Southeast Asia is far from achieving its carbon abatement goals.
According to a report by Bain & Company, Temasek, and Microsoft, while most Southeast Asian countries have pledged to work toward net-zero emissions targets, none are expected to meet the 45% carbon reduction goal by 2030, from 2010 levels. The report highlights a 3 gigaton CO2 emissions gap.
Indonesia, the largest and most important market in Southeast Asia, faces numerous challenges in meeting its carbon abatement goals. These include the absence of scalable and renewable energy solutions, misaligned coal mining and deforestation regulations that allow incentives for non-renewables to stay in place, inadequate electric vehicle adoption stimulus, and slow-progressing carbon sinks due to uncertainty surrounding any sort of upcoming voluntary carbon market in the nation.
For the uninitiated, a voluntary carbon market is a decentralised marketplace where private actors voluntarily buy and sell ‘carbon credits’ that represent certified removals or reductions of greenhouse gasses in the atmosphere. It allows buyers (read Nike, Nestl?, P&G, L’Or?al, etc) to offset their carbon footprints and comply with regulations.
Indonesia is well-positioned to build a carbon credits marketplace
Bain and Temasek identify energy, agri-food, and nature as the three sectors capable of capturing more than 90% of Southeast Asia’s carbon abatement potential. Our firm believes that Indonesia is best equipped to tackle issues in the nature sector, especially regarding the market for developing and trading ‘nature-based solution’ credits that focus on forests.
Indonesia boasts the second-largest tropical rainforest and peatland cover in the southern hemisphere and the world’s largest mangrove cover. These ecosystems act as carbon sinks, absorbing more carbon than they release into the atmosphere. Through active conservation, restoration, and management of these carbon sinks, companies can generate carbon credits, which can then be traded to offset their carbon emissions.
This creates a total addressable market for carbon project origination, feasibility, development, design, and credit sales and trading valued at $16 billion to $18 billion by 2030, according to Bain and Temasek. Indonesia alone is responsible for 66% of Southeast Asia’s investable forestry carbon stock.
Classic chicken-or-egg problem in emerging markets
To build a successful marketplace for carbon credits, there are two key questions that arise in emerging markets. First, how can we generate enough supply to attract growth on the demand side or vice versa? Second, how do we go about catalyzing growth on both the supply and demand sides?
On the “supply side,” or the side of people trying to create more carbon projects, there are a few different things they can do.
First, they can create tools that make it easier to figure out which projects are worth doing. These tools would use tech like light detection and ranging and geospatial analysis to quickly evaluate potential projects. Second, they can become project developers themselves by starting and managing their own carbon initiatives. Third, they can educate landowners and communities about how to create new carbon projects.
Meanwhile, on the “demand side,” or the side of people who want to invest in or buy carbon projects or credits respectively, the problem is that current voluntary carbon markets do not provide a uniform standard to quantify the real potential of carbon abatement. The same can be said about the quality of verification for traded projects.
To solve the problem, some people are building vetted marketplaces that have standards and predetermined attributes for measuring a project’s carbon-saving potential. This would make it easier for investors to find trustworthy projects to put money into.
On both the supply and demand side, people can impose take rates. The amount of money they make depends on what they do. People who assess the feasibility of a project and those who create the project typically make about a 15% profit. People who sell the projects to others might make a 3% to 5% profit. People who run marketplaces for trading carbon projects can make up to 50% in profit.
After a great deal of research, our firm [AC Ventures] believes that most players may eventually have to approach an end-to-end play to service both supply and demand. This will create inevitable competition among a few dominant players in a tight oligopoly.
Some of the early venture-backed companies that have outlined such a roadmap include Go-Ventures-backed Fairatmos, Openspace-Ventures-backed Thryve.Earth, and CarbonX. A few others have chosen to be more focused, such as CarbonEthics and Ozon in project development and TruClimate, Unravel Carbon, and Jejak.in in carbon monitoring and measurement. In Indonesia, the largest household names in carbon project development include Restorasi Ekosistem Riau, Rimba Makmur Utama, and Rimba Raya.
Practical advice for builders and investors
For potential investors, regulation continues to be a key challenge to overcome. Current regulations are showing progress in terms of taxes, trading through the IDX, and other administrative requirements set by the government.
For builders, given our learnings from global comparisons such as South Pole, a carbon finance consultancy valued at more than US$1 billion, and NCX, a platform valued at more than US$100 million that connects carbon demand with project developers, two critical notes come to mind.
First, to succeed in this space, companies need a highly technical founding team and a clear tech roadmap. Players should understand the problems that buyers and sellers face in the carbon market and create a plan to make trading easier. They should also focus acutely on a simple, no-nonsense user experience. This will help them stand out and be successful.
Frustrated users in some of today’s more unreliable voluntary carbon markets have cited difficult trading and an overly esoteric user experience as their main problems.
Finally, it’s important for companies to have a strong network of project developers, financiers, and buyers to be successful. This often requires having a founding member that has a strong local network of relevant stakeholders. When a company can quickly generate carbon credits and find interested buyers and investors, it creates a positive flywheel cycle of growth.
The author is an analyst at the Southeast Asian venture capital firm AC Ventures.
