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In this Explainer, find out…
Why is Singapore engaging in carbon trading?
How does carbon trading help Singapore achieve emissions reduction?
What are the strengths and pitfalls of relying on carbon trading to achieve emissions reduction?
Introduction
Climate change now poses an existential crisis to Singapore and many countries around the globe.¹ With its impact on food security, sea levels, and inclement weather already materialising, it is more important than ever for Singapore to tackle the problem of climate change.
Singapore alone cannot solve this problem due to geographical and industrial constraints, such as its limited land size and lack of factor endowments needed for renewable energy deployment. Nevertheless, there is an opportunity for Singapore to contribute substantially to removing carbon from the atmosphere² through carbon trading.
Carbon trading occurs when countries pay a certain amount for a permit to emit greenhouse gases into the atmosphere, with the assurance that the recipient will use the money paid to remove the same amount of carbon from the atmosphere.
In this Policy Explainer, we explore Singapore’s motivation for inking carbon trading agreements and Memoranda of Understanding (MOUs) with multiple countries. We then explain how such carbon trading agreements aid Singapore in meeting CO2 emissions reduction targets. Finally, we explain the advantages and disadvantages of leveraging carbon trading to achieve emissions reduction.
Drivers Behind Carbon Trading as a Strategy
Singapore has signed 16 carbon trading-related MOUs in the past two years.³ These documents define the signatories’ common desire for further cooperation on carbon trading markets. On top of that, these MOUs have been signed with countries all across the globe from Latin America to Asia to Africa. These MOUs can be viewed as precursors to formal Implementation Agreements, which are bilateral frameworks that enable the transfer of carbon credits between countries.⁴
Reasons for Implementing Carbon Trading Agreements
Singapore’s move to implement carbon trading agreements with other countries is broadly attributable to domestic “push” factors and international “pull” factors.
Domestic “Push” Factors
Several domestic factors have led to an increase in carbon trading agreements.
Firstly, Singapore has set concrete green goals, such as a commitment to net zero emissions by 2050.⁵ This means that, by 2050, the balance of carbon produced and removed from the atmosphere by Singapore must be zero. Carbon credits, which count toward removing carbon from the atmosphere, are hence an extra avenue through which Singapore can achieve these targets.⁶
Secondly, Singapore is an alternative energy disadvantaged state. This means that Singapore cannot tap into alternative energy sources, such as wind or hydropower, which do not emit carbon dioxide (CO₂). This is largely due to Singapore’s lack of natural geographic features. It does not possess the wind speed required to power wind turbines or the fast-flowing rivers that power hydroelectric dams. Hence, Singapore has to look beyond its borders to meet its climate ambitions.⁷
Thirdly, the policy options for reducing Singapore’s domestic emissions are limited due to economic and technical constraints. This includes hard-to-abate, industry-related emissions in key sectors such as the refining and petrochemical sector, which are a key contributor to Singapore’s Gross Domestic Product (GDP) but also made up one-third of Singapore’s emissions as of 2022.⁸
Finally, key technologies like carbon capture, utilisation, and storage (CCUS) are also currently non-bankable, meaning they are not considered suitable for traditional financing by banks or investors. Their non-bankability could be due to factors such as high upfront costs, perceived financial risks, uncertain revenue streams, or the lack of a proven track record. This results in a lack of financial support for these novel technologies, which limits the scope and scale of deployment.⁹
As a result, Singapore is unable to meet its commitment to carbon emissions reduction without international cooperation, which drives it to pursue more bilateral carbon trading agreements.¹⁰
International “Pull” Factors
Globally, several developments have motivated an increase in carbon trading agreements.
Most prominently, critical breakthroughs in international frameworks for carbon trading have simplified cooperation between countries. For instance, the 26th United Nations Climate Change Conference (or COP26) in 2021 set mechanisms to link emissions trading systems between countries and established a global carbon market overseen by the United Nations (UN).¹¹ All these made it easier for countries to work out carbon trading agreements with each other. Further developments include an international agreement to create a centralised globaltrading market with UN oversight. This was discussed during COP27 in 2022 but has not come to pass.¹²
Separately, developing countries are increasingly keen on entering carbon trading agreements as they recognise how carbon trading can benefit their local economies and livelihoods. For instance, Singapore’s carbon trading agreement with Papua New Guinea is expected to improve water quality and create jobs, creating a win-win situation for both parties.¹³ To this end, bilateral agreement negotiations have become easier and more attractive for all parties.
