Southeast Asia is turning to carbon markets to catalyse new finance flows. But despite their rapid development, there is a disconnect between ambition and implementation, as countries struggle to stimulate both supply and demand. Here we take a look at how countries can bridge the gap and generate demand for high-quality emissions reductions and removals and how recent COP30 announcements will help support turning ambitions into reality.
According to the Asian Development Bank, Southeast Asia needs $210 billion annually until 2030 to invest in climate-resilient infrastructure.1 In tandem, the region currently attracts just 2% of global renewable energy investment even as its energy demand is set to account for a quarter of the world’s total in the next decade. Carbon markets present a promising solution to attract large scale finance and fund the region’s transition. Backed by its abundant natural resources and rapid economic growth, Southeast Asia has the foundations to transform into a major carbon trading hub; a hub that would help finance decarbonisation projects and protect the region’s plentiful, but threatened, carbon sinks, including 40% of the global tropical peatland.
The region’s voluntary carbon market has started to turn this vision into a reality, outpacing emerging compliance markets. Eight markets – Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand and Vietnam – are focusing on being suppliers of internationally traded carbon credits. These countries are also laying the foundations for engaging in Article 6 of the Paris Agreement, with Thailand and Cambodia already authorising transfers of ITMOs under Article 6.2 of the Paris Agreement. Singapore has positioned itself as a major buyer and is driving activity in the region, engaging countries globally on potential trades, including Chile, Peru and most recently Malawi.
What are carbon markets?
Carbon markets are trading systems where carbon units or credits are auctioned, sold and bought. Companies can use carbon credits to comply with a regulation in the case of a compliance market or to compensate their greenhouse gas emissions under a voluntary scheme.
One carbon unit or credit is equal to 1 tonne of CO2e reduced or removed from the atmosphere.
Compliance markets are established and regulated by mandatory national, subnational or international level. The Authority sets quantity restrictions on greenhouse gas emissions for individual liable emitters and allows trading of emissions allowances/permits between the emitters to meet their caps. Examples of compliance markets include the EU, Chinese and Indonesian Emissions Trading Schemes.
Voluntary markets are decentralised markets where private actors voluntarily buy and sell carbon credits that represent removals or reductions of their greenhouse gas emissions in the atmosphere.
Article 6 and carbon markets
Article 6 of the Paris Agreement sets out alternatives for international cooperation to meet climate goals and unlock finance to support developing countries. Article 6 also enables the participation from the private sector, subnational governments and other stakeholders to channel finance towards NDC targets.
Articles 6.2 and 6.4 relate to market-based mechanisms and provide rules for trading carbon credits from greenhouse gas emissions reductions internationally.
- Article 6.2 – lays out the accounting rules for cooperative approaches where Parties establish bilateral agreements for achieving their Nationally Determined Contribution (NDC); and also sets the basis for the trade of Mitigation Outcomes. These Mitigation Outcomes can be transferred from a host country to another country as an Internationally Transferred Mitigation Outcome and authorised for use towards their NDC goals.
- Article 6.4 – establishes the Paris Agreement Crediting Mechanism as a new UNFCCC mechanism that can be used to trade high-integrity carbon credits (A6.4 ERs) at the national or international level.
Setting the right supply and demand signals
Announcements at COP30 have signalled a strong global push for carbon pricing and structured compliance markets as essential tools for implementing national climate plans and attracting private finance. However, a range of supply and demand side constraints have prevented Southeast Asia from scaling carbon markets.
Current challenges that need to be resolved to scale carbon markets.
For a sustainable market that is going to enable long term investment in carbon reductions and removals, clarity and certainty are key and will help overcome a lot of these constraints. This is historically not something the voluntary carbon market has been able to generate. Governments and the private sector will need to work closely together for the opportunities behind the carbon market to be realised.
While the government sets the framework, it is the private sector that makes the investment and takes the associated risk when it comes to carbon market implementation. Despite unstable supply, demand for carbon credits in Southeast Asia has grown since 2018, however low demand for domestic credits remains, leading to oversupply and persistent low credit prices.3 With few carbon policies in place in the region and little incentive for decarbonisation, demand signals for credits remain weak. Governments need to think about how they create both domestic and international demand signals to drive the scale of projects required to achieve impactful climate mitigation.
For the private sector to invest in Asia’s carbon markets, host countries must address gaps in integrity, transparency and policy stability. Recommended actions include:
- Market integrity and standardisation: Current fragmentation and inconsistent standards undermine trust, so aligning with global frameworks such as the ICVCM Core Carbon Principles (CCP) and Article 6 rules is essential.
