Speech by Permanent Secretary (Finance) (Performance), Ministry of Finance, and Chairman, Energy Market Authority Chan Lai Fung at the Opening Ceremony of Carbon Forum Asia 2010

Mr Henry Derwent
President and CEO, International Emissions Trading Association

Mr Michael Dreyer
Vice President, Asia Pacific, Koelnmesse

Mr Edwin Khew
Chairman, Sustainable Energy Association of Singapore

Distinguished Guests

Ladies and Gentlemen

I am pleased to join you for the opening of Carbon Forum Asia 2010. I would like to congratulate the International Emissions Trading Association and Koelnmesse for organising this very successful conference for the fourth year running. Today, Carbon Forum Asia is the leading platform for key industry players to discuss carbon market trends and issues. This year, being part of the Singapore International Energy Week, we can expect the event to further extend its reach, and benefit from the synergies from the gathering of the world’s foremost energy thought leaders.

As we approach the upcoming round of UNFCCC (United Nations Framework Convention on Climate Change) meetings in Cancun at the end of the month, discussion on carbon and emission-related issues will again intensify. There will be renewed interest in what governments are doing to mitigate the effects of climate change and promote sustainable development. Attention will be drawn to the progress made under different efforts, including initiatives such as the Clean Development Mechanism (CDM), and what it can deliver in terms of efficient and effective climate change mitigation.

Singapore’s contribution to the Clean Development Mechanism

CDM has come a long way since its inception in 2006. While its critics are quick to point out flaws, others have come to recognise its potential in facilitating capital flows and stimulating the development of emission-reduction projects. To date, the mechanism has registered over 2,400 projects. According to the UNFCCC, CDM projects from Asia contributed close to 78 per cent of the total number of projects registered, as of August this year. China alone accounted for nearly 60 per cent of all Certified Emission Reductions or CERs. There is much potential for the scaling up of CDM projects for the rest of Asia, including the ASEAN countries.

In Singapore, we encourage local companies to contribute to this global endeavour in addressing climate change. The Government provides support by giving grants to help companies defray the cost of developing the documentation needed for CDM projects. The grant is up to 50 per cent of the qualifying costs or $100, 000. In November 2008, Singapore registered its first CDM project. The project involves the recovery of waste steam from a biomass cogeneration plant for the drying of waste, and for the heating of ISO tanks which will result in savings of 6 million litres of diesel every year.

Currently, there are seven other CDM projects that have been submitted for validation. These projects address a myriad of factors that contribute to carbon emissions. Although the number of projects may not be large, they represent the industry’s commitment in support of the CDM initiative.

The Singapore Government has also invested in testbedding facilities to support private sector innovation in carbon mitigation. Earlier this year, we established a Cleantech Park which will allow the testbedding and demonstration of system-level clean technology solutions. We also launched two nation-wide pilot projects for the testbedding of intelligent energy systems and electric vehicles. To develop the Cleantech sector, the Singapore government has set aside close to $700 million to enhance capabilities in this sector, which has seen significant growth in recent years. All these efforts will enable not just local but international companies to use Singapore as a test-bed for clean energy technologies.

Challenges ahead for the Clean Development Mechanism

If we look back at the achievements of CDM, we can view it as a glass half full or half empty. Overall, I think CDM has made good progress in a short space of time. But there are still many challenges ahead. Specifically for CERS and CDM projects in Asia, the outlook will depend very much on the demand for these projects. The first commitment period of the Kyoto Protocol will expire in 2012. In the medium-term, economic growth in the developed countries may remain muted, and that will reduce demand for carbon credits. Further, demand within Asia currently stems mainly from just one source - Japan. The outlook post-2012 is by no means clear. It will hinge critically on the outcome of ongoing climate change negotiations.

Assuming there is continued growth in demand, the rules governing the CDM market will need to evolve if CDM projects are to take off in a big way. We need clear and consistent rules so that the CDM market can not only function efficiently, but also achieve the objectives of emissions reduction and sustainable development effectively. The regulatory framework must be enhanced. Not just to streamline procedures and give greater certainty to investors, which is important. But also to address issues of additionality and appropriate baselines, to give similar certainty that there will be real reduction in emissions.

Global trading rules may also need to be tightened to ensure that the goals of mitigation are met. Earlier this year, an episode involving the sale of used CERs resulted in the temporary collapse of the spot price of CERs, putting a dent on investor confidence. Stringent and well-designed rules are needed to foster investor confidence and promote participation in the trading markets.

The CDM challenges may be complex, but we believe they are not insurmountable; and we believe that carbon trading activity will be on the rise. For example, New Zealand recently set up its own cap-and-trade system. That has generated keen interest from Singapore-based trading companies. There is also an anticipation that other countries such as Australia, Japan and Korea may also establish mandatory cap-and-trade systems, which would boost demand and promote carbon trading in this region.

Carbon Trading Market Potential in Singapore

The global carbon trading market has been growing rapidly in recent years. It is estimated to increase from a worth of about EUR 90 billion in 2008 to nearly EUR 1.2 trillion by 2020 . While London is widely viewed as the carbon trading capital of the world, there are now other growing hubs. In Singapore, we have seen a number of new entrants. They are here to serve the regional carbon market, reflecting the increased industry interest for carbon trading in Asia.

Singapore, given its position as a major international financial centre, has been able to attract some key players to trade carbon credits in our small but burgeoning carbon industry market. One of these new entrants is Tricorona, headquartered in Stockholm. It is one of the largest traders of emission allowances in the world, and it established its office in Singapore last year. Another key carbon trading player in Singapore is Gazprom, one of the world’s largest natural gas producers. Its trading unit has set up an office in Singapore this year to conduct liquefied natural gas and carbon credit trading. Apart from these new entrants, existing energy companies in Singapore have also recognised the market potential and started trading carbon credits, in addition to other traditionally traded commodities. Today, there are some 30 emission trading companies operating in Singapore.

In August this year, the commencement of trading activities of the Singapore Mercantile Exchange also marked a significant milestone. It is the first Pan-Asian commodity derivatives exchange that offers trading in a diverse range of commodities, including energy derivatives. Last year, to support the development of Singapore as a carbon trading centre, the scope of our tax incentives was enhanced to include carbon trading activities. It reflects our confidence in the continued growth of the carbon trading market, and our belief that Singapore is well placed to leverage on this growth.

Conclusion

To conclude, the global carbon market indeed holds both exciting possibilities as well as challenges. How the market will develop would depend not just on how the regulatory environment would evolve, but also how market players would respond. There have been many proposals for CDM reform. It is premature to speculate how the regulatory environment would pan out exactly. But whatever the eventual environment, I believe there is enough resourcefulness and expertise among industry players like yourselves to make the market work. Over the next two days, I trust you will hear many resourceful ideas and benefit from the collective expertise in this room. I wish all of you fruitful discussions, and hope to see you again at next year’s Singapore International Energy Week.

Source: Energy Market Authority