COMMODITIES 2025: Asia’s emerging compliance carbon markets to gather pace

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

An increasing number of Asian countries have started building new carbon markets that will see major advancements in 2025, but governments will have to grapple with a broad array of economic and energy policy changes that affect climate initiatives at the national level.

Countries like South Korea and Japan are reassessing their national energy strategies from scratch, with potentially the most decarbonization-focused plans devised so far, but political turbulence means that these decisions will be pushed into 2025. South and Southeast Asian countries are also wrestling with broader socio-economic policy changes making carbon pricing less important.

Asia's energy roadmap will be impacted by the 2025 deadline to submit new Nationally Determined Contributions -- NDCs -- and set emission reduction targets till 2035. For countries like China that are closer to their emissions goals, there is a lesser need to leverage carbon pricing for climate actions, but most others would need to.

"These new NDCs are expected to be the key deliverable for COP30 and will be essential in demonstrating progress on climate action," S&P Global Commodity Insights analysts led by Anna Mosby, Head of Global Environmental Policy, said in a report.

In 2025, Asian carbon markets will also take cues from COP29's main success, which was firming up the essential framework for Article 6 markets. "This sets the stage for implementing the international carbon market mechanisms," Mosby said.

Japan and Singapore

Before COP29, Japan and Singapore both signed dozens of bilateral agreements with countries worldwide to source for Article 6.2 credits. As buyer countries, in 2025, the governments need to translate the UN's guidance agreed at COP29 into implementation details under these bilateral agreements, market participants said.

Local market participants said two critical implementation issues must be addressed -- the first would be to clarify, in each bilateral agreement, under what conditions a seller country can revoke its authorization for carbon credit exports; and the second would be safeguarding the integrity of Article 6.2 carbon credits to avoid another trust crisis and price collapse. Further guidance is also expected about how the private sector can participate in this market.

One key difference between Singapore and Japan is the clarity of long-term price signals. Singapore's carbon tax scheme has provided strong price signals till 2030. However, Japan's nascent ETS currently only requires companies to set voluntary emission reduction targets, resulting in weak demand and the absence of price signals for carbon offsets.

Japan has drafted a plan to transition from a voluntary ETS to a compliance ETS from 2026, which means implementation rules should be in place by 2025 to inform companies about their mandatory targets.

Indonesia

Indonesia kicked off a cap-and-trade system in 2023, starting from its coal-fired power sector. Under this system, companies that emit beyond their given caps need to either purchase emission allowances, called PTBAE-PU, or pay a carbon tax.

However, the Indonesian government is still working on rules for the carbon tax, which makes the emission trading system incomplete.

Meanwhile, unlike South Korea and China, Indonesia's national carbon exchange has not published PTBAE-PU prices yet, making the market opaque. In 2025, these bottlenecks need to be addressed to build a more effective market, local sources said.

Indonesia's plan for the Article 6 market is also in focus. The country used to be an important supplier of nature-based carbon credits in the voluntary carbon market, however, the government halted VCM credit exports in 2021, and other countries followed suit.

For Article 6 markets, the government's attitude seems to have softened, with two bilateral trading agreements signed with South Korea and Japan. In 2025, local industry participants expect the government to develop more detailed policies to standardize international trading activities.

India

India's upcoming carbon market consists of two segments: one compliance market to regulate emissions of 11 sectors from around 2026, with policy guidance expected in 2025; one voluntary market to help non-obligated entities meet voluntary targets, with the first set of carbon crediting methodologies expected in mid-2025.

As such, 2025 could become a watershed year for the world's third-largest emitter to launch critical policy instruments to curb its emissions.

Meanwhile, as one of the most influential developing countries, India's plan for Article 6 could also serve as a weathervane for its Global South partners. So far, India has issued a list of Article 6-eligible technologies, but guidance for project implementation and government-to-government bilateral agreements are needed for project investors to start moving, local sources said.

Vietnam, Malaysia and Thailand

Vietnam, Malaysia and Thailand are also expected to see critical policy advancement.

In 2025, Vietnam will assign emission quotas to power, iron and steel, and cement industries, preparing for a cap-and-trade system. Malaysia is likely to announce a carbon tax in emission-intensive sectors. Thailand will launch its Climate Change Act, setting national carbon pricing strategies.

Meanwhile, carbon industry associations in Malaysia and Thailand, together with Singapore and Indonesia, have established the ASEAN Common Carbon Framework, which will work on building common rules for ASEAN's carbon crediting methodologies. Vietnamese industry participants have also expressed interest in joining this to avoid market fragmentation.