The Price of Tomorrow: Asia Pacific's High-Stakes Experiment with Carbon Markets

Written by Riyaa Agarwal (BSc Politics and Economics)

How the world's fastest-growing region is reshaping global climate policy though market mechanisms

As global temperatures continue to rise and extreme weather events intensify across Asia Pacific, the region’s policymakers are wielding an increasingly sophisticated arsenal of carbon pricing mechanisms to combat climate change. From the snow-capped peaks of Northeast Asia to the tropical coastlines of Southeast Asia, governments are experimenting with innovative market-based solutions that could reshape the global approach to emissions reduction. Yet beneath this veneer of progress lies an intricate web of complications that threatens to undermine the region’s climate ambitions towards a green transition. This analysis delves into the transformative journey of Asia Pacific’s carbon pricing landscape, examining how the world’s most economically dynamic region is attempting to balance aggressive climate action with sustainable development imperatives.

The story of carbon pricing in Asia Pacific is one of bold experimentation and cautious implementation. As home to both the world’s largest carbon market (China) and some of its most innovative pricing mechanisms (Singapore), the region has emerged as a laboratory for climate policy innovation. However, the implementation of these mechanisms across diverse economic and political landscapes reveals critical tensions between environmental aspirations and economic realities. This analysis argues that without substantial reforms to existing carbon pricing frameworks, including harmonised cross-border mechanisms, stronger price signals, and more comprehensive sectoral coverage, the region risks failing to achieve its intended emissions reduction targets while potentially exacerbating economic inequalities among developing and developed economies.

Current Landscape: A Fragmented Reality

The evolution of carbon pricing in Asia Pacific presents a carbon pricing landscape that has undergone dramatic transformation since 2021, with major economies implementing increasingly sophisticated mechanisms while grappling with unique implementation challenges and economic constraints. Globally, carbon pricing revenues reached a record $104 billion in 2023, with emissions trading schemes generating the majority of this revenue (World Bank, 2024). As of June 2024, 89 national and subnational jurisdictions have implemented carbon pricing, covering 24% of global greenhouse gas (GHG) emissions (ADB, 2024).

China’s national emissions trading scheme (ETS) stands as the cornerstone of regional carbon pricing initiatives. Launched in 2021, it marks a watershed moment in global climate policy, covering over 4.5 billion tonnes of CO2 emissions, primarily from the power sector. The scheme’s innovative compliance mechanisms, including allowance allocation based on carbon intensity rather than absolute caps, reflect Beijing’s attempt to balance environmental ambitions with economic growth imperatives. The system has shown promising early results, with trading volumes reaching 194 million tonnes in 2023 and prices stabilising around ¥58-65 ($8-9) per tonne. However, this approach has sparked intense debate among policy experts, who argue that intensity-based targets may inadvertently dilute emissions reduction incentives during periods of rapid economic expansion.

India, as the third-largest global greenhouse gas emitter lacks an explicit carbon tax but employs implicit carbon pricing through energy taxes. High excise duties on petrol and diesel and the Clean Energy Cess on coal act as de facto carbon taxes, influencing consumption patterns. The recent introduction of the Carbon Market Trading Scheme (CMTS) in 2023 marks India’s most ambitious step toward comprehensive emissions trading. The scheme initially covers 1,000 installations across power, steel, and cement sectors, with innovative features including a ‘carrot-and-stick’ approach that combines penalties for non-compliance with incentives for early adoption of low-carbon technologies. The Indian government’s decision to link the CMTS with renewable energy certificates has created a unique hybrid market that could serve as a model for other developing economies. However, implementation challenges persist, particularly in terms of monitoring and verification infrastructure, func utilisation and policy coherence.

South Korea’s mature ETS has emerged as a laboratory for policy innovation in East Asia. The introduction of market makers in 2019 represented a significant step toward addressing liquidity constraints that had plagued earlier iterations of the scheme. The system’s evolution has been marked by continuous refinement, including the integration of financial institutions as market participants and the pioneering development of hydrogen credit trading mechanisms. The Korean Carbon Market has achieved remarkable success in price stability, maintaining prices between ₩30,000-35,000 ($23-27) per tonne throughout 2023, significantly higher than other regional markets. This price stability has provided clear investment signals for low-carbon technologies, resulting in documented emissions reductions of 4.5% annually in covered sectors since 2015.

Japan’s multilayered approach to carbon pricing exemplifies the challenges of policy coordination in a complex federal system. The country’s framework encompasses municipal initiatives like the Tokyo Cap-and-Trade Program, which has successfully reduced emissions from commercial buildings by 27% since its inception, alongside national mechanisms such as the J-Credit Scheme. The introduction of a hybrid ETS-Carbon Tax system in 2023 represents an attempt to create a more coherent national framework while maintaining flexibility for local innovation. The system’s distinctive feature lies in its integration of voluntary and mandatory elements, allowing smaller enterprises to participate in carbon markets through opt-in provisions while maintaining strict compliance requirements for large emitters. Japan’s experimentation with carbon removal credits, launched in partnership with Singapore, demonstrates the potential for innovative market mechanisms to address hard-to-abate emissions.

