. The first of these is through an emissions trading scheme (ETS). Here, businesses or countries are provided with emissions permits allowing them to emit a particular amount of carbon or equivalent greenhouse gas from their operations. The total number of permits and allowed emissions levels are capped by the issuing government and those that exceed their predetermined emissions must buy permits from those with available ones. Credits and permits are also given to countries or businesses that engage in successful emissions reduction activities. The ETS essentially creates a market for carbon credits and allows trade to take place which facilitates the buying and selling of carbon credits, aimed at incentivizing emissions reductions, and creating value in environmentally friendly efforts.

Emissions trading supports the reduction of carbon emissions by incentivizing companies to keep emissions at a minimum, less they be required to pay for the requisite permits. On the other hand, companies that sell their permits to emitters can use the revenues from this to invest in green technologies and sustainable initiatives which pay respect to climate friendly aspirations.

The other way in which carbon pricing can occur is through a carbon tax. A carbon tax is where a price is directly set for the emissions of carbon or associated greenhouse gases. Taxes can be directly levied in this way, or they can be done indirectly, by placing a tax on the carbon content of fossil fuels, for instance. In contrast with the ETS system, in a carbon tax system, the emissions reduction outcome is not pre-defined, however the carbon price is. By using this approach, governments can then choose to use the funding accrued from these taxes towards the implementation of carbon emissions reductions measures, national climate friendly initiatives, renewable energy investments and the development of climate resilient infrastructure.

Companies can also choose to establish carbon pricing mechanisms internally within their own organisations. These are generally referred to Internal Carbon Pricing (ICP) and occur when a business sets a predetermined internal charge on the amount of emissions released from activities under their control. This allows them to manage risks associated with climate change while also encouraging more environmentally sustainable practices within their operations.

Carbon offsets another economically viable means of reducing greenhouse gas emissions. Here, an emitter can choose to invest in a carbon offset to compensate for the emissions that they produce. These offsets can come in various forms, ranging from reforestation activities to projects involving capturing the carbon in soils, to investments in climate smart agriculture. The carbon offset mechanism can work alongside an emissions trading scheme in which they are purchased in exchange for credits and in the case of carbon taxes, an emitter can choose to purchase an offset instead of paying the taxable amount.

Climate Concerns at the ASEAN doorstep

The ASEAN economic region is on a trajectory to become the fourth largest economy in the world. The region has experienced sustained economic growth at approximately 5.3 % since 2006 and is poised to continue developing at an increasingly rapid rate in the years to come. This industrial expansion means that emissions within the region are likely to see an equivalent increase and it is for this reason that ASEAN must now consider the role it will play with regards to global emissions reductions.

Greenhouse gas emissions within the ASEAN region have been largely dominated by those coming from the energy sector, primarily from that of fuel combustion, at 1,485 Mt MtCO2 , and from the land use and land use change and forestry (LULUCF) sectors at 965 MtCO2eq, as per 2018 estimates. The manufacturing, transportation as well as electrical and heat production sectors are also major emissions sources while deforestation and peatland exploitation can be traced as significant contributors as well.

It is worth noting that ASEAN nations are indeed especially vulnerable to the adverse effects of climate change events as many of its members states contain major coastal cities that would be at risk to the flooding, rising sea levels and typhoons that would occur should temperatures continue to rise. While this is true, it is also promising to note that the region contains a large and dense reserve of forested areas and natural resources, placing it in a particularly unique position with regards to taking positive actions on climate change and engaging in emissions reduction activities.

The above-mentioned conditions make the adoption of climate positive strategies within ASEAN both a necessity and an opportunity, as the introduction of mechanisms which leverage on the strong economic growth in the region to create better climate resilience while reducing carbon emissions could be highly beneficial both from an economic perspective as well as from a sustainability one. Carbon pricing mechanisms hold the potential of shifting the ASEAN response to climate change onto a more firm and equilateral footing by providing a commercially viable means of reducing emissions without compromising on economic growth.

The ASEAN Approach to Carbon Pricing

Approaches to Carbon Pricing in the ASEAN region over the last three decades have mostly been lukewarm due to concerns surrounding the potential drawbacks to economic growth and access to energy, however more recently a growing number of initiatives have begun to take root as countries become more informed of the potential benefits that these could bring.

