S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hi, everyone. Good morning, good afternoon and good evening. Welcome to the webinar that S&P Global Commodity Insights is presenting. The topic of today's presentation is One missing key enabler: How to price carbon in Southeast Asia. And with me today, I have here Yuejia Peng as well as Cecillia Zheng who will be presenting. Just some housekeeping before we actually start the presentations. So I'll just hold here for a couple of seconds on the copyright notice and disclaimers. And feel free to actually type in the Q&A box at any time during the webinar. The questions will be locked, and we will try to address all the questions towards the end of the webinar. And if any of the questions are left unanswered, we will respond or reach out after the webinar. If, at any time, you have any technical issues, also feel free to put it inside the Q&A box. Last but not least, at the end of the webinar, please take a couple of minutes to fill up our short survey, and this survey is really important and useful to us to gather feedback and understand your needs and interest for subsequent webinars that we will conduct and hold. So just a quick run-through of today's agenda. There's broadly 3 sections: carbon pricing overview, country analysis as well as case study. Yuejia will be taking us through the carbon pricing overview in a more global perspective. And thereafter, Cecillia will be touching on the country analysis as well as case studies. Over to you, Yuejia.

Thank you very much. Hello, everyone. Lovely to join you today. So I'm here to give you a quick overview of what is carbon pricing and what's been happening most recently globally. But perhaps we can just start with why are we talking about carbon pricing for Southeast Asia. And it's largely because pricing carbon will be really increasingly important, not just globally but especially for this region because the pricing of carbon will be a very much needed tool in order to drive emission abatement everywhere. So on the left-hand side chart here, you see a view of percentage of total emissions from power generation comparing 2021 to 2050 for different global regions. And you can see that while major economies, such as Mainland China and the U.S., are looking to shrink those proportions, developing countries in Asia, Africa and the Middle East are projected to increase this share. While on the right-hand side chart, you can see that power generation certainly very much dominate these emissions globally but especially in Asia. And Southeast Asia is no exception. And hence, while governments across board, there are also global commitments to drive down emissions. We really expect carbon pricing to be more of a prevalent thing in the future, along with other regulatory and economic tools that are at government's disposal and also for the private sector. And just moving to the next slide. So if we can then quickly talk about what are carbon markets and pricing. Perhaps many of you are familiar with this. But globally, there are 3 main types of carbon markets and pricing mechanisms. And they're fairly distinct with their own participants and dynamics, but there are linkages between them. So if we start on the left, you have different types of compliance carbon policies. And the 2 main types here are an emission trading scheme, such as a cap-and-trade system where the authorities would set a total emissions that is allowed for a certain sector or sectors and then they issue permits, which can be then traded between entities. And hence, this is a market-based mechanism. And we sometimes call these compliance carbon markets, so CCMs. A carbon tax is another way for governments to directly put a levy on emissions. And there's a long ongoing debate about which system is better. And of course, there are trade-offs, right? So in an ETS, you would have an emission level that is fixed because that level is determined by the authorities but the cost of emissions will vary and, at times, can be quite volatile. A carbon tax will fix the cost of the emissions but not the emission levels. So as a government, you cannot control the overall levels, but you control the pricing of it. And often, the tax is easier to administer compared to an ETS, but then the tax -- the word tax is very unpopular globally, and they can be a hard sell for many politicians and governments. But yes, so all of these different factors will go into consideration where authorities would decide which route to go down. And if we were to move to the middle column here, that is the VCM. So the voluntary carbon market. And this is where carbon credits can be generated from different activities, and that then gets traded or used by someone and somewhere else. But most typically, they can come from a range of different projects, a very large, diverse set, such as nature-based projects like the forests and planting trees that we've all heard of, and also technology solutions like carbon capture or renewables. Unlike the compliance markets I just mentioned, voluntary carbon market is voluntary by definition. So you don't have to take part, but many such as companies and entities may choose to do so for various reasons. There are some linkages. So some voluntary carbon credits can be accepted by some compliance mechanisms. But usually, that is controlled at a certain percentage or by certain type or location. And the last type of major carbon market we've seen globally today is country-to-country trading. So such as those are already happening under Article 6 of the Paris Agreement, which I'll come to in a little bit. So perhaps it's worth taking a high-level look at what is happening to compliance carbon pricing globally today. As you can see, so this chart sort of shows you a very high-level view of some of the larger economies and what's happening there. I'll just quickly go through these. We don't have too much time to dive into details, but if we start with Europe. So the EU ETS is the oldest one running in the world. It's been running since 2005. It was very much the first of its kind. It covers power and industry. And the prices of -- for ETS, because it's market-based, had been fairly volatile and reached record levels over the past year. I think the highest was about EUR 98, just short of EUR 100 but recently has been trending a little bit lower. But interestingly, many European countries also have a carbon tax, and that's complementary to the ETS because they tend to cover sectors that are not covered by the ETS, so such as transport and domestic. So the ETS has been fairly successful. It has delivered decarbonization in Europe. And the EU considers it one of the major policy tools for it to reach the 55% reduction target from 1990 levels by 2030. And you may have also heard that EU is proposing a Carbon Border Adjustment Mechanism, a CBAM, which is another key and innovative tool that the EU is hoping to employ in the pricing of carbon and it's how it deals with trading partners. And we can talk about that later if we have more time. The U.K. has left the European Union, so it's developed its own ETS. Canada -- if we jump to North America, Canada has a backstop system where you have regional prices but they need to be at least as high as the federal minimum. The U.S. is obviously a huge economy, but they don't really have a national carbon price per se. They have various regional markets in the form of California and RGGI in the East Coast. But what the U.S. does have, which tend to get lost a bit, is it has a social cost of carbon assumption. And this is an economic measure that reflect the cost of -- to society of 1 tonne of CO2 emissions. And this number, which currently President Biden has just revised it upwards to $120 a tonne, is used in U.S. policy cost and benefit analyses. So it is hidden, but it can be quite influential as a number. Elsewhere, so Mexico is piloting an ETS. It also has a carbon tax, and so does Argentina and South Africa. And if we were to move to Asia, which is where most of our clients and audience are interested in today, I know Cecillia will go through -- do a deeper dive into the Southeast Asian, but -- so you've got China national ETS is obviously the big one. It began in earnest in 2021 after some delays. It is functional, although not without its problems. It covers the power sector at the moment, and prices have had some ups and downs but currently trending around USD 8 a tonne. Japan also has a regional ETS and a national carbon tax, but pricing levels are really quite low. And it remains to be seen what the government will do in introducing more or higher pricing measures. The Korean -- Korea and also in New Zealand has ETS and has been functioning for a while. Prices have been volatile, of course, because they're determined by the market, and so they're quite interesting to watch from our side. And Indonesia has announced a carbon tax, and I will talk a bit more about this later, but the implementation of this has been delayed. So one thing I'll just leave you with before I jump to the next slide is that you can see pricing levels a bit all over the place. Some are really quite high, like the EU ETS over the past year, and others are really low. And so there is this understanding that carbon pricing is important, but the details also matter in terms of not just their level but how and where they are applied, who's paying for it. And all of these things will be very important to determine how effective this is as a measure in driving the energy transition. And as a global service at S&P, we do have many long- and short-term pricing projections and policy coverage for various markets. So please do speak to us if you're interested in hearing more about a certain region. We'll move on to the next slide. So another key element, and you may have seen this a lot in the news, is the development of global markets under Article 6 from the Paris Agreement. What is Article 6? So essentially, it is a global agreement between countries that set out 3 different ways that nations can cooperate with each other in order to reach the NDCs because every country now has an NDC target, a nationally determined contribution, under the Paris Agreement. So those 3 different mechanisms are 6.2. On the left-hand side, you see some boxes illustrating those. 