The Asia-Pacific region is transforming its approach to carbon markets, with interoperability emerging as a defining design feature. Countries like China, India, Vietnam, Indonesia, Thailand, and South Korea are setting the stage by allowing domestic carbon project credits to enter their compliance markets. Furthermore, Singapore, Korea, and Japan are leading the charge by permitting the use of international credits in their domestic systems. This movement toward regulation and interoperability not only promotes collaboration among nations but also enhances the overall effectiveness of carbon markets in achieving climate goals. As interoperability becomes the new normal, treaty-based agreements are on the rise. Countries such as Singapore, Switzerland, Sweden, Japan, and Korea are actively crafting Article 6 agreements, which facilitate internationally transferable mitigation outcomes (ITMOs)—carbon credits—with countries like Papua New Guinea and Laos that seek climate finance to help preserve nature and promote green development. These agreements help create an interconnected global market that is beginning to set a price on carbon emissions. The implications are profound; this cooperative framework allows for the exchange of carbon credits, ensuring that efforts to reduce emissions are both efficient and equitable.
Additional dynamics are also at play. Carbon Border Adjustment Mechanisms (CBAMs) from Europe and other importing regions are set to drive carbon pricing, cap-and-trade mechanisms, and taxes into exporting countries. This pressure will compel exporting nations to act quickly to protect affected industries and capture the EU carbon price for domestic use. Consequently, conflicts may arise surrounding the measurement, reporting, and verification (MRV) of projects in these countries. It is unclear whether organizations like Verra and Gold Standard can produce the high-quality credits that meet EU requirements. However, with CBAMs in Europe and other countries, carbon pricing has now moved from the realm of climate treaties into the scope of the WTO and trade policy. Despite these challenges, existing carbon standards and auditors remain important and are improving as de facto regulators of the carbon market. Organizations such as the International Carbon Reduction and Offset Alliance (ICROA), the Integrity Council for the Voluntary Carbon Market (ICVCM), and the Science Based Targets initiative (SBTi) play pivotal roles in providing oversight and ensuring the integrity of carbon credits.
The Voluntary Carbon Market (VCM), now more aptly referred to as the Project Carbon Market—since the projects may be used in both regulated and voluntary markets—has often struggled due to a lack of robust engagement from the United Nations (UN). While companies have historically driven this market forward, the UN and national governments are now stepping in to define their roles. The Asia-Pacific consensus is clear: interoperability, both internally and in cross-border trade, is the path forward. Each country is developing its own approach, but the common thread is a commitment to making carbon markets more interconnected. In November 2024 in Baku, Azerbaijan, the UN Climate Convention finalized its Article 6 rules—eight years after the Paris Agreement enshrined markets in the climate treaty. This is a significant milestone, and while systems and methodologies are not yet fully in place, the existing project carbon market will integrate into country-to-country trade of carbon credits. This will finally unleash the power of markets to drive funding to climate projects on the ground, particularly in developing regions where they can prevent emissions and accelerate sustainable economies.
For corporations to engage effectively in this evolving landscape, several key questions must be addressed. How can businesses gain confidence in the Project Carbon Market? Article 6 agreements between countries provide essential clarity and heightened efficiency in achieving decarbonization quickly. If Country A sells credits to Country B, Country A must adjust its carbon accounting to exclude these credits from its emissions reductions, while Country B can use the credits toward its own climate targets. This process is known as a corresponding adjustment, ensuring transparency and accountability in international carbon trading.
Companies can support Global South countries’ climate goals and purchase credits without a corresponding adjustment, assisting those countries in their decarbonization efforts. The corporate ledger and the country ledger for carbon are separate yet complementary, particularly for poorer nations that may struggle to decarbonize. Furthermore, companies must navigate claims and integrity within the market. The Voluntary Carbon Market Integrity (VCMI) guidance provides a framework for accountability, while the Science Based Targets initiative (SBTi), despite its current complexities, underscores the importance of clarity over strict adherence to EU-centric standards. Many jurisdictions are already addressing integrity concerns by establishing a “whitelist” of methodologies and registries, signaling progress in building trust within the market.
Countries must also consider how to engage effectively in these evolving markets. The Singapore model stands out as a beacon of regional leadership, promoting the adoption of standards, creating whitelists, and allowing the integration of international project credits into regulatory systems. China, due to its size, appears to be charting its own course by developing a domestic compliance carbon market that will be the largest in the world, permitting the use of project carbon. Like Japan and Singapore, China may also allow project carbon credits from outside the country to fulfill emitters’ obligations under its emissions trading system. Meanwhile, Indonesia represents a more hybrid approach, blending aspects of various models but moving quickly with new regulatory frameworks.
The Prabowo administration is set to lift the moratorium on carbon markets and establish clear guidelines for the use and export of project carbon to other countries and companies. Japan and Korea are transitioning from pilot phases to mandatory participation in their carbon markets, and they increasingly recognize the necessity of accessing projects beyond their borders. This diversity in approaches highlights the dynamic nature of carbon markets in the Asia-Pacific region. ASEAN, the diplomatic group of Southeast Asian countries, is even considering the creation of a regional carbon market akin to the European model. Although these discussions are in the early stages, the momentum is evident.
The Asia-Pacific region is rapidly evolving in its approach to carbon markets, driven by the imperative of interoperability. As nations collaborate to build interconnected systems and address the complexities of international standards and verification, the potential for robust climate finance in the region is becoming increasingly clear. Aligning domestic markets with international standards will not only enhance the attractiveness of investments but also accelerate progress toward achieving global climate goals. For investors seeking opportunities in climate finance, the Asia-Pacific region presents a compelling landscape marked by innovation, adaptability, and a strong commitment to sustainability. As carbon market frameworks mature and interoperability becomes the norm, the region is positioned to emerge as a leader in the global fight against climate change, offering unique opportunities for climate finance investment.
