Southeast Asian countries will need to incorporate rules governing carbon market mechanisms under Article 6 of the Paris climate agreement in their emissions trading systems (ETSs), as their economies will depend on external finance and crediting to decarbonise, the Global Green Growth Institute (GGGI) said in a policy paper presented at the UN Cop 31 climate conference in Antalya, Turkey, on Friday.
Thailand, Indonesia, the Philippines and Vietnam, which are in various early stages of developing domestic ETSs, do not have the "luxury" enjoyed by the region's larger economies China, Japan and South Korea, whose carbon systems are backed with decarbonisation funding, GGGI said.
Japan, for instance, supports its companies with transition bonds worth about ¥20 trillion ($126bn), while South Korea has introduced transition loans and facility support, GGGI said.
And while Thailand or the Philippines are potential carbon credit suppliers, their companies may see the high-quality credits they need for their own compliance targets move overseas because of the higher prices paid there.
South Korea expects international emissions cuts to contribute to 12.8pc of its reductions by 2030, GGGI noted. International carbon credit sales should therefore be "carefully" measured against quantified national emissions targets before being authorised by the prospective exporting country, so that they are not treated as "unrestricted" export opportunities, GGGI warned.
China, Japan and South Korea were among the first ETS movers in the region, and the southeast Asian countries should learn from their experience, GGGI said, such as linking finance to emissions pathways, defining scope and sectoral coverage, and conducting simulations.
Governments in southeast Asia have generally prioritised competitiveness and energy security over tighter allowance supply and stronger carbon prices, GGGI said. Free allocation, allowances linked to output or historical emissions, and access to offsets have limited costs for industry, but are also weakening incentives to decarbonise.
The paper specifically recommended that Vietnam and Indonesia restore predictable allocations and tighten power sector benchmarks used to calculate free allocation levels, while the Philippines should introduce a carbon charge on large emitters to prepare for an ETS and develop its domestic monitoring, reporting and verification (MRV) industry. Thailand should align fuel taxes, carbon taxes and its ETS to streamline carbon pricing, the paper said.
Priority should also be given to closing Vietnam's 2027–28 MRV gaps, GGGI said, as well as extending Indonesian reporting to its captive coal and industry, and using Thailand's 2027–28 data collection to establish verified baselines.
Early co-operation between the early movers and newcomers could lead to the establishment of compatible registries and accounting formats. This would strengthen domestic compliance and voluntary markets and also support Article 6 transfers against quantified national mitigation budgets, the paper found.
And sectors that are both emissions intensive and trade exposed — and therefore vulnerable to the EU's carbon border adjustment mechanism (CBAM) — should combine benchmark-based free allocation with modest auctioning to establish verified domestic carbon payments.
Interoperable reporting systems should be designed that could expand to product-level carbon accounting, including EU CBAM requirements.
Before binding compliance begins, the newcomers should publish multi-year sector allowance budgets aligned with their climate plans — or nationally determined contributions (NDC) — under the Paris Agreement, GGGI said. South Korea's NDC-aligned cap method could serve as a model, the paper said.
The newcomers should also recycle carbon tax and auction revenues into industrial decarbonisation, grids, social protection transfers for vulnerable households and market administration, while budgeting for declining receipts as emissions fall, GGGI recommended.
Southeast Asian ETSs could also draw on Japan's GX-ETS reference prices by publishing a progressively rising price corridor with defined banking limits, vintage rules and a market stability reserve, GGGI said.

