Malaysia must build a consolidated national crediting scheme that integrates both nature- and tech-based credits under a single framework, and mutual recognition of methodologies with other countries to build a bridge to global markets, says Renard Siew, head of corporate sustainability at Yinson Holdings Bhd (KL:YINSON) and president of the Malaysian Carbon Market Association.

This will signal Malaysia’s intent to establish a more sovereign carbon market architecture by developing domestic standards, registries and governance bodies.

Mutual recognition then becomes the bridge, ensuring local methodologies are credible and interoperable with regional and international systems while creating confidence for sustained demand, says Siew. “In practice, it points towards developing domestic standards, registries and governance bodies, not to replace Verra or others outright, but to complement them.”

At present, fragmentation in standards and methodologies is slowing down project development and limiting market confidence.

This means there is a need for a regional framework, where methodologies are recognised across borders, he says. This would not only facilitate the supply of high-quality carbon credits but also create liquidity and trust in the market.

“For Malaysia, this means our projects could access a wider pool of buyers across Asean and beyond, while investors would have greater assurance of consistency and credibility. Ultimately, such alignment strengthens the entire ecosystem, moving us closer to a market that is not just functional, but also impactful in delivering real climate outcomes,” says Siew.

Countries such as Thailand and Indonesia have developed their own domestic carbon markets. Malaysia, meanwhile, is in the process of developing a nature-based national carbon standard, which is spearheaded by the Malaysia Forest Fund.

However, there is no equivalent framework for technology-based solutions in Malaysia yet. Carbon credit generation for carbon markets can come from two streams — nature-based solutions and technological solutions.

Tech-based credits are essential because nature-based offsets alone cannot decarbonise hard-to-abate sectors such as steel, cement and chemicals, says Siew.

In fact, the “high-hanging fruit” for carbon markets are the harder to abate areas such as carbon removals, industrial decarbonisation, methane abatement and emerging nature-tech solutions, he adds.

These are often more complex, costly and technologically challenging compared to renewable energy or avoided deforestation, but are crucial in order to reach net zero, he says.

“Nature-based projects typically take a longer time but the volume of credits generated is high; tech-based solutions are quicker and Malaysia does have potential to generate more carbon credits from tech-based solutions as well.”

Credible carbon markets are central to decarbonisation, but this requires more than voluntary credits, and demands a robust compliance system with higher carbon prices, say industry experts.

Malaysia is currently operating its voluntary market through the Bursa Carbon Exchange (BCX), while exploring a carbon tax and emissions trading scheme (ETS) to establish a compliance framework.

With this, voluntary markets can act as an incubator for projects and capacity, while compliance markets ensure scale and enforce accountability, says Siew.

This will depend on how well these systems are designed and integrated. “For instance, will compliance markets allow high-quality domestic projects to thrive? Will revenue from a carbon tax be recycled into resilience and just transition measures? If so, Malaysia has a real opportunity not only to build a robust market but to set a benchmark for the region,” he says.

Pieter Stek, senior lecturer at the Asia School of Business, says Malaysia needs a compliance system such as an ETS because voluntary credits alone will not have a significant impact on driving emissions reductions. An ETS could be designed to allow a percentage of voluntary credits as offsets, thereby stimulating the domestic carbon market.

“You really see dynamic carbon markets in places that have a compliance market. Keep in mind that if I’m a company that wants to voluntarily offset, I usually won’t buy spot contracts on one of these carbon markets. In compliance, you definitely need to trade the spot market,” says Stek.

That being said, Siew observes that the voluntary carbon market is beginning to see credits evolve beyond the traditional project types. “Removals, for example, are gaining traction, but the pipeline is still small relative to demand. Certification bodies like Gold Standard and Verra play an important role here; they set the framework, ensuring methodologies are robust and that credits reflect real, additional, and verifiable climate benefits,” he adds.

Ultimately, what matters is the integrity, scalability and impact of carbon markets, says Siew. Carbon markets must do better in embedding integrity at every stage from project design to monitoring, to claims made by buyers, he says.

Carbon capture, utilisation and storage (CCUS) will need to deliver deep decarbonisation across Malaysia’s hardest to abate sectors for the country to achieve net zero.

That means moving beyond “capturing CO2 from power plants and gas processing plants and storing it in depleted oil and gas reservoirs, where there is already infrastructure and geological understanding”, says Siti Aishah Mohd Hatta, head of Southeast Asia at the Global CCS Institute.

She says Malaysia must move towards capturing emissions from heavy industry, building national CO2 transport and storage, so that projects are part of an integrated system, and scaling removals through bioenergy with CCUS (BECCS) and eventually, direct air capture (DAC).

This means mandating CCUS in heavy industries, mobilising public and private capital for shared infrastructure, and embedding removals into long-term planning, says Siti.

“We must move beyond frameworks to delivery at scale, with clear milestones and system-wide adoption.”