- Price transparency and predictability: Carbon prices in Asia are generally too low (often < $20/tCO2e) and volatile, far below the $50-100/tCO2e needed by 2030 to meet goals of the Paris Agreement. Lack of clear price signals discourages long-term investment as project developers don’t know how their initial investment will pay back. Countries should implement phased price floors and ceilings, and publish transparent auction results to build confidence.4
- Political uncertainty: Establishing a dedicated carbon market authority and multi-stakeholder governance can maintain continuity. The UK’s recent consultation on integrity principles for voluntary carbon and nature markets is a good model for embedding trust and clarity.
- Aligning corporate demand: Corporate demand is largely compliance-driven. Governments should engage businesses early to design products aligned with removals and co-benefits such as biodiversity and community impact.
- Government support with upfront project costs: Host countries should work with locally based financial institutions to support with upfront project development costs, in the form of lower cost loans or grants, that could be tied to the implementation of a high standard, CCP-aligned, methodology. This, alongside mechanisms to create credit price certainty, would help derisk upfront investment, support project developers and carbon credit supply.
The above recommendations can be used in different ways and targeted to specific mechanisms to be effective. For example. Indonesia’s Nilai Ekonomi Karbon framework and IDXCarbon exchange are promising, but prices remain low ($0.76-3.66). Scaling beyond coal power and integrating forestry credits with strong monitoring, reporting and verification processes could attract international buyers.5 In Thailand, the T-VER programme is growing, with forestry credits trading at THB 1,700-2,076 ($50-61), signalling demand for nature-based solutions. Expanding methodologies and linking to Article 6 could boost liquidity.6
How COP30 announcements will support with these aims
The opportunity for carbon markets clearly exists. Recent COP announcements have reinforced the importance of collaboration between governments and the private sector to maximise this opportunity and spur thriving carbon markets. A number of the announcements at COP30 will help support these aims for Southeast Asia:
Declaration on the Open Coalition on Compliance Carbon Markets
Developed under the leadership of Brazil, the Open Coalition on Compliance Carbon Markets seeks to exchange experiences on carbon pricing mechanisms, monitoring, reporting and verification (MRV) systems, carbon accounting methodologies and rules for the potential use of high-integrity credits. The coalition will help support the current fragmentation and inconsistency of standards globally, working towards a more globally consistent of approach which could increase the potential of linking markets and creating a single global carbon price.
Coalition to Grow Carbon Markets
The Coalition to Grow Carbon Markets focuses on the role of the private sector. Co-chaired by the governments of Singapore, Kenya and the UK, the coalition launched the ‘Shared Principles for Growing High-Integrity Use of Carbon Credits by Companies and Other Buyers’ at COP30s to strengthen the incentives business need to invest in high-integrity carbon credits. This could help support corporate confidence and engagement, improving the demand signals in the market.
Key Insights report from the Transition Credits Coalition
At COP28 Singapore convened the Transition Credits Coalition (TRACTION), comprising over 30 global ecosystem players to identify system-wide barriers and solutions for energy transition credits to be used as a credible financing instrument for the early retirement of coal plants. At COP30, TRACTION released its final report, which identified that a third of coal-fired power plants across 15 Asian markets are eligible to generate energy transition credits. This could lead to significant supply of carbon credits in the future, however, the report also recognised that clear demand signals from credible buyers and innovative financing structures are key to improving bankability and attracting financier participation.
Such coalitions are a positive step for countries to guide and support each other but will only succeed if the work is done on the ground by each signatory to establish how different approaches could be applied in their context and which is the right fit for them. Deep and early engagement across these identified challenges will benefit all parties and lead to a sustainable climate financing mechanism that can operate at the scale required to achieve real and impactful results.
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1Southeast Asia’s Frustration with the State of Climate Finance | FULCRUM
2The carbon sinks of Southeast Asia are in trouble | Lowy Institute
3BNEF: Advancing Southeast Asia Carbon Market: Nature and Nurture – Oct 25
4Carbon pricing in Asia: Examining emissions trading systems and carbon taxes | IEEFA
5Indonesian Economic Value of Carbon (Nilai Ekonomi Karbon) Trading Scheme | International Carbon Action Partnership
6Thailand's voluntary carbon trading set for 2027 with 15% offset limit | NEWS | Reccessary
