Companies should adopt internal carbon pricing, carbon offsets early: ENGIE Impact

Asian companies tend to fall under “followers’ or laggards’ archetypes”, with “very few” early adopters when approaching offsets.

Carbon emissions have historically been treated as an unpriced externality, but many governments and sustainability frameworks are now encouraging — or even requiring — companies to include a price on their emissions.

Singapore became the first country in Asia to introduce a carbon tax in 2019, with companies that emit 25,000 tonnes of carbon dioxide equivalent (tCO2e) emissions or more in a year subject to a tax of $5/tCO2e. Singapore’s carbon tax rate will rise to $25/tCO2e in 2024 and $45/tCO2e from 2026.

To prepare for these impending policy changes, global companies should actively consider incorporating internal carbon pricing (ICP) into their decision-making frameworks, says Amandeep Bedi, managing director, Southeast Asia at ENGIE Impact.

CDP, formerly known as the Carbon Disclosure Project, has collected data on ICP every year since 2014. In 2021, 1,077 companies around the world reported using an ICP, and 1,601 reported that they plan to use an ICP in the next two years.

The number of companies using an ICP rose again in 2022 to 1,200 of 8,400 surveyed, according to a study by the CDP and the World Bank released in May.

The number of companies using ICP in their operational decision-making have doubled from 2016 to 2021, notes Bedi. “ICP mechanisms help companies not only meet regulatory requirements but also enable more cost-effective decarbonisation decision-making, as well as to allow for pricing of transition risks and opportunities into strategic considerations.”

Companies using or planning to implement an internal carbon price, 2015-2022

The ‘carbon market trust crisis’

Asian companies tend to fall under “followers’ or laggards’ archetypes”, says Bedi, with “very few” early adopters and innovators when approaching offsets. “They want to minimise greenwashing claims, comply with current regulations and prioritise lower costs over other objectives.”

Companies are in a dilemma of whether to have a proactive or reactive stance on offsets, and are choosing to keep their options open in developing a better sense of the Asian markets, adds Bedi, who was formerly a director at EY-Parthenon and Honeywell.

Speaking on a panel about carbon markets and trading in Asia at the Asia Pacific Petroleum Conference (APPEC) 2023 on Sept 6, Bedi warns of a “carbon market trust crisis”, which has been fueled by several factors, including fraud, mismanagement and a lack of transparency. “These issues have eroded confidence in the effectiveness and integrity of these markets.”

The voluntary carbon markets (VCMs) have been caught up in controversies involving cheap and low-quality carbon credits that do not avoid or remove greenhouse gas emissions.

These credits are generated by projects that remove or reduce greenhouse gas emissions, such as reforestation, building renewable energy, carbon-storing agricultural practices and waste and landfill management.

Verra, a global leading carbon standard, was criticised earlier this year for issuing phantom rainforest offsets.

Everyone in the carbon market ecosystem has to be involved in verifying the quality of the carbon credits, says Bedi to The Edge Singapore. “Besides the responsibilities of the sellers and project developers, the private sector has an opportunity to engage deeper, hold the market accountable and shape it for the future.”

This can be done by exercising the “full weight” of their purchasing power and investment decisions, he adds. “For example, by screening carbon credits more carefully, prioritising quality credits over price and demanding more from stakeholders across the carbon market ecosystem, companies can help to improve the quality of carbon credits.”

Building trust

Establishing and maintaining trust in both the compliance and voluntary carbon markets requires clear rules, transparent practices, third-party oversight and adherence to recognised standards, says Bedi.

The Voluntary Carbon Market Integrity Initiative (VCMI), for one, published its Claims Code of Practice in June, providing companies with a rulebook for voluntary use of carbon credits and associated claims on the pathway to net zero.

This brings integrity to the demand-side of the VCMs, a growing but largely unregulated field.

By demonstrating commitment to accountability and meaningful emissions reductions, carbon markets can build confidence among participants, stakeholders and the public, says Bedi.

Besides verification of the credits, companies should also ensure that the carbon offset strategies serve to take responsibility for residual emissions that cannot be abated and should be nested within an overall emissions reduction plan, says Bedi.

Companies should also ensure that their strategy and selected projects are “meaningfully aligned” with their business strategy, operations locations and core activities, Bedi adds.

Finally, selected carbon projects should also have “good-quality characteristics” and consider additional benefits beyond carbon, such as impacts on community livelihoods, biodiversity and contribution towards the UN Sustainable Development Goals, says Bedi.

The last lever

Carbon offsets have a role to play in an organisation’s decarbonisation journey, even if it must only be used for residual, hard-to-abate emissions, says Bedi.

That said, this “last decarbonisation lever” is not a licence to pollute, he adds. “It is a valuable way to address residual emissions while funding a range of carbon reduction projects. Given the urgency to mitigate climate change, we must use every tool available.”

Despite being the last lever in a decarbonisation strategy, companies should begin offsetting early to mitigate reputational risks surrounding their net-zero targets and pre-empt exposure to potential national or international carbon pricing mechanisms, says Bedi.

Companies that start early also reduce their price and supply risks in the face of rising demand for carbon offsets, he adds.

“Our take is that a good decarbonisation approach activates reduction levers and then offset,” says Bedi. “A great decarbonisation approach, however, reduces emissions actively and offsets residuals at the same time.”

Read more about carbon credits:

• Are carbon credits credible?

• Why do carbon credit prices vary for different project types?

• Temasek's GenZero turns one with inaugural summit to explain 'nascent' decarbonisation sector

• Singapore-backed carbon credits data platform CAD Trust launches 20-member user forum

• IRAS move to waive GST on carbon credits will see demand spike as carbon tax increases from 2024: KPMG

• Verra CEO resigns after 15 years, president appointed in February set to take over

• IETA responds to The Guardian's claims that carbon offsets are 'worthless'

Infographic: CDP and World Bank Group

See Also:

• Click here to stay updated with the Latest Business & Investment News in Singapore

• Why do carbon credit prices vary for different project types?

• Carbon credit certification and registration non-profit, Asia Carbon Institute, launches in Singapore

• Voluntary carbon market body publishes rulebook for credible use of carbon credits

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