by Aldilla Noor Rakhiemah, Indira Pradnyaswari and Muhammad Ilham Rizaldi

As climate change increasingly impacts the environment, global leaders are amplifying efforts to curb greenhouse gas emissions. The Paris Agreement, adopted during COP21, established a legally binding commitment to limit global temperature increases to 1.5°C by 2030. This agreement compels signatories to submit detailed domestic strategies for emission reductions in Nationally Determined Contributions (NDCs), thus highlighting each nation’s roadmap for achieving its climate targets.

In the ASEAN region, Member States (AMS) have embraced the Paris Agreement by setting specific national carbon reduction targets in their NDCs. The 8^th ASEAN Energy Outlook (AEO8) also addresses this effort by establishing the Carbon Neutrality Scenario (CNS), aiming to foster ASEAN’s path to carbon neutrality through collaborative frameworks. At the regional level, ASEAN has set an ambitious course with its ASEAN Strategy for Carbon Neutrality, which outlines eight key strategies aimed at accelerating ASEAN’s transition toward a low-carbon economy. Among these strategies, establishing an interoperable carbon market stands out as a transformative approach to unifying regional carbon reduction efforts.

In particular, it encourages regional development of carbon market which comply with global market standards. Seeing the correspondences between AEO8 and ASEAN Strategy for Carbon Neutrality, thus, incorporating regional carbon market standards will potentially boost the collaborative efforts within the ASEAN Member States and consequently will enhance ASEAN progress towards a carbon-neutral future.

What is an Interoperable Carbon Market?

The interoperability of carbon market highlights the compliance between national, regional, and global market standards. In response to achieve a qualified carbon market, several aspects should be considered including setting eligible credit standard, sharing compliance market practices and adopting best practices of carbon credit accounting standards.

To understand the potential of an interoperable carbon market, it’s essential to grasp the basics of carbon markets. A carbon market is a trading system where carbon credits, representing emission reductions, are exchanged within a defined regulatory framework. By purchasing credits from entities that successfully reduce or remove emissions, companies can offset their own emissions, creating a financial incentive for low-carbon investments. Carbon markets play a crucial role in driving investments toward achieving NDC goals under the Paris Agreement, bridging the funding gap for renewable energy, and supporting other green initiatives.

Carbon markets generally fall into two categories: compliance and voluntary. Compliance markets arise from government mandates, offering a structured approach to emission reduction targets, though sometimes weighed down by bureaucracy. In contrast, voluntary carbon markets provide flexibility and encourage broader participation, allowing companies and individuals to offset emissions without regulatory constraints. However, voluntary markets often lack rigorous oversight, leading to concerns about the credibility and verification of credits traded.

The ASEAN Carbon Market Landscape

ASEAN’s carbon market landscape reflects both challenges and progress, with diverse national policies and varying levels of carbon market maturity across Member States. The regional journey towards carbon trading began with the establishment of national-level carbon policies aimed at achieving domestic NDC targets, driven by the urgency to curb emissions and incentivise renewable energy development. Indonesia, for instance, leads the way in establishing a compliance-based carbon market, launching its Emission Trading System (ETS) in early 2023. The Indonesian ETS initially targets the coal-fired power sector, mandating emissions caps and enabling tradable allowances—a pioneering move that marks a significant step in Southeast Asia’s carbon policy trajectory.

Other ASEAN countries have focused on voluntary carbon markets (VCMs), with Singapore taking a prominent role in regional VCM development. As a major financial hub, Singapore has attracted numerous carbon-offset projects, especially those linked to nature-based solutions like reforestation, which have become a preferred means for ASEAN countries to participate in the global carbon market. Malaysia and Thailand are also exploring pathways to introduce domestic carbon trading mechanisms, driven by rising investor demand for sustainable finance and a growing awareness of climate risks. The report Progress of Carbon Pricing in ASEAN highlights these efforts, recognising the region’s mix of carbon tax and ETS explorations as a promising foundation. Still, ASEAN faces challenges, particularly around economic reliance on fossil fuels and the need to enhance carbon credit verification and infrastructure.