Structural Challenges and Market Evolution: the Price-Development Dilemma

The implementation of carbon pricing across Asia Pacific highlights a fundamental tension between climate ambition and economic development imperatives. This tension manifests in three interconnected challenges that shape the region’s carbon pricing landscape: price adequacy, market architecture, and economic transition costs. Current carbon prices across regional markets reveal the depth of this dilemma – ranging from $3-15 per tonne in most jurisdictions, with even advanced economies like South Korea struggling to maintain prices above $30. These levels fall dramatically short of the $40-80 per tonne that the Asian Development Bank identifies as necessary for Paris Agreement alignment by 2025. However, the pricing challenge extends beyond mere numbers, reflecting deeper structural constraints in rapidly developing economies.

The region’s market architecture exhibits systematic weaknesses that reflect political-economic realities rather than mere technical oversight. China’s intensity-based allocation system, while criticised for potential environmental inadequacy, represents a calculated attempt to maintain industrial competitiveness during rapid economic transformation. Similarly, Indonesia’s sector-specific carbon pricing pilots demonstrate how emerging economies are attempting to shield strategic industries from sudden cost increases. The Asian Development Bank’s 2023 Carbon Pricing Review reveals that 73% of covered entities across the region receive some form of free allocation or cost containment measure, indicating the pervasive nature of this challenge.

Market innovation has emerged as a response to these structural constraints, though with varying degrees of success. Singapore’s International Carbon Exchange introduced sophisticated derivatives products in 2023, including carbon futures and options, creating hedging opportunities that have attracted financial intermediaries and improved market liquidity. Meanwhile, Japan’s Joint Crediting Mechanism (JCM) has pioneered a novel approach to international carbon trading, facilitating technology transfer while generating credible emission reductions. The mechanism has mobilised over $2.3 billion in low-carbon investments across Southeast Asia, demonstrating how innovative market designs can address both environmental and development objectives.

However, these innovations cannot fully resolve the underlying tension between price signals and economic development. The World Bank’s State and Trends of Carbon Pricing 2024 report highlights how persistent oversupply and price volatility have hampered investment signals. This challenge is particularly acute in emerging economies, where rapid industrial growth creates uncertainty about future emissions trajectories and appropriate allocation levels. India’s experience with its perform-achieve-trade scheme for energy efficiency is an instance of how even well-designed markets can struggle to maintain price stability in rapidly evolving economic contexts. The region’s response to these challenges has spawned a new generation of hybrid mechanisms that blur the line between carbon taxes and trading systems. Thailand’s new Carbon Credit Market mechanism, launched in 2023, combines elements of both systems using a carbon tax as a price floor while allowing trading for compliance flexibility. This approach represents a pragmatic response to the price-development dilemma, though its effectiveness remains to be proven.

Policy Innovation and Regional Cooperation

Recent developments in regional cooperation offer promising pathways for addressing these challenges. The Asia-Pacific Carbon Market Cooperation Initiative, launched in late 2023, represents an ambitious attempt to create a framework for cross-border carbon credit trading while establishing common monitoring, reporting, and verification (MRV) standards. This initiative builds on earlier bilateral experiments, such as the Japan-Korea carbon credit transfer mechanism, while introducing innovative features including a regional price floor mechanism. Vietnam’s comprehensive approach to carbon market development, codified in Decree 06/2022, illustrates the potential for emerging economies to leapfrog earlier market design challenges. The decree establishes a roadmap for creating a domestic carbon market by 2025 while facilitating links with international markets. Similarly, Indonesia’s Carbon Economic Zone program demonstrates how carbon pricing can be integrated with broader industrial policy objectives to inherently create low-carbon development frameworks.

Institutional Architecture and Capacity Building

The effectiveness of carbon pricing mechanisms in Asia Pacific has been significantly constrained by institutional and technical barriers, particularly in developing economies. Inconsistent emissions measurement methodologies and limited technical capacity have hampered the development of robust MRV systems essential for market credibility. The high costs of compliance have proven particularly challenging for small and medium enterprises, while inadequate verification procedures have raised concerns about environmental integrity. The Asian Development Bank’s Article 6 Support Facility has emerged as a crucial initiative for addressing these capacity gaps. The facility provides technical assistance for carbon market development while facilitating cross-border pilot transactions that help build institutional experience. However, a deeper analysis presents complications in harmonising registry systems and accounting standards across jurisdictions, complicating efforts to create integrated regional carbon markets.

Future Directions and Policy Implications

The path forward for carbon pricing in Asia Pacific requires a delicate balance between environmental ambition and economic pragmatism. Singapore’s International Carbon Credit Exchange, launched in 2024, represents a promising model for regional market integration, providing standardized contracts and settlement procedures that could help overcome current fragmentation. The Regional Carbon Price Support Mechanism further demonstrates the potential for coordinated action to establish minimum carbon price trajectories that create predictable investment signals while reducing competitive distortions. However, the success of these initiatives will ultimately depend on addressing fundamental political economy constraints. The disproportionate burden on developing economies requires innovative mechanisms for revenue recycling and technical support. Meanwhile, concerns about carbon leakage and industrial competitiveness necessitate careful policy design that maintains environmental integrity while protecting vulnerable sectors during the transition period.

As Asia Pacific continues to grapple with these challenges, the region’s experience offers valuable lessons for the global climate policy community. The evolution of carbon pricing mechanisms in this diverse economic landscape demonstrates both the potential and limitations of market-based approaches to emissions reduction. Success will require sustained political commitment, innovative policy design, and robust institutional frameworks that can adapt to changing economic and environmental imperatives.