By Dr Alloysius Joko Purwanto, Energy Economist, and Ayu Pratiwi Muyasyaroh, Research Associate: Amongst the key discussion topics on carbon markets at the 30th United Nations Climate Conference of the Parties (COP30) was the operationalisation of Article 6.4, the Paris Agreement Crediting Mechanism (PCAM), which establishes rules for international carbon markets. Issues of integrity, carbon credit quality, standardisation, and interoperability were central to the debate surrounding the mechanism.

The Association of Southeast Asian Nations (ASEAN) has identified the development of credible and interoperable carbon markets – both within the region and with global markets – as one of its eight strategies for achieving carbon neutrality. In ASEAN, compliance carbon markets (mandatory and regulation-based) coexist with voluntary carbon markets (VCMs), which are optional and largely driven by corporate or individual demand.

Although considered complementary to compliance markets, ASEAN’s VCMs have shown strong potential to support entities – both companies and countries – in meeting their climate targets. However, VCMs should serve only as an add-on mechanism, supporting but never substituting the fundamental requirement of reducing domestic emissions first. Countries and firms must be cautious in using VCMs, treating them as a ‘last-mile tool’ to address residual emissions in their target year, whether for net-zero or annual decarbonisation goals.

VCMs play a dual role in decarbonisation. First, they provide leverage for countries to compensate emissions from hard-to-abate sectors such as aviation and steel, until decarbonisation infrastructure becomes widely accessible. Second, they offer firms a transitional pathway, enabling them to make in-house adjustments as they shift toward cleaner energy, technology, and operations. Over time, this mechanism encourages companies to steadily transition to lower-emissions business models – bridging the ambition to decarbonise with the reality of limited access to affordable technologies and practices.

Data collected since the early 2000s show that ASEAN Member States (AMS) have been active suppliers of carbon credits in VCMs. According to Climate Focus, as of 2023 Southeast Asian countries hosted 284 carbon projects and issued 171.5 million tonnes of carbon dioxide equivalent. Nature-based solutions (NBS) – including forestry and land-use projects – made up only 5.3% of total projects but generated 73% of total credit issuance. Renewable energy projects represented the largest share of projects (about 30%) but contributed less than 20% of total issuances.

Berkeley Public School’s Voluntary Registry Offsets Database shows that up to April 2025, Indonesia had the highest number of issued, retired, and remaining carbon credits amongst ASEAN countries, followed by Cambodia, Viet Nam, and Thailand. Forestry and land-use projects generated the largest share of credits across the region, explaining their dominance in Indonesia and Cambodia where such projects account for a significant portion of national portfolios.

On the demand side, a 2025 study by the Economic Research Institute for ASEAN and East Asia (ERIA) estimated that ASEAN will need to reduce emissions by 992 million tonnes (Mt CO) cumulatively from 2030 to 2050 to achieve carbon neutrality by mid-century. Assuming offsetting is allowed up to 10%, the potential cumulative regional demand for carbon credits could reach 99 Mt CO between 2030 and 2050.

Have ASEAN Member States used VCMs effectively to support their decarbonisation targets? Unfortunately, at least four observations show that utilisation remains suboptimal.

First, most buyers of carbon credits produced in ASEAN are entities or companies outside the region. Using carbon market data from Allied Offsets, ERIA found that less than 3% of credits generated in ASEAN have been purchased and retired by buyers within the region.

Second, ERIA’s analysis of the same database reveals that buyers within ASEAN are mostly entities in the consumer and financial services sectors (85.6% combined). Their primary motivation appears to be sustainability or corporate social responsibility (CSR), rather than compliance-linked or decarbonisation-driven needs.

Third, most credits issued in ASEAN still come from nature-based projects (73%), while energy-related, industrial, and manufacturing projects represent less than 20% of issuances. This profile indicates that energy-intensive sectors have not yet used VCMs effectively as a financing tool for their emission-reduction measures.

Finally, regional VCM prices remain low compared with the marginal abatement cost of CO reduction – that is, the cost of reducing one additional tonne of CO equivalent. A 2025 ERIA study estimated ASEAN’s marginal abatement cost at about USD 48 per tonne in 2025, rising to USD 287 per tonne by 2050. Based on Allied Offsets data, the average weekly carbon price from September 2024 to September 2025 was only USD 5.3 per tonne, with no clear upward trend.

Having carbon prices near marginal abatement cost levels would allow entities – especially in industrial manufacturing – to secure financing for decarbonisation projects. Too-low prices cannot serve as a fair offsetting mechanism for companies with higher abatement costs.

To optimise the use of voluntary carbon markets in their decarbonisation strategies, ASEAN countries should take at least three key measures.

First, governments must strengthen domestic demand to reduce dependence on foreign buyers, through strong regulatory signals and catalytic incentives. This includes stringent greenhouse gas (GHG) reporting to reinforce decarbonisation targets, and incentives such as corporate tax rebates, reductions, or exemptions.

Second, key stakeholders in the ASEAN VCM ecosystem should collaborate to actively promote carbon credit projects in energy-intensive sectors. Credits generated from such sectors would help firms secure the financing needed to decarbonise. Diversifying credit supply would also support higher prices, improving market viability.

Finally, ASEAN must adopt harmonised standards for measurement, reporting, and verification (MRV) to safeguard credit integrity and accelerate interoperability across member states. Such standards should ensure fair offsetting by aligning carbon credit prices with an entity’s marginal abatement costs. By doing so, companies will be encouraged to invest in carbon-reduction technologies once credit prices rise above the cost of internal abatement.

Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the Economic Research Institute for ASEAN and East Asia.