ASEAN’s carbon markets are evolving with each Member State making strides in establishing frameworks for carbon reduction and trading. However, with each AMS developing its own regulatory frameworks and carbon accounting methods, there is an opportunity for further integration through standardisation. An interoperable carbon market would enhance regional cohesion by harmonising standards, enabling seamless cross-border trading, and fostering greater private sector participation in emissions reduction initiatives across Southeast Asia. This collaborative approach would help ASEAN fully realise its collective potential in driving low-carbon development and positioning the region as a global leader in sustainable finance.

The Path Forward for ASEAN’s Interoperable Carbon Market

An interoperable carbon market in ASEAN has the potential to unlock immense benefits, from enhanced credibility of carbon credits to increased foreign investment in green projects. To achieve this vision, ASEAN will need to take deliberate steps in three critical areas: standardisation, regulatory alignment, and capacity building.

1. Standardisation of Carbon Credits
   Standardising carbon credits is crucial to ensure they have uniform quality and verifiability across ASEAN. This involves creating a regional framework that defines carbon credits’ characteristics, including verification standards, additionality requirements, and permanence criteria. By adopting unified standards, ASEAN can boost confidence in its carbon market and increase demand for its carbon credits both regionally and globally. Singapore has recently been working with international organisations to set robust carbon credit standards; this experience could be leveraged to develop ASEAN-wide protocols.
2. Regulatory Harmonisation
   Regulatory harmonisation across ASEAN is essential to facilitate cross-border transactions and integration between compliance and voluntary markets. This includes developing aligned policies for carbon accounting, emissions tracking, and trading rules. A harmonised regulatory framework would minimise legal discrepancies between countries, reducing transaction costs and administrative burdens for companies that operate across ASEAN. Initiatives such as the ASEAN Working Group on Climate Change (AWGCC) could play a leading role in coordinating these efforts, working closely with national governments to bridge policy differences.

The ASEAN Climate Change and Energy Project (ACCEPT) can further support these efforts by conducting research, capacity-building programmes, and policy dialogues that bring together diverse stakeholders from the energy and climate sectors across ASEAN. ACCEPT could facilitate technical workshops and knowledge-sharing sessions to address gaps in regulatory alignment, especially in emerging areas like carbon market integration and renewable energy investments.

1. Capacity Building and Technical Support
   Establishing a robust, interoperable carbon market requires significant capacity-building efforts. Member States, particularly those with emerging carbon markets, would benefit from training on monitoring, reporting, and verification (MRV) systems to ensure environmental integrity. ASEAN could establish a regional support centre dedicated to providing technical assistance and sharing best practices, helping countries develop the necessary infrastructure and expertise for carbon market operations.
2. Creating a Digital Carbon Trading Platform
   ASEAN could consider creating a digital platform that enables seamless carbon trading across Member States. This platform could function as a unified marketplace where companies, governments, and individuals can buy, sell, and trade carbon credits, fostering transparency and liquidity. A shared digital infrastructure would also enable real-time emissions tracking and reporting, promoting accountability and encouraging companies to actively participate in carbon markets. Building this platform in collaboration with leading ASEAN financial hubs, such as Singapore and Malaysia, could ensure both technological robustness and investor confidence.
3. Engaging the Private Sector and Encouraging Regional Partnerships
   Private sector participation is critical to the success of an interoperable carbon market. ASEAN can attract private investment by establishing clear incentives for companies that actively reduce emissions or purchase carbon credits. Engaging companies in sectors such as energy, manufacturing, and finance in carbon trading partnerships will provide a foundation for sustainable financing. Public-private partnerships, alongside regional cooperation could facilitate knowledge sharing and financing for carbon market projects.

Looking Ahead

ASEAN’s journey toward an interoperable carbon market offers the promise of stronger collaboration and accelerated carbon neutrality across the region. By implementing standardised frameworks, harmonised policies, and robust support systems, ASEAN has the potential to establish a thriving carbon market that attracts investment and promotes sustainable development. In the process, ASEAN can become a model for other regions aiming to create cohesive, large-scale carbon markets that drive meaningful climate action.