ASEAN countries are accelerating efforts to develop carbon markets as climate risks intensify, with Malaysia moving closer to introducing a carbon tax, according to a report by RHB Investment Bank revealed on Wednesday.

The push comes as the region faces mounting climate impacts. Asia is warming at twice the global average, with recent events including severe floods in northern Peninsular Malaysia that displaced 148,000 people, rising dengue cases in Indonesia, heat-related deaths in Thailand, and widespread coral bleaching in Singapore.

Singapore has responded by establishing a S$5 billion ($3.93 billion) Coastal and Flood Protection Fund in 2020, later topped up by another S$5 billion in Budget 2025.

The International Monetary Fund estimates natural disasters could cut output growth by 1.3 percent, while the World Bank projects Malaysia’s economic output could fall by 4.1 percent by 2030 without mitigation measures.

To address these risks, ASEAN has stepped up green investments, which rose 43 percent to $8 billion in 2024 across six key economies.

Malaysia and Singapore accounted for 60 percent of total investments, driven largely by solar and waste management projects.

A key initiative is the ASEAN Common Carbon Framework (ACCF), launched to create a unified regional carbon market.

The framework is expected to generate up to $3 trillion in cumulative revenue and 13.7 million green jobs by 2050, while reducing 1.1 gigatonnes of carbon emissions.

It also aims to standardize carbon credit trading across the region and align with global frameworks such as the Paris Agreement’s Article 6.

Currently, ASEAN’s carbon market remains fragmented, said the report.

Malaysia, Indonesia and Singapore have established voluntary carbon markets, but liquidity varies.

Singapore and Thailand have implemented carbon taxes, while Indonesia operates a mandatory emissions trading system for high-emission sectors.

Malaysia is now taking foundational steps to introduce a carbon tax targeting the steel, iron and energy sectors.

This is expected to boost activity on Bursa Carbon Exchange, supported by the Malaysia Forest Fund and the upcoming Climate Change Bill, which will establish a monitoring, reporting and verification system, said RHB.

Indonesia, meanwhile, is strengthening its carbon market with a new regulatory framework and vast forestry resources, including peatlands and mangroves.

A pipeline of over 32 million tons of carbon credits is in place, although growth remains dependent on international demand, according to the report.

Meanwhile, Singapore is positioning itself as a regional carbon services hub, leveraging financial institutions and exchange infrastructure.

Its carbon tax has risen to S$45 ($35.34) per ton, while its International Carbon Credit framework allows companies to offset emissions.

The city-state has also secured carbon credit agreements with countries such as Peru, Ghana and Paraguay.

Across ASEAN, nature-based projects dominate, accounting for 74 percent of carbon credit issuances.

Regional initiatives under the ACCF include peatland restoration, forest conservation, blue carbon ecosystems, and carbon capture technologies, aimed at testing high-integrity carbon credits aligned with global standards.

Despite progress, RHB opined that challenges remain. Carbon market liquidity is still developing, and commercialization depends heavily on global demand.

However, RHB said stronger policy alignment and regional cooperation will be key to building a robust carbon trading ecosystem.

“ASEAN nations must collaborate to develop a more active regional carbon market to mitigate the impact of external carbon taxes and climate-related risks,” it said.

Malaysia studies nuclear power as complementary energy source