Cablegate: Singapore Positions to Be Carbon Trading Center

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FM AMEMBASSY SINGAPORE
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INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

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SUBJECT: SINGAPORE POSITIONS TO BE CARBON TRADING CENTER

1. (U) SUMMARY: Singapore hosted an October conference on emissions
trading and carbon finance, highlighting the role Asia, and
potentially Singapore, can play as a center for carbon trading.
Speakers at the Carbon Forum Asia conference voiced concerns about
the lack of carbon credit supply and acknowledged the tremendous
influence that passage of U.S. cap-and-trade legislation will likely
have on the size and direction of the carbon market, noting that
much also depends on the outcome of the climate talks in Copenhagen.
Singapore aims to capitalize on its position as a financial
services and commodities trading hub to become a carbon trading
center. Progress to date has been slow, but the Singapore
Mercantile Exchange (SMX) may launch carbon product trading in the
second half of 2010. Even as the market continues to expand, doubts
remain among energy experts that carbon trading will actually lead
to emissions reduction. End Summary.

Carbon Forum Asia
-----------------

2. (U) Singapore hosted the fourth annual Carbon Forum Asia October
26-27. The International Emissions Trading Association (IETA)
helped organize the Forum with support from the Sustainable Energy
Association of Singapore (SEAS), the Economic Development Board, and
the National Environment Agency, among others. The conference
brought in speakers from the private and public sector to discuss a
range of topics, such as: changes in the global carbon market;
opportunities for growth in Asia; the implications of the upcoming
climate change talks in Copenhagen; and the political situation
surrounding carbon trading in the United States. Exhibitors at the
concurrent trade fair ranged from multinational corporations like
Bunge and Sumitomo Corporation to investment banks and
representatives from the United Nations Framework Convention on
Climate Change (UNFCCC) secretariat. The 8th UNFCCC Clean
Development Mechanism (CDM) Designated National Authorities (DNA)
Forum followed Carbon Forum Asia on October 28.

3. (U) During a panel regarding the global carbon market and the
impact on the Asia-Pacific region, speakers highlighted the current
challenges created by political uncertainty leading into climate
talks in Copenhagen and concerns about carbon credit standards that
result in low carbon credit supply. Panelists predicted that the
future source of most carbon projects will likely be developing
countries in Asia, while demand for credits will come from the
United States, EU, Canada, Japan and Australia. One speaker
cautioned against boosting supply by moving too rapidly to using
voluntary carbon credit standards, because credit buyers will demand
a level of quality, transparency and verifiability that voluntary
credit standards may not ensure. However, more stringent standards
reduce the supply of offsets available for countries to meet their
emissions goals, he added. Independent groups like The Carbon
Rating Agency pitched their services and advocated for a global
trading system that uses regulated and voluntary standards that can
be independently verified and enforced.

4. (U) Discussion on the quality and supply of carbon credits
continued in a panel focused on the U.S. political environment.
World Resources Institute provided an overview of the U.S. House of
Representatives bill (H.R. 2454) and Senate cap-and-trade bill,
noting that each sets different limits on the proportion of
international offsets that can be used in the United States. One
panelist estimated that the 50 U.S. states would need to purchase
$15 billion in international offsets to help close the gap between
their shares of emissions caps under H.R. 2454 by 2012. Passage of
U.S. legislation could lead to a huge increase in the overall carbon
trading market and price increases for credits from offset projects
in Asia, said Philippe Rosier, the President of carbon-trading firm
Orbeo. There is only an up side for the price of offsets going
forward, he continued.

5. (U) Margret Kim of the California Air Resources Board provided
an overview of California's CDM projects in Asia, and echoed
concerns about the lack of carbon credit supplies. Kim emphasized
that the focus for developing a global carbon market should be on
transparency, and she suggested that U.S. federal legislation should
not be designed to assume that international credits are not as
credible or valuable as domestic credits. Initially, it may be
necessary to consider limited project-based voluntary credits in
order to meet emissions goals. CDM projects in least developed
countries could help fill a short-term gap in offset supplies and
have the added benefit of local capacity building, Kim continued.
Eventually, such project-based voluntary credits could be phased out
for sectoral carbon crediting (e.g., credits for the cement sector).

Building Singapore's Carbon Market
---------------------------------

6. (SBU) Singapore aims to establish itself as a carbon-trading

SINGAPORE 00001142 002 OF 002

center, but Singapore's carbon market is unlikely to take off before
2011, Kavita Gandhi Executive Director at SEAS told Econoff.
Singapore does not yet have a carbon exchange or a carbon trading
regulator. However, Singapore is home to major banks like HSBC and
Standard Chartered, which finance renewable energy projects, and CDM
project managers like EcoSecurities. Singapore is already a major
financial services and commodities trading hub and is geographically
near to a range of CDM projects in Asia, Ghandi added. Hong Kong
would be another likely contender but it is no closer to having a
working exchange, she asserted. Reports indicate that to date only
one Singapore environment solutions provider has been granted
international approval to engage in carbon trading, but six other
local firms have since applied. Carbon trading by local firms is
currently done through Europe, Ghandi said.

SMX May Trade Carbon Products in 2010
-------------------------------------

7. (U) Press reports in late October stated that the Singapore
Mercantile Exchange (SMX) may launch carbon product trading in the
second half of 2010. The SMX was established in Singapore in July
2008 as an international commodity derivatives exchange for trading
in various commodities, including options and futures contracts on
agricultural commodities, base and precious metals, currencies and
commodity indices. Reports stated that SMX would trade seven carbon
products initially, but details about the products were not
released. The SMX would compete with the European Climate Exchange
(ECX), which dominates the European and international carbon market
and trades EU Allowances (EUAs) and Certified Emissions Reductions
(CERs).

Mixed Outlook for Carbon Trading Results
----------------------------------------

8. (SBU) Local views differ on how effectively the carbon market
will actually reduce carbon emissions. Carbon credits can help
encourage investment in renewable energy projects that can be three
times as expensive as traditional fossil fuel projects, William I.
Y. Bunn, Managing Director at Asia Renewables Pte Ltd, said during a
recent seminar on renewable energy projects in Southeast Asia. Bunn
said that he supports carbon markets but acknowledged that the
market is not perfect. There is no real "punishment" in place if
companies or countries miss their emissions targets, and they can
just "loosen their belts" by relaxing targets they do not reach.
SEAS's Ghandi acknowledged that at this stage, the secondary carbon
market is actually growing faster than the primary market. Dr.
Elspeth Thomson, a senior fellow at the Energy Studies Institute in
Singapore, expressed her concerns about the potential for financial
market problems caused by "sub-prime" carbon credits. Thomson said
she was skeptical about how emissions reductions would be accounted
for, especially as trading in the primary and secondary markets
expand, and she suggested that there was some irony in the
enthusiasm about carbon trading following the financial crisis
caused by sub-prime mortgages. In her view, there is the potential
for trading of poorly regulated carbon securities to go "very wrong"
as it did with sub-prime mortgage-backed securities.

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