6.2 allows you -- countries to have bilateral trading of what is called ITMOs, which stands for internationally transferred mitigation outcomes. And that is the official unit under 6.2. So this is where country-to-country trading can occur. And on the right-hand side of this chart -- diagram, you can see some of the agreement that has already been reached. So buyers tend to be wealthier buyers, such as Singapore, Switzerland, South Korea. And they are -- they have entered into agreements to purchase credits from countries, such as Colombia, Vietnam, Thailand, Ghana. So a fairly diverse set of countries looking to supply these credits. So that 6.2 is the country-to-country trading. 6.4 is different. It sets up a new carbon trading mechanism and effectively replaces the clean development mechanism from the Kyoto Protocol, the CDM. And this is the place where anybody, so companies, individuals. So people like you and I, we can go and buy credits or develop projects and make them available for sale through this mechanism. But the development of this has been delayed. So there has been lots of back and forth about how the system will actually operate. And COP27, which just finished in Egypt last year, didn't really make as much progress as we would have liked. And so we're looking at the earliest issuance from this mechanism probably from 2025 onwards. And then the last mechanism is 6.8, which is a non -- which takes account nonmarket approaches. So things like offering development aid or transfer of technology between countries. So what is important here is that Article 6 gives you a set of rules and accounting framework that countries can abide by. But importantly, countries now need to go away and think about how do they want to then use these mechanisms in order to achieve the NDCs and reduce their overall emissions. Questions such as should they hold on to their credits, such as the nature-based ones or sell and export them, for example. And who do they trade with? Who do they partner off with? Should they trade with nations or companies? What should they do? So this kind of stock taking and carbon accounting questions is very much likely to dominate the global dialogue in the coming months. So my last slide before I hand over to Cecillia is perhaps a view of what's happening on the voluntary carbon market and the VCM and just how important it might be for the region. So this chart shows you the issuance of credits. So basically, how many credits from various projects have been created and entered into the voluntary carbon marketplace. And these are all from projects based in Southeast Asia. And first, you can see that nature-based avoidance types really dominate from this region. So those will be projects such as forest protection like the REDD and REDD+ projects, and because -- this is largely because many countries in this region, like Indonesia, are really blessed with a lot of rich natural carbon sinks like forest and mangroves and peatlands. So through this market mechanism, many of these credits are already being monetized and brought to market. And the second thing you'll notice here is that there is a massive spike for 2021. You kind of can't really avoid it when you look at this chart. And this is because there was a huge interest -- rise in interest in voluntary credits that began to take shape through 2020, really, but really realized in 2021 because a huge number of corporations, private sector, net-zero pledges came in. So it wasn't just governments. It was private sector participants all over the world. And this signaled a huge rise in demand, and that enticed many credits to be entered into the marketplace. But then subsequently, you notice a big drop into 2022. And so what we observed last year is that there's a bit more of a return to normal or readjustment of the market. So this cooling is due to a number of reasons. There is -- since the rise in interest in 2021, there's been an increasing media scrutiny over corporate use of different carbon credits as offsets where many companies rightly or wrongly were accused of buying cheap credits to offset the emissions instead of doing the hard work of reducing their own obligations. And plus, there's been lots of questions over the quality and integrity of a number of projects, especially around renewables or technology-based solutions that went into the marketplace. So yes, there has been a readjustment in 2022, and we remain sort of highly glued to the screen to see what will happen in 2023. But the voluntary carbon market does have huge potential and implications for the region, lots of countries are interested, a lot of private sectors are interested and certainly one to watch. I know I've whisked through a lot over the past 10 minutes or so, but if you are curious to learn more about various compliance of voluntary carbon market, our S&P product team, research team have a wide range of offerings. We track different policies, volumes and pricing. And so we would be very happy to follow up with any questions you may have. And with that, I'll hand over to Cecillia for the rest of the presentation. Thank you.

