Four risks to know about carbon pricing

Annie Huang, Taipei; Vyra Wu, DIGITIMES Asia 0

Credit: AFP

The Taiwan Carbon Solution Exchange (TCSE) opened on Monday. As the era of carbon pricing looms, industries are confronting the prevailing economic trend of carbon trading. In light of evolving market dynamics, energy companies are emphasizing that carbon credits will evolve into a vital strategy for enterprises in the realm of social and environmental responsibility. Nevertheless, enterprises must also shoulder the risks associated with international carbon credit exchange.

Coherent Market Insights, a global market intelligence and consulting organization, forecasts that the carbon credit market is poised to attain a value of $2.4 trillion USD from 2020 to 2027, with a CAGR of 31%. Within the context of climate change, the global temperature rise must be constrained below the 2°C threshold stipulated by the Paris Agreement before 2030. Consequently, based on assessments, the cost per metric ton of carbon must range between $50 to $250 USD.

Nonetheless, up until 2022, a mere fraction, less than 4%, of greenhouse gas emissions subject to carbon pricing worldwide have reached this designated price range. Recent appraisals within the market also suggest that a more elevated price point is imperative by 2050 to efficaciously attain carbon neutrality—a prerequisite for realizing the 1.5°C objective established by the Intergovernmental Panel on Climate Change (IPCC).

TCSE has embraced a voluntary approach to the carbon trading market. The total global volume of transactions within the voluntary carbon trading market stands at approximately 362 million metric tons, with an aggregate value of $1.4 billion USD. Looking ahead, carbon credits will develop into an essential strategy for for corporations, reflecting their commitment to social and environmental responsibility.

Currently, commonplace avenues for acquiring carbon credits in the market encompass reforestation, renewable energy adoption, enhancements in energy efficiency, utilization of household equipment, and advancements in industrial processes. As outlined in a 2022 report by Timberland Investment Resource, the most effective and notable avenue is forest carbon credits, achieved through practices like afforestation and forest management. In reality, numerous companies lean towards agricultural and forestry-related carbon credits due to their tangible attributes and supplementary advantages that extend beyond carbon sequestration. These include preserving biodiversity, regulating climate, and contributing to local economies through other ecosystem services.

In the ongoing strategic blueprint of TCSE, the initial emphasis will be on carbon consulting and carbon auditing, subsequently leading to engagement in international carbon credit trading. Eventually, with the establishment of subsidiary laws governing carbon credit trading and the formulation of pertinent policies, carbon trading will be launched.

It is important to take note that TCSE's emphasis on international carbon credit trading over domestic trading prompts a word of caution to businesses regarding potential risks associated with international carbon credit transactions. These risks encompass credit, system, market, and legal aspects. Credit risk pertains to the potential for traders' assets to incur losses due to credit-related issues within the carbon market. System risk involves being vigilant about human errors, technical glitches, and cybersecurity concerns within the operational processes and system. Market risk entails being attuned to price fluctuations in the carbon market. Legal risk encompasses the prospect that legal and policy regulations in the carbon market could influence traders' transaction strategies and asset allocation.

Beyond the risks outlined by energy companies, scholars also underline the laudable intentions of the carbon trading platform. While the platform's mechanisms are still in the developmental phase, its success or failure hinges on factors like trading counterpart categories, transaction scale, and employed trading methods. In the context of carbon trading, it is essential not to overly constrain the range of trading counterparts. The ethos of carbon reduction should be embraced universally, offering opportunities for small and medium-sized enterprises, commercial users, communities, and individuals to partake in the benefits of carbon reduction through the platform.