KAB's Perspective on the Decarbonisation Dynamics: Renewable Energy Certificates (RECs) and Carbon Credits (CC)

Energy sources are inherently vital as we live in a modern world with the rapidly evolving aspect of sustainability approach. The rising energy demand which leads to environmental and economic implications has heightened the urgency of addressing how energy sources are harnessed and managed for clean transition that represent best practices across businesses. Arguably, energy sources used by the renewable energy industry may not be all green. For instance, power generation by burning organic material from sustainable forests may be considered renewable. However, since it generates CO2, it may not necessarily be classified as green energy. This perspective underlines a necessity for businesses to explore strategies aimed at managing or, at least mitigating, the impact of different energy sources on their carbon footprint generation. Two key mechanisms, widely discussed in ESG spheres, emerge as instrumental in shaping a lower-carbon future with their sustainable principles and frameworks: RECs¹ and CC².

The market's support for sustainability creates a macro-level impact, drawing attention to claims of being environmentally friendly and the procurement of green energy. RECs have somehow been recognised as the simplest and cost-effective method for companies to meet their renewable energy goals and enhance regulatory compliance. Tradeable RECs allow the purchase of 1 megawatt-hour (MWh) of renewable energy source and displace 1 MWh of conventional power used by the businesses for their electricity consumption. By purchasing these credits, companies are certified to claim reductions in the climate change effects they generate.

In the midst of rapid decarbonisation in the energy sector, our national electricity utility company has introduced the Green Energy Tariff (GET) programme, supported by mRec³. This initiative offers consumers low-carbon electricity options, ensuring they receive green electricity and reduce their carbon footprints. This programme is also supported by Malaysia’s Energy Commission, which, in its guidelines released on February 15, 2023, promotes renewable energy use and conserves non-renewable energy. The proceeds from the GET will also support the nation’s renewable energy development initiatives and agenda. Moreover, it provides insights into the Energy Commission's tariffs and pricing strategy, aiming to stimulate the adoption of RE sources. Hence, it underscores the potential to enrich the RE value chain by embracing a more varied energy mix, as well as meeting the aspiration of Malaysia’s National Energy Transition Roadmap (NETR).

However, this option is only expected to drive a reduction in businesses’ Scope 2 greenhouse gas (GHG) emissions.

CC, on the other hand, tackles the mitigation of both Scope 1 and Scope 3 emissions, with its overarching aim being to reduce GHG emissions in the atmosphere. Here we intend to provide a good basis for its values in two angles. CC can be viewed as beneficial credits used by companies to offset their carbon dioxide or other GHG up to a certain limit, with 1 carbon credit equivalent to 1 ton of carbon dioxide. Several countries have introduced its market-based approaches to support the scaling efforts of its CC market, for example the Emission Trading Schemes (ETS) ⁴ also known as Cap-and-Trade⁴, is a tradeable-permit market system for GHG emissions. It offers companies with surplus allowances the opportunity to sell unused credits to those in need. High-emission companies or those pursuing business expansion may opt to raise their emission caps by investing in verified carbon credits generated from certified climate action projects. This allows them to strike a more optimal balance between profitability and sustainability. Ultimately, this system enables companies to be held accountable for their unavoidable emissions while also fostering climate action practices to help balance total worldwide emissions. Additionally, it offers industries the chance to capitalise on a new economic resource.

In fact, market-based solutions for clean energy are on the rise, including the importance of energy portfolio management and increased awareness of environmental attributes, which may lead to the adoption of renewable purchase obligations. Purchasing these certificates means an additional investment fund is required, particularly considering that their prices are subject to the forces of supply and demand. Likely, these mechanisms could be influenced by market regulations. Therefore, achieving a delicate balance among factors within the regulatory framework will become essential to create a more level playing field for sustainable energy sources in Malaysia.

The launch of the Voluntary Carbon Market (VCM) by Bursa Malaysia is a step in making Malaysian producers remain globally competitive. This encourages more carbon projects to be developed and have quality CC generated by projects to be recognised internationally. Advanced economies with aggressive emission targets and implemented carbon pricing mechanisms, such as carbon taxes, ETS or both, have experienced benefits for both businesses and the environment. These benefits include improved competitiveness in export markets.

RECs as a market-based instrument and CC devised as a mechanism aim to maximise the utilisation of abundant resources while establishing governance ecosystems. Both validate renewable sources that may be seen as palatable alternatives to participate in green financing and enjoy green incentives. More significantly, they are the emission offset options for companies as a result of industrial activity.

Due to the different regulations in each market and other geographical distinctions that may affect the transition to clean energy, the functionality, trading and redemption mechanisms for RECs and CC can vary significantly. That is to say, they have different prices, depending on the location and market where they are traded.

Malaysia’s commitment to achieving climate neutrality and reducing greenhouse gas intensity by 45% by 2030 may support the integration of RECs and CC into sustainability approaches to achieve progress at the scale required to meet these targets. While RECs and CC present an opportunity, the array of challenges spanning from emissions standards to renewable energy targets has grown increasingly intricate.

While several countries may have already demonstrated the advantages of managing RECs and CC in bolstering their environmental initiatives, some others are still evaluating the feasibility within their domestic markets. It is evident that industry stakeholders and global policymakers continue to explore effective strategies to promote green energy amidst this complex regulatory landscape.

The regulatory framework governing RECs and CC, including aspects such as the National Tariff Policy, the roles of Electricity Regulatory Commissions, and the Electricity Act, plays a crucial role in the adoption of new mechanics. The absence of a unified regulatory framework and limited financial incentives may undermine the reliability and functionality needed to facilitate local and global trading in RECs and CC. Nonetheless, with Malaysia poised to become a top destination for ESG investments, there exists growth potential for businesses investing in economic activities related to decarbonisation, energy efficiency, conservation and circular economy. While businesses face pressure to reduce emissions, they also stand to gain competitive advantages if they leverage existing market solutions to integrate into the low-carbon value chain and shape a more sustainable business.

The views expressed herein belong solely to the company.

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