Thanks, Yuejia. Thanks for the good introduction of the global carbon pricing, especially the carbon market developments and those players. And now let's go into the Southeast Asia region. Okay. So Southeast Asia also has made big progress or achievement in terms of carbon pricing. From this map, we can see that 3 countries, Singapore, Thailand and Malaysia, have legalized the carbon pricing. I'll share more details of each of these 3 countries in the following slides. And on this slide, I'd like to highlight that there are a few big policy gaps in the region as the majority of the Southeast Asia countries still have no carbon pricing mechanisms in place yet. But we can see from the right side of the map, Indonesia proposed a carbon tax of USD 2.1 per tonne to be implemented from April 2022. Yuejia also mentioned just now. However, this plan has been delayed a few times. And after the delay, there is no clear starting days announced. So the country also had a [indiscernible] ETC covering 80 coal-fired power plants in 2021, but the national ETC likely will not happen before 2024. Vietnam in January 2022, outlined a road map for the implementation of the national crediting mechanisms and the ETS. The road map states that the ETS regulations and trading platform should be in place by 2025, and pilot voluntary ETS is planned to take place between 2026 and 2027. The mandatory ETS should be implemented from 2028 onwards and will be designed to link with others under the Article 6 of the Paris Agreement. Philippines lag further. It is now conducting engagement into carbon tax or carbon pricing instruments. And the country also plans to look to Indonesia's experience for carbon markets, which we know is being delayed. So however, the region overall still represents a big potential as almost all ASEAN member states, they have a project development experience with crediting mechanisms such as CDM and those voluntary standards, the [indiscernible], et cetera. Okay. Now let's move to Singapore. So Singapore is undoubtedly leading the carbon pricing in the region. It's the first ASEAN country to impose a carbon tax, which on the left side of the slide, which started from SGD 5 per metric ton of CO2 in effect from 2019 to 2023 and will go up to SGD 25 in 2024 and '25, $45 in 2026 and '27 before reach $50 to $80 by 2030. So the carbon tax increment is deemed to be more cost effective for the emitters to switch to more energy-efficient solutions and also provide the financial support to new decarbonization technology. By end of 2022, about 50 industry facilities are subject to this carbon tax and which will cover about 80% of the country's greenhouse gas emission. Singapore is also the first ASEAN country to launch a voluntary carbon exchange. And in March 2022, Singapore's carbon credit exchange, the Climate Impact X, launched the first digital platform, the Project Marketplace. To start, the marketplace will mainly feature carbon credits from nature-based solutions such as forest conservation efforts, et cetera. And in fact, in early -- in December 2021, Climate Impact X already launched a pilot auction. And this auction -- so on the right side of the slide, this auction involves 8 projects and 19 buyers and traded 170,000 tonnes of CO2 an average price of $8. Later in March 2022, they launched the first auction, traded 250,000 tonnes of CO2, with an average price at $27.8. This price is close to 40% premium to the current spot prices for the nature-based solutions of the same credit vintage. So as Climate Impact X continues to strive for price transparency for the carbon market, it attracts more international buyers who are willing to pay a premium for high-quality and unique credit type. Also, Singapore announced that from 2024, it would allow high-quality international carbon credit to replace the carbon tax that would further drive the demand for carbon credits. Besides in May 2022, Singapore was selected by the World Bank to work on a platform under the Climate Warehouse initiative that -- to connect information from various carbon registries in the world to enhance the transparency and avoid double counting of mitigation outcomes. As we know, the double counting has become a big issue for most of the projects. So from all these efforts, we can see that Singapore not only strives for domestic decarbonization but also aims to be the carbon service hub in the region. We expect that on the way to reach its target of becoming the carbon hub by 2030, the country will actively look to support the regional development. Next one, Thailand is the second ASEAN country to launch the voluntary carbon market. In fact, the country has long experience with carbon pricing mechanism from many pilots and voluntary programs. In 2007, it established the greenhouse gas management organization, the TGO, to support Thailand's greenhouse gas mitigation actions and the low carbon development, including the promotion of CDM activities and the establishment of the carbon markets. So from 2013, Thailand's government started several voluntary carbon price instruments, such as Thailand Voluntary Emission Reduction, the TVER program, and Thailand carbon offering program -- sorry, offsetting program. So carbon trading in Thailand started from 2016, and the volume increased to about 1.2 million tonnes in 2022. And this is 7x of the volume traded in 2021. Despite that the average per tonne prices stayed at low level, so increased from around $1 to slightly higher than USD 2 in 2022. So in September 2022, the Federation of Thai Industries and TGO launched the carbon market FTIX platform. The FTIX platform will incorporate the existing voluntary emission reduction, the TVER program. It also follows a previous attempt by the EGAT, the Thai utility, and 10 of the nation's biggest companies that they already set up a separate private market to trade credit over the counter. Although the FTIX platform only allows domestic trading for now with the government's TVER program, the platform is expected to include other international ones later. In December 2022, just 3 months after Thailand, Malaysia officially launched the government-backed voluntary carbon markets, the Bursa Carbon Exchange. The government seeks to unlock domestic and global sources of VCM revenue to meet the nation's climate and environmental policy goals and to achieve their net-zero carbon by 2050. The first auction on Bursa Carbon Exchange is planned for March 2023, so in 2 months, and is open to both domestic and international buyers. It's expected to offer 2 types of credit: the global nature-based credit and technology-based credit. Both will be traded through standardized contracts. The government of Malaysia is also considering the implementation of domestic ETS and carbon tax for longer term. So in the plan, the national domestic emission trading mechanism will support sustainable development and green economy by allowing project participants to develop domestic carbon projects and trade the emission reduction allowance at the domestic level. So from what we discussed, just now we can conclude that the benefits of carbon pricing in Southeast Asia. In addition to the general benefits such as to promote low-carbon technologies to raise funds, to finance climate-aligned projects and ultimately incentivize emission reduction and help implement the countries' NDC goals. The carbon pricing also benefits Southeast Asia, specifically in that it helps get the exporting industries more prepared for the adverse impact, both by the EU CBAM, the Carbon Border Adjustment Mechanism. So if we have time later, Yuejia will discuss more about the CBAM. So without domestic carbon pricing, the exporting product will be required to pay the carbon emission price to EU. However, with the domestic carbon pricing, those exporting countries will be able to keep those revenue for domestic development. Besides given the huge natural resources are available and the pace of the development of the renewables in the region, to set up voluntary carbon markets would definitely incentivize more decarbonization projects to be developed for carbon credit trading, and we think the Article 6 could play a role here. However, the challenges still remain. So first of all, the region's power sector, we know that it's mostly regulated, and the governments are still subsidizing energy use in some areas despite of the efforts removing the subsidies over the years. So the nature of the regulated power sector proved to be somehow comparable to the voluntary emission trading and the voluntary carbon market's development likely will be delayed by the slow progress of the power market reform. And secondly, imposing the carbon prices is risky for the countries with weak power systems. They either have a narrow reserve margin that might result in potential capacity shortage, or they do not have a strong grid network to support higher renewable integration, which we already see in some Southeast Asia countries. And lastly, the region, in general, is not able to afford to higher cost resulting from the carbon price. So the biggest challenge is to set appropriate carbon price that should be affordable but, at the same time, should be high enough to support the energy transition. Okay. And now let's move to the case study, and first of all, we will talk about a bit of the approach. So as we -- as I explained just now, the question narrows down to how to price the carbon to enable power sector's transition in Southeast Asia. The general approach to a national carbon price is sophisticated and required to cover the carbon abatement cost, in particular, the cost to remove the carbon that is being emitted. Also to cover the social and environmental cost of Scope 3 carbon emission, that requires a discount rate on investment, knowing the damage due to emission will impose on the economy and the risk of potential disasters, et cetera. And in this webinar, we will focus on the power industry. So in our approach, we determined our BAU scenario, business as usual, and the net view scenario. Each scenario has a specific technology mix. Obviously, compared to BAU scenario, the net-zero scenario will require additional financing as carbon capture and the other new and clean power technologies are more expensive than those stand-alone fossil fuel plants in the absence of the carbon prices. So given that carbon prices will be utilized for decarbonization, so we calculated the carbon price revenue necessary to support the net-zero scenario, and then we converted it into $1 per tonne. In -- let me move to -- okay. And in the case study, firstly, I think I'd like to explain this after -- about the correlation of carbon price and power generation costs for different technology. We've done the cost models for all major Southeast Asia countries, and we will present the results of Vietnam today, which is quite representative for the region. So the left chart shows the LCOE in 2030 without carbon price. And you can see that thermal power, in general, is more expensive than renewables by 2030. And the carbon capture technologies will significantly increase the LCOE and appears economically unviable if you just see from the cost. And the right chart is the 2030 power production costs to assess the potential impact of carbon prices on power generation costs. It demonstrates that a carbon price set at a moderate level would trigger a coal-to-gas switch and, at a higher level, would incentivize expensive carbon capture application, at the same time, of course, still deliver effective emission reduction while maintaining the system -- the power system's reliability. So in the case of Vietnam, by 2030, you can see from the 3 -- the 2 circles, a carbon price at $13 will trigger a coal-to-gas switch. And the price of $64 will make the unabated coal plant. I would say -- no, will make the coal plants with carbon capture more -- match the cost of the unabated coal plants. So please note that in this simulation, we did not include the transport and storage cost for CO2. If these costs are considered, the breakeven carbon price will be higher. Furthermore, the carbon price can incentivize low-cost renewable energy, and that will lead to 2 additional benefits. First is that renewable energy -- as the renewable energy becomes cheaper versus thermal, which you can see from the left chart, higher share of renewables will help reduce the overall power systems and accordingly to mitigate the carbon price's impact. And second is that the higher renewable penetration will need more flexible backup power and automatically promote the coal-to-gas switch. The more the renewables, the more CCGT will be preferred than coal. Okay. As we illustrated the correlation between carbon prices and power costs, now I move to the forecast of the optimal carbon tax in Singapore. This forecast only considers the power sector and remodeled net-zero scenarios by 2050 following the country's goal. Accordingly, we determined our technology mix through 2050 based on the current announcement plans, such as low-carbon power import, hydrogen and carbon capture. Based on these inputs, we forecast the power system's investment premium. Then we start with the announced carbon tax trajectory that I showed earlier when we expect that post 2030, the carbon tax will continue to rise at a similar pace but with smaller increments. We forecast the tax will reach around $130 per tonne by 2050. This is equivalent to SGD 180. This takes into consideration the current trajectory of up to SGD 80 carbon tax by 2030 and also consider the technology auctions currently being studied and planned. And the commitment that revenue from the carbon tax will not be a source of additional government revenue means that those revenue will only be used for decarbonization and energy transition. This is the commitment the government has made. And technology-wise, with the support of the carbon tax, the carbon capture will be added from late 2030 when the carbon capture technology application to the power sector matures. And the hydrogen blending rates will rise through -- all the way through 2050. So all this will help reduce Singapore power sector's emission. Again, I'd like to highlight that the carbon tax usually is set at the same level across the country and is not differentiated by sectors. But this forecast can give an indication -- a good indication on the level that is necessary for power sector's energy transition. So in fact, if other sectors require a higher level, the excess carbon tax revenue from the power sector can be channeled to other industries. Okay. So now let's move to the conclusion. So in general, the carbon price might increase the overall power supply cost in the short time. But with well-designed redistribution mechanism, they will benefit the whole power sector. So carbon prices will promote emission-free renewable energy over the fossil fuels and help reduce emissions. And specifically for Southeast Asia, the lack of carbon pricing, to some extent, is hindering the energy transition in the power sector. And secondly, a relatively low carbon price will facilitate the coal-to-gas switch, owing to increasing costs of financing coal projects at the cost of equipment. As we observed, going forward, the gap between -- the cost gap between coal and CCGT will narrow quite a lot due to the increase in cost for the coal power plants. And so the carbon prices at $20 to $40 per metric ton in 2030 will trigger the coal-to-gas switch. And this is -- the price range is from the numbers from the different countries. And relatively low carbon price will -- yes, I move to the third. Yes. The third, a significantly higher carbon price is necessary for the adoption of the new technology such as carbon capture and storage and also the blending of hydrogen. Okay. If you have any questions, you can just put your questions on the Q&A. Joo Yeow, I think I can hand it back to you now.

Thanks, Cecillia. I think we have a couple of questions in the Q&A box. Cecillia, maybe you can take a short break because I think one of these questions is posed more towards Yuejia. So Yuejia, there's a question on is paying for nature-based avoidance credit similar to paying someone just not to cut down the forest?

Yes, that is a good question. So nature-based avoidance credits are basically when you have a project that protect forests or natural carbon sinks and avoid their destruction because if you destroy these natural sinks, then you are net increasing emissions. So you end up with more emissions. So by protecting these assets, you avoid extra emissions. And so these are considered emission avoidance-type projects. And that is to sort of distinguish them from carbon removal-type projects. And the methodologies behind these can be quite complex and definitions fairly difficult at times. But yes, yes, short answer is yes. Nature-based avoidance credits are -- is about protecting natural carbon sinks.

Yes. Thanks for that. And just another question as well. So can you just talk a bit more about the CBAM, so cross-border adjustment mechanism (sic) [ Carbon Border Adjustment Mechanism ] and its implications?