Who will claim Asia's carbon hub status?

Jessica Cheam

Asian cities are in a race to set up carbon trading exchanges in a move that could see it finally catch up with its United States and European counterparts

While private sector carbon exchanges the likes of CCX (Chicago Climate Exchange) and ECX (European Climate Exchange) have flourished, similar ventures in Asia have yet to take off.

Recently, however, Asian cities have announced plans to launch carbon trading facilities, starting with Singapore, where a new trading platform called the Singapore Mercantile Exchange (SMX) was announced in July.

SMX will allow local investors to buy and sell carbon credits for the first time when it is operational next year. The platform will also provide derivatives trades for commodities, including futures and options contracts on metals, energy, agricultural products, and commodity indexes.

It is a significant move for Singapore, which has voiced its ambitions to claim the status as Asia's carbon trading hub.

The exchange, which will be Singapore’s third derivatives bourse, was launched by the Financial Technologies Group, the operator of India’s main commodities exchange. India, in this aspect, is already ahead of the curve having established its own carbon trading bourses. It does not, however, have the Asian financial hub status that Singapore and Hong Kong can stake claims to. If Singapore does not move quick enough, its rival city might beat her to it.

A new Hong Kong Mercantile Exchange (HKMEx) which will focus on commodities was announced in June, and it will begin trading first quarter next year.

Its aim is to succeed where Singapore has stumbled, in terms of offering fuel oil contracts, for delivery into China. A HKMEx spokesman however did not rule out carbon trading. "The first contract will be fuel oil, with the possibilities of other products later," said the spokesman.

Carbon trading expert Mr Yuvaraj Dinesh Babu, group director of carbon services firm Asia Carbon, said Hong Kong was in some ways "further ahead than Singapore" in that it had commissioned a full feasibility study on the global carbon markets and has "a good understanding" of how it works.

Singapore's advantage would be its attractiveness as a location for carbon services firm to set up shop. Already there are a handful of such firms and growing. US-based EcoSecurities, with a global fund of 50 million euros (S$101.2 million), is one example of a foreign firm drawn to set up shop in Singapore -  a possible indication that firms ranging the entire carbon market value chain might have started consolidating in Singapore.

"The carbon market in Asia is currently very fragmented," said Mr Babu. “The first location to bring together different players of the market and create volume will take the lead”, he added.

Whoever takes the lead will no doubt benefit from the phenomenal growth the carbon trading market is enjoying. New World Bank figures show that the global carbon market doubled in 2007 to Euros 47 billion (S$100 billion), with Asia accounting for 80 per cent of the carbon credits trading.

Some form of trading currently goes on in Asia, aside from bilateral agreements. Asia Carbon, a Singapore-based firm, has an online auction trading platform which started five years ago. It trades an average volume of 200,000 carbon credits, or certified emission reductions (CER), per month. It manages 25 million carbon credits globally, of which 4.6 million comes from Asia, said Mr Babu.

Mr Henry Derwent, the president of the International Emissions Trading Association, when in Singapore in July, said the city-state was following in the footsteps of London by being vocal about its ambitions to become a carbon trading hub. The government's determination is "obvious", he adds, even before it knows what the post-Kyoto future would be.

Still, only time will tell if being vocal is enough. Competition is tough, and Singapore, although a Non-Annex I country, offers limited potential for projects that can reap carbon credits.China and the United Nations have been reported to be working on setting up a carbon trading exchange in Beijing, which could enable the Chinese capital to become the centre for Asia's carbon trading activities. China currently corners almost half of the world's UN-regulated carbon credit projects.India follows closely with more than 30 percent, with the rest of it mostly in developing nations.

Some Chinese newspapers have reported the launch of a new carbon trading exchange in Wuhan, the capital city of Hubei province in October this year.

One common sentiment expressed by analysts is that one way Asian cities can emerge ahead of its counterparts is by thinking up attractive policy and regulatory frameworks which would encourage the regional carbon trade to flourish. The first to this finish line, wins the race.