Singapore's Article 6 Implementation Agreements
Having analysed the reasons motivating Singapore’s implementation of carbon trading agreements, also known as Article 6 Implementation Agreements, we now turn to understanding its nuts and bolts.
How Does Carbon Trading Work?
Carbon trading is a market-based approach to controlling greenhouse gas emissions. It fundamentally works by rewarding those who reduce CO₂ emissions with carbon credits, which they can then sell. These credits are purchased by buyers who need to meet their emissions reduction targets.
The incentives behind buying carbon credits are manifold; for instance, buyers may have limited ability to reduce their emissions directly and find it more cost-effective to purchase credits from sellers who have the resources to implement such projects. This, in turn, facilitates the offsetting of emissions, supporting Singapore's own climate goals.¹⁴
Figure 1: Carbon Credit Life Cycle¹⁵
Current Agreements with Other Countries
Singapore signed its first Article 6 Implementation Agreement with Papua New Guinea in December 2023, followed by an agreement with Ghana in May 2024.¹⁶ A pending agreement with Paraguay is expected to be signed sometime in 2024.¹⁷
Singapore also has MOUs with 15 other countries that could be formally ratified within the near future.¹⁸
Figure 2: List of countries that Singapore has signed agreements with¹⁹
How Implementation Agreements Facilitate Emission Reductions
Implementation Agreements play a pivotal role in allowing countries to achieve their Nationally Determined Contributions (NDC) targets. These NDCs are climate action plans submitted by countries under the Paris Agreement, outlining their commitments to reduce national CO₂ emissions and adapt to the impacts of climate change.²⁰ Each country sets its targets based on its unique circumstances, capabilities, and priorities.
Singapore leverages carbon credits generated by projects in other countries, helping it to meet its NDC targets. This is facilitated through international Implementation Agreements, which help to translate the objectives of Article 6 of the Paris Agreement.²¹ Article 6 specifically promotes such cross-border exchanges, which are particularly beneficial for countries like Singapore with limited domestic decarbonisation options.²² Through these Implementation Agreements, countries can more effectively collaborate via market mechanisms, driving global efforts to combat climate change while optimising their contributions.
Singapore's Eligibility Criteria for Carbon Credit Projects
Singapore maintains stringent eligibility criteria for carbon credit projects to uphold environmental integrity and international standards. These criteria ensure that Singapore's participation in carbon markets supports genuine and impactful emissions reduction while meeting global best practices. Key criteria include the demonstration of additionality, ensuring that emissions reduction is attributable to financial incentives from carbon markets and would not have occurred otherwise.²³ Projects must also prove the permanence of emissions reduction over time. Finally, they must demonstrate accurate measurability and verification through certification by recognised standards such as Verra or Gold Standard.
Singapore's overall eligibility list categorises sources and types of carbon credits eligible for trading within its carbon market framework. Projects from Least Developed Countries (LDCs) are generally eligible, provided they meet Singapore's stringent criteria for additionality, permanence, and measurability. Eligible project types often include renewable energy installations, energy efficiency improvements, afforestation, and sustainable land use initiatives.
However, certain projects, such as large-scale hydropower or nuclear energy initiatives, may beineligible due to environmental concerns or regulatory considerations. Starting from January 1, 2024, carbon tax-liable companies in Singapore can offset up to five per cent of their taxable emissions using carbon credits, incentivising participation in carbon markets and supporting local and global emissions reduction goals.²⁴
Establishing Singapore's Position as an Enabler of Carbon Markets
This strategic approach is further bolstered by Singapore’s efforts to establish itself as a nexus for carbon trading. Initiatives like Climate Impact X, backed by prominent institutions such as DBS Bank and the Singapore Exchange, aim to position Singapore as a key player in the verified carbon credit market. Partnerships with international carbon credit rating agencies like Verra and Gold Standard ensure that the credits traded are credible and impactful.
