Ravi Menon: A vibrant carbon market for a low carbon future Opening remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the Climate Impact X Announcement Event, Singapore, 20 May 2021. * * * Minister for National Development Mr Desmond Lee, ladies and gentleman, good afternoon. Let me start with the big picture. To limit global warming to 1.5°C, global annual greenhouse gas emissions need to be halved by 2030 and reduced to net-zero by 2050. Yet, the trajectory of carbon emissions is still on a steady uptrend. Just on energy needs alone, demand in Asia is projected to double in 2030. Economic development will drive demand for fossil fuels, which is still the cheapest way to generate electricity in many parts of Asia. The switch to cleaner energy sources cannot be made in one leap. Coal accounts for about half of Asia’s total energy supply today. We need to shift the energy mix progressively, first to relatively less emissions-intensive fuels like natural gas, and then to renewables. This shift will require fundamental infrastructure changes: refurbishing power plants to generate cleaner fuels; and upgrading the power grids to manage different energy sources and to minimise the intermittency of renewables. To make this progressive shift to a low-carbon future, Asia will need a lot more transition financing than is available today. To spur more green finance for transition, we need to have two things in place: a price on carbon, and a market for trading carbon credits.
This is where a robust carbon market comes in. Carbon credits are essentially tradable certificates that represent the reduction, avoidance, or removal of a certain amount of emissions from the atmosphere. Firms can buy these credits to offset hard-to-abate emissions. To efficiently match the demand for carbon credits with the supply of these credits, we need a robust carbon market. In so doing, a carbon market becomes an important mechanism to channel funds to the emission reduction and removal projects that generate the carbon credits. Adopting a twin strategy of reducing and offsetting carbon emissions is a practical and effective way to reach our climate goals in time. Given Asia’s transition needs, a well-functioning carbon trading ecosystem is particularly relevant to the region’s decarbonisation effort. There are two types of carbon markets: The compliance carbon markets support the trading of emission allowances by entities subject to mandatory targets set by national, regional or international emissions reduction regimes. The voluntary carbon markets, on the other hand, are not tied to emissions trading systems or regulatory requirements. Any company or individual can purchase carbon credits to offset their own carbon footprint voluntarily. In our journey towards a greener world, voluntary carbon markets are expected to play a more impactful role. First, the voluntary market can cater to a wider group of firms and individuals. Emissions trading systems tend to cover sectors with higher emissions and so not all firms participate in the compliance carbon market.