Another priority will be unlocking offshore CO2 storage resources beyond depleted oil and gas fields, including the exploration of deep saline aquifers, says Siti. This would expand storage capacity not only for Malaysia’s own emission, but also to serve regional demand.

Currently, Malaysia’s depleted oil and gas fields are seen as a valuable opportunity for CCUS ventures, creating an opportunity to establish the country as an Asean carbon storage hub, which is an idea that Sarawak has been exploring. That also means CO2 will need to be transported across borders and injected offshore.

The country could leverage its critical geological assets and invest in specialised vessel technology that enable cross-border CO2 transport, synthetic fuel shipping and handling of new fuels with unique physical properties, says Shioly Dong, power and energy transition analyst at BMI, a Fitch Solutions company. These green products and services require tailored shipping technology.

“However, our view is that commercial viability is challenged by limited offtake markets, with Japan currently the only major investor and buyer, posing single-country risk. Malaysia will need to actively seek a wider base of international investors and offtakers to scale these solutions and mitigate demand-side risks,” says Dong.

Additionally, at the moment, there is no clarity on critical issues such as responsibility in the event of leakage during transport or underground storage, says Renard Siew, head of corporate sustainability at Yinson Holdings Bhd.

“There is always this question around what happens if there’s leakage of the carbon [that has been] captured while [it is being transported]. Whose role and responsibility is it before it gets to Malaysia?” he asks.

“[There is also the concern of] leakage after [carbon has been stored, where] we call it the nirvana of carbon, because technically, it’s supposed to be the grave or the final destination of the carbon that is supposed to be mineralised and stored. What happens if there is leakage underground? Whose responsibility is it? Who needs to be accountable for it?”

This is important to note because the large majority of CO2 captured will need to be stored to permanently achieve net zero emissions. Siti adds that utilising several billion tonnes of CO2 each year globally is simply not feasible.

“The most important requirement for utilisation of CO2 is a market for the product being produced. Generally, products produced through the utilisation of CO2 will be more expensive than the same product produced through conventional means. One exception may be the utilisation of CO2 to produce cement or concrete, where the increase in the cost of production is relatively low,” she says.

“The Malaysian government could require a proportion of the cement or concrete used in public works funded by the government to incorporate cement which utilises captured CO2. This would create demand for this utilisation pathway. Standards for cement may need to be updated to enable this.”

The government has set ambitious targets for CCUS, aiming to scale hubs that can capture and store 15 million tonnes of CO2 per year by 2030, and 40 million to 80 million tonnes annually by 2050, to enable near zero emissions in power, cement, steel and petrochemicals, according to the National Energy Transition Roadmap.

Yet, Malaysia’s capture and storage capacity is forecast to reach only 3.3 million to 4.1 million tonnes per year, with most projects still at early development stages by 2034, according to insights from BMI.

Achieving these outcomes will require further reductions in technology costs, clear regulatory frameworks and coordinated regional infrastructure for CO2 transport and storage, says Dong.

To bridge this gap, Siti stresses the importance of defining concrete milestones tied to enabling decisions like storage licences, final investment decisions and first injection dates. Without bold timelines and regulatory action, CCUS risks being confined to studies rather than deployment.

Critically, these efforts must focus on Malaysia’s hardest to abate sectors. Emissions from cement, steel, refining and petrochemicals sectors cannot be eliminated by efficiency or electrification alone, making CCUS essential to preserve competitiveness, as international product standards increasingly factor in carbon intensity, she says.

“These milestones should be public, time-bound and tied to enabling decisions, like storage licences, final investment decisions, and first injection dates. Without bold timelines and regulatory teeth, CCUS risks being confined to studies rather than deployment.”

For Siti, the focus from now until 2030 is on capturing emissions at gas processing facilities, progressing to two to three storage sites to permit readiness, completing front-end design for the first multi-user hub, and concluding bilateral agreements that would allow Malaysia to import and store CO2 from other nations for a fee.

In the 2030s, she hopes to see the ambition shift to constructing the first CCUS plants in cement, steel and power generation, commissioning at least one shared hub with third-party access, expanding CO2 transport and storage infrastructure and initiating cross-border CO2 transport and storage.

CCUS should be broadened across all applicable sectors, including new industries based on low-emission hydrogen production by the 2040s. Application to coal and gas power generation should also be in place alongside the deployment of BECCS. Siti adds that at least one DAC project should be commissioned by then, proving both cost and operability under Malaysian conditions.

Negative emissions through technologies like BECCS and DAC will be critical to closing the gap to net zero.

BECCS captures and stores CO from processes in which biomass is converted into fuels or burned to generate energy. Plants absorb CO as they grow, so this is a way of removing CO, according to the International Energy Agency (IEA). Most of the BECCS now is from bioethanol production, where it is claimed that the conversion of corn into ethanol removes carbon dioxide from the atmosphere.

DAC, meanwhile, extracts carbon dioxide directