SGX announces tie up with banks, Temasek to launch carbon exchange

London, (Quantum Commodity Intelligence) - Singapore Exchange has become the second major bourse to try to gain a foothold in what is likely to be a huge market for carbon offsets after it announced Thursday it was tying up with banks DBS, Standard Chartered and Temasek – the Singapore state-owned investment firm – to provide a contract for offsets.

The venture – called Climate Impact X – will operate in a similar space as CME Group's Global Emission Offset, although the latter is likely to appeal to airlines as a target market who will likely want to buy the cheapest credits to comply IATA-backed emission reduction goals.

Instead, the Singapore-backed venture says it will focus on high quality projects that are nature-based, such as restoration of forests and wetlands, and provide a minimum carbon price to encourage developers of emission reduction projects to create supply.

In addition, CIX, as it will be called, claims it will be the first exchange to use satellite monitoring, machine learning and blockchain to enhance transparency and integrity of the carbon credits.

Ravi Menon, managing director of the Monetary Authority of Singapore said: "CIX is a promising solution to the problem we face today of fragmented carbon credit markets characterised by thin liquidity and credits of questionable quality".

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The market for carbon offsets has been around for two decades, but growing corporate sustainability targets are expected to drive demand over the next decade as countries seek to implement their targets to cut emissions of greenhouse gases made under the 2015 Paris Agreement.

The marketplace so far has been divided into compliance schemes – those governed by the UN and regional authorities that oversee cap-and-trade schemes – and voluntary schemes – where carbon registries provide standards that developers must adhere to before being issued with credits that prove their actions reduce emissions.

Initially, voluntary schemes traded at a discount to mandatory schemes, but corporate sensitivity around their ESG image has seen the price of some voluntary credits trade at a significant premium as companies want to buy credits that create other benefits, such as social, than merely those that cut carbon dioxide.

For example, so called Corsia credits that airlines can use can trade as low as $2/mt, while some avoided deforestation credits can fetch $10/mt

But the concept of carbon offsets is a difficult one, with negotiators at the UN failing so far to agree rules on whether such credits can be used to meet national targets, with some countries comparing the concept to a sinner paying pennance, while green groups question the credibility of schemes as they become scaled up.

The crunch time for markets will come in Glasgow at COP26 talks later this year, when countries are meant to sign off on new rules that govern market-based mechanisms.

CIX said it will provide two types of services – one is the traditional platform for trading and a second where it marries carbon credit buyers with project developers to better meet client needs.

It will also ask buyers to commit to a reserve price for forward volume of carbon to ensure longer-term supply of credits.

It's not all altruism though.

The prize for exchanges is huge, with the market estimated to be worth $200bn by the middle of the century.