Among ASEAN Nations, Singapore has most recently shown initiative to create carbon pricing mechanisms by introducing a carbon tax in 2019 which was set at S$5/tCO2e. The tax is applied uniformly across all sectors, including those which are energy intensive as well as those that are trade exposed, without exemption, to create fair, consistent, and transparent price signals across the economy. The country has expressed its intention to transition to an energy efficient, low carbon economy, and sees the tax as an economically effective way of making that

Singapore is also where Climate Impact-X is headquartered, a private initiative which created a carbon exchange focused on nature-based solutions. CIX completed its pilot auction in November in which its carbon credits were purchased and issued, representing 170,000 tonnes of carbon. These credits were linked to forest conversation projects in Africa, Asia, Central America and South America, and the company provides a platform to attract investment into emissions reduction efforts.

Elsewhere in the region, member states have been considering the potential of introducing pricing mechanisms of their own in the form of taxes, voluntary carbon markets and emissions trading schemes. Indonesia, for instance, announced earlier this year that it will be introducing its own carbon tax at 30 Indonesian rupiah per ton of CO2e through a pilot program directed at coal fired plants. It is also considering possibility of introducing an Emissions Trading Scheme for the power sector by 2024, and a domestic carbon offset mechanism named the Indonesian Certified Emissions Reduction (ICER) is presently being assessed for its potential.

In Thailand, carbon pricing has found potential through introduction of a carbon market called FTIX, operated by the Federation of Thai Industries. The platform comprises 12,000 private companies across 45 sectors, allowing firms and government agencies to buy and sell carbon credits while tracking emissions using an online dashboard. The Thailand Carbon Offsetting Program has also been developed to allow public and private sector organisations to offset their emissions and the country is presently developing a voluntary emissions trading scheme which is being piloted for the energy sector.

Here in Malaysia, carbon pricing mechanisms currently exist in the form of Internal Carbon Pricing (ICP) practices which are upheld by three major companies, Sunway Group, CIMB Bank and Malayan Banking Berhad (Maybank). Each of these companies have carbon pricing mechanisms which are applied to the emissions that are under their internal control. Sunway Group, for instance, has an energy intensity target which is associated with a particular Business Unit (BU) and if the target is exceeded, a deduction of Rm 15 per tonne of carbon dioxide will result as per the ICP.

CIMB Bank’s ICP is set at Rm 70 and is similarly levied on any country that fails to meet its designated GHG cap. The company makes use of the funds that are collected from the ICP to invest in energy efficiency upgrades, purchase carbon offsets and renewable energy certificates, wherever appropriate. Both companies foresee carbon pricing mechanisms as likely to find their way into the Malaysia economy eventually and consider these internal efforts as a means of preparing for this while also driving more environmentally conscious behavior within their organizations.

Malaysia does not presently have its own Carbon Tax in place, although it is considering the potential of introducing one to improve domestic revenue. It does however have a Voluntary Carbon Market (VCM) in the works developed by Bursa Malaysia which is expected to begin trading at the end of 2022. The VCM is intended to support the financing of projects which reduce GHG emissions, and its carbon credits will be derived from nature-based solutions and technologies that achieve this aim.

Vietnam has also been putting together plans to introduce its own carbon pricing mechanisms in coming years, on that will largely be centred around an emissions trading scheme while the Philippines is looking into the viability of a carbon tax to be introduced into its economy

The above initiatives indeed indicate that ASEAN nations are looking more actively into the potential for carbon pricing mechanisms to drive governments and members of the business community towards reducing emissions. While those mentioned above are promising, there remains vast potential for more committed and collaborative efforts to introduce these mechanisms in ASEAN.

The ASEAN State of Climate Change Report produced by the Indonesian government highlights several areas that could benefit from greater attention with respect to carbon pricing in Southeast Asia. An ASEAN wide carbon tax is one of the suggestions that is put forward along with a mention for the need for a proper Management, Reporting and Verification (MRV) System to assist in determining the level of emissions within all sectors of member states. The report also points to the need for having a Social Cost of Carbon (SCC) study carried out which accurately assesses the true economic cost of carbon by measuring the potential resulting damage in monetary terms. These efforts would aid the development of carbon pricing measures by providing quantifiable information which can be used to accurately set the price of carbon and determine areas which have the most potential for emissions reductions.

A major point of emphasis in the report is that there remains a pressing need for more collaboration among ASEAN members states with respect to the development of carbon pricing mechanisms. Linking national emissions trading schemes by aligning evaluation standards and rules for exchange is also advised to better facilitate cross border carbon trading and improve pricing mechanisms in the region. Such approaches would improve the efficiency, liquidity and transparency of carbon markets, allowing them to find greater effectiveness in member states.

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