This article first appeared in The Edge Malaysia Weekly on December 25, 2023 - January 7, 2024

The carbon markets were certainly a hot topic this year as many parties began enquiring what projects could generate carbon credits, how to sell them via the Bursa Carbon Exchange (BCX) and what role carbon markets play in the fight against climate change.

Despite the interest, carbon markets are still new to many industry players in Malaysia and methodologies for measuring and reporting carbon credits are being developed globally. Verification of the true impact of carbon credits is particularly important as interest in carbon markets has taken a hit due to allegations of greenwashing.

For Malaysia, the voluntary carbon market (VCM) is its first step into carbon markets, which include the compliance market. The latter involves carbon taxes and an emissions trading system (ETS), where entities that emit more than a predetermined limit of greenhouse gases (GHG) must pay a fee or buy emission allowances.

The BCX is a VCM set up by Bursa Malaysia Bhd a year ago. The VCM allows the trading of carbon credits generated from projects that avoid, reduce or remove GHG emissions and enable corporates to offset or reduce their GHG footprint.

“Within the context of the international carbon market, findings by the World Bank revealed that carbon markets can help mobilise resources and reduce costs to facilitate countries and companies in their energy transition,” says Bursa Malaysia CEO Datuk Muhamad Umar Swift.

The government has announced plans for an ETS or carbon tax. The VCM will help prepare corporates and the country for that future, says Muhamad Umar.

BCX launched its first auction of carbon credits in March. Fourteen successful bidders from various sectors participated, most of whom were from the financial sector. The carbon credits auctioned were certified by Verra, currently the world’s biggest certifier of carbon credits, and based abroad, since no Verra-certified project was available in Malaysia then.

Up to 150,000 units of carbon credits from a project that reduces emissions from deforestation and forest degradation in Cambodia and another that generates energy from biogas in China were cleared. The latter, which had a lower reference price, was oversubscribed, “indicating the price sensitivity of Malaysian corporates”, observes Muhamad Umar.

In September, the BCX platform went live, offering continuous trading (spot) based on a central book order and facilitating off-market transactions for carbon credits. In the first two days, 10 companies traded 16,500 units of carbon credits on the platform.

“Interestingly, most of the companies that participated in the go-live trading were small and medium enterprises, indicating their willingness to explore the purchase of carbon credits for various reasons, such as creating carbon-neutral products or meeting the ESG obligations of their supply chain. This contrasts with the inaugural auction, where participants were mainly from established listed companies,” says Muhamad Umar.

Trading of carbon credits on BCX is still slow because it is still at a nascent stage, he acknowledges. Bursa will provide more capacity-building and awareness-raising to build interest in and understanding of the VCM. This includes publishing the VCM Handbook and VCM Directory in October.

A complaint by some industry players was that no Malaysia-generated carbon credits were available on the BCX and to get Verra to certify projects took too long or cost too much. This will change soon as the Kuamut Rainforest Conservation Project in Sabah, which aims to protect and restore 83,381ha of forest, is in the process of being certified.

According to Dr Chen Wei Nee, head of carbon markets at Bursa Malaysia, the project is one of the highest-rated Improved Forest Management projects by BeZero and aims to achieve triple gold for Climate, Community and Biodiversity labelling under Verra’s standards.

“The Kuamut Project will serve as a lighthouse project for other nature-based projects in the country, something that the Malaysian VCM ecosystem can be very proud of. BCX is looking forward to auctioning our very first Malaysian nature-based carbon contract in the first quarter of 2024, if credits can be issued by Verra by early next year,” she says.

Bursa acknowledges the challenge that carbon credit project developers face and is encouraging the development of local validation and verification bodies (VVB), she adds. “We understand that several companies with a presence in Malaysia are undergoing accreditation progress with Verra. Once accredited, we encourage these VVBs to be listed in the VCM directory for greater visibility.”

Carbon credits certified by Gold Standard, the other leading verifier of VCM credits, will also be accepted on BCX next year.

Another exciting addition to the VCM by the third quarter of 2024 is the trading of renewable energy certificates (RECs). RECs represent the environmental attributes of the generation of 1MWh of energy produced by renewable sources. Entities purchase RECs to support the production of renewable energy, especially if they cannot generate it themselves.

Bursa signed a memorandum of collaboration with Sarawak Energy Bhd, I-REC Standard Foundation and Hydropower Sustainability Alliance at the recently concluded 28th Conference of the Parties (COP28) for this purpose, which will see distinct hydropower RECs on BCX.

“Currently, we see higher demand for RECs than carbon credits in Malaysia as the market for RECs is more mature than that for carbon credits. Our aim is to improve current market inefficiencies, particularly in over-the-counter deals for RECs, which lack price discovery and transparency, and incur high broker fees,” says Chen.

Standardised REC contracts may be traded via auction or continuous and off-market transactions on BCX. Local and global RECs will be offered and introduced in phases.

At COP28, several initiatives were announced to restore trust in the global VCM, including by the Voluntary Carbon Market Initiative and the Integrity Council for the Voluntary Carbon Market. The two governing bodies also released draft guidance to promote the integrity of VCMs, says Chen.

Carbon projects must fulfil stringent methodologies set by standard bodies such as additionality, which means the project will not occur without revenue from the sale of carbon credits, demonstrate permanence and be real and measurable.

BCX screens on a best-effort basis prior to admitting carbon credits for trading, including for sanctions on entities and locations, the credibility of companies and adverse media, she says.

This can be difficult to ascertain sometimes. For instance, the South Cardamom Project in Cambodia, whose credits were auctioned via BCX, has been accused of human rights abuses. Chen says BCX will wait for Verra’s investigation into the allegation.

On whether purchasing carbon credits results in companies diverting resources away from doing the real work of decarbonisation, Muhamad Umar disagrees. He cites data from a recent survey by Ecosystem Marketplace that showed VCM buyers are more likely to reduce emissions, have science-based targets and disclose their emissions.

“Furthermore, for some sectors with hard-to-abate emissions, reaching a financial investment decision on decarbonisation may take longer due to the amount of due diligence required. In such cases, buying carbon credits can help maintain emissions reductions while companies evaluate their decarbonisation options. Buying carbon credits should be a concurrent strategy and not a deferred one,” he says.

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