This commitment not only enhances the transparency and integrity of Singapore's carbon market but also incentivises companies worldwide to engage in emissions reduction efforts. Moreover, by fostering a marketplace for transparent and high-quality carbon credits, Singapore may attract companies to purchase credits from carbon trading platforms based in Singapore. This, in turn, supports Singapore's climate goals by facilitating the offsetting of emissions. The availability of credible carbon credits in Singapore's market further reinforces its role in mitigating global climate change, creating a positive feedback loop that drives greater emissions reduction.
Evaluating Carbon Trading as an Emissions Reduction Strategy
Advantages of Carbon Trading Agreements
As outlined above, there are numerous advantages to carbon trading agreements.
To begin with, carbon trading enables financial resources to be channelled to the most cost-effective emissions reduction activities.²⁵ This is because countries can buy carbon credits from countries with more efficient and effective emission reduction technologies. Overall, this makes contributing to climate change mitigation efforts more economical, incentivising more countries to contribute to the fight against climate change.
Additionally, there are spillover effects to the economy through the creation of green jobs and the environment through the protection of ecosystems.²⁶ These projects also generate societal benefits, through quality-of-life improvements like greater access to clean water and greater energy security.²⁷
Disadvantages of Carbon Trading Agreements
Despite these benefits, there are also drawbacks to the use of carbon trading agreements. These are largely associated with the practical implementation of carbon trading and the trustworthiness of carbon credits.
At the heart of carbon trading agreements are carbon credits, credits earned by countries and organisations when they reduce greenhouse gas emissions. These credits can be earned in several ways, such as by preserving forests, halting deforestation projects, investing in clean energy sources and more.
However, there are challenges when it comes to verifying these carbon credits. Recent research has raised concerns over the credibility of carbon credits, specifically those generated by deforestation prevention projects. A study analysing 18 carbon offset projects across five countries found that only six per cent of 84 million carbon credits were linked to actual carbon reductions.²⁸ This can be attributed to both the overstating of threats to forests in a particular area and the over-exaggeration of forest preservation efforts. As an illustration, consider Figure 2, which depicts exaggerated carbon offsets from a world-leading carbon standard, Verra. Verra claimed that it halted deforestation in the purple area, generating carbon credits as part of a deforestation reduction project.
However, since the purple area is located further from major roads and rivers, it is less likely to be affected by human activity, meaning that deforestation in this area was unlikely even without Verra’s intervention. This is in stark contrast to the green area, which includes major roads, towns and rivers. Such an area is much more likely to undergo deforestation as its location makes it easier to access.
Hence, it is arguable that Verra exaggerated its carbon emission offsets by using the green area to calculate its carbon emissions reduction when in reality, it had not protected that area at all. Rather, it had protected the purple area, which was much less vulnerable to deforestation.²⁹
Despite these challenges, the international community has rallied together to enhance the credibility of carbon credits. Following COP28 in 2023, the United Nations Framework Convention on Climate Change
Figure 3: An Example of an Overexaggerated Carbon Offset Project by The Guardian³⁰
(UNFCCC) has started developing methodological tools and guidelines to accurately track carbon offsets, while simultaneously establishing expert panels to accredit auditors who verify and validate carbon offset projects.³¹
On top of that, Singapore is also making inroads to enhance the trustworthiness of carbon trading. This includes efforts to improve the transparency of carbon trading by partnering with the World Bank and the International Emissions Trading Association (IETA) on the Climate Action Data Trust (CAD Trust) initiative. CAD Trust is developing a Data Dashboard that will allow the public to access information about carbon credits issued globally, enhancing the transparency of these credits.³² This in turn allows for greater scrutiny of these carbon credits, improving their credibility.
Conclusion
As Singapore continues to pursue collaboration with other countries to scale up climate markets, leveraging international cooperation will remain a key point of its decarbonisation efforts. By working closely with standard-setting bodies such as Verra and Gold Standard, Singapore can ensure that the carbon credits traded are linked to actual and verifiable emissions reduction.
This dual approach not only bolsters Singapore’s ability to meet its NDCs but also contributes to the integrity and effectiveness of global carbon markets. These strategic partnerships are essential for ensuring that countries are leading the way in fostering a robust and credible carbon trading system that supports the global fight against climate change.
This Policy Explainer was written by members of MAJU. MAJU is an independent, youth-led organisation that focuses on engaging Singaporean youths in a long-term research process to guide them in jointly formulating policy ideas of their own.
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