As the world grapples with the severe challenges of climate change, countries are increasingly adopting measures to reduce carbon emissions. While carbon dioxide is seen as the primary culprit of global warming, carbon credits are treated as a tradable commodity in financial markets. Businesses can offset their carbon emissions by purchasing these credits, promoting environmental protection while encouraging green investment and innovation.
Taiwan launched its carbon exchange on August 7, 2023, marking the beginning of a new era in carbon pricing. The initial batch of international carbon credits was listed at the end of 2023, signaling the arrival of a market where carbon has a price. Domestic carbon trading is set to commence by the end of September. This article will explore what carbon credits are, how they can be obtained through activities like tree planting, and when domestic carbon fees will be implemented.
Global trend towards net zero emissions
According to a report by the Intergovernmental Panel on Climate Change (IPCC) in 2018, global human-caused carbon dioxide emissions need to reach net zero by 2050 to limit global warming to 1.5°C. Governments and businesses are reducing their carbon emissions through renewable energy and energy efficiency measures. They are also using carbon credits to offset unavoidable emissions, making these credits a crucial tool for achieving net zero targets.
What are carbon credits?
In simple terms, carbon credits represent the "right to emit carbon." Typically measured in "tons of carbon dioxide equivalent" (tCO2e), one ton of emissions equals one credit. Industries can obtain carbon credits to meet Taiwan's carbon regulations or to comply with international supply chain demands for carbon neutrality.
How can businesses acquire carbon credits? They can open accounts with domestic or international carbon credit exchanges to purchase available credits, or they can negotiate with intermediaries to buy third-party credits. However, companies need to ensure the quality and validity of the carbon credits they purchase.
How are carbon credits generated?
Carbon credits come in two types: mandatory and voluntary.
1. Mandatory carbon credits
Managed by governments, these credits are allocated through cap-and-trade systems. For example, major emitters like industrial and power generation sectors receive free emission allowances. If a company reduces its emissions, it can sell excess allowances to others. These credits do not transfer between different mandatory markets and are strictly regulated to prevent double counting.
Examples of mandatory carbon market mechanisms include:
- Clean Development Mechanism (CDM)
- Joint Implementation (JI)
- Emission Trading System (ETS)
2. Voluntary carbon credits
These credits are derived from carbon reduction projects such as reforestation, mangrove conservation, and energy efficiency improvements. They serve as a supplementary mechanism to the mandatory markets and are a policy tool for carbon management.
Common voluntary carbon standards include:
- Verified Carbon Standard (VCS)
- Gold Standard (GS)
- American Carbon Registry (ACR)
- Climate Action Reserve (CAR)
Types of voluntary carbon credits
Carbon credits can be obtained through methods such as reducing, capturing, and storing carbon emissions. According to the Carbon Credits news website, the four common types of carbon credits are:
1. Renewable energy projects
Utilizing solar, wind, and hydro energy to lower carbon emissions.
2. Energy efficiency improvements
Reducing energy demand in existing buildings and infrastructure by using renewable energy or upgrading processes. For instance, replacing incandescent bulbs with LEDs can cut energy consumption.
3. Carbon and methane capture and storage
Removing carbon dioxide and methane from the atmosphere. Methane, being over 20 times more harmful than carbon dioxide, can be converted into carbon dioxide and then stored underground.
4. Land use and reforestation
Using natural carbon sinks such as trees and soil to absorb atmospheric carbon. Activities include forest conservation, reforestation, and soil management, which helps enhance crop yields by restoring soil properties.
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Carbon credits can be obtained through natural carbon sinks such as forest conservation and afforestation. (Photo: iStock)
Taiwan's carbon regulations and market status
Currently, Taiwan does not have mandatory cap-and-trade systems. To achieve its 2050 net zero goal, the Environmental Protection Administration plans to impose a carbon fee on entities emitting 25,000 tons annually (covering direct and indirect emissions from electricity use). This will affect approximately 500 factories across sectors like steel, cement, semiconductor, and panel industries, which account for about 54% of Taiwan's total emissions. Carbon fees are expected to be based on 2024 emissions and could be implemented as early as 2025.
For assessing carbon costs, domestic discussions suggest a fee range between NT$100 to NT$1,000 per ton. Final pricing will be determined by the Carbon Fee Advisory Committee.
To encourage emission reductions, the Environmental Protection Administration is offering incentives through voluntary reduction programs. Companies can benefit from favorable carbon fee rates by adopting low-carbon fuels, enhancing energy efficiency, using renewable energy, and optimizing processes.
To encourage companies to reduce carbon emissions, the Ministry of the Environment not only imposes carbon fees as a form of penalty but also offers incentives through voluntary reduction programs. (Photo: iStock)
Carbon trading in Taiwan
With the advent of carbon pricing, Taiwan established the Taiwan Carbon Solution Exchange (TCX) on August 7, 2023. The International Carbon Credit Trading Platform launched on December 22, 2023, with the first batch of seven carbon credit projects, including clean water, solar, wind, and biogas power. A total of 27 enterprises (including subsidiaries) participated, trading 88,000 tons of carbon credits at prices ranging from $3.90 to $12 per ton.
The domestic carbon trading platform is expected to launch by the end of September, offering trading or auction of domestic carbon credits. Currently, trading is restricted to institutional entities, and individuals are not allowed to participate.
Taiwan's carbon trading rules
| Project | Rule |
|---|---|
| Eligibility | Buyers are limited to domestic legal entities. Sellers can be either foreign or domestic legal entities. |
| Trading hours | Weekdays from 9:00 AM to 3:30 PM* *Holidays follow the standard holidays of Taiwan's banking sector. |
| Trading unit | 1 metric tonne of carbon dioxide equivalent. |
| Currency | USD |
| Carbon credit listing standards | 1. The issuing body of the carbon credits must be recognized by the TCX. 2. The vintage of the carbon credits should be within the last 5 years. 3. The carbon credit projects should align with three or more of the United Nations Sustainable Development Goals (SDGs). |
Can purchasing carbon credits offset carbon taxes or the EU CBAM?
With the opening of the TCX, companies are keen to know whether the carbon credits purchased at the exchange can be used to offset domestic carbon taxes or the EU Carbon Border Adjustment Mechanism (CBAM).
Domestic carbon credits can offset domestic carbon taxes: According to the regulations under the Ministry of Environment’s carbon tax sub-laws, future domestic carbon credits listed on the exchange can offset carbon taxes up to a limit of 10% of the taxable emissions. However, the currently listed international carbon credits cannot be used to offset carbon taxes until the Ministry of Environment publishes the relevant international carbon credit acceptance criteria.
Carbon credits cannot offset EU CBAM: Both international and domestic carbon credits purchased from the Carbon Credit Exchange cannot be used to offset EU CBAM certificate costs.
Once buyers purchase carbon credits, they can only hold, cancel, or transfer them to the account of the buyer’s international carbon credit issuing institution. Reselling on the exchange platform is not permitted.
Fostering low-carbon innovation and emerging industries
The introduction of carbon pricing not only provides a financial incentive to reduce emissions but also encourages businesses to invest in low-carbon innovations, accelerating the development of emerging low-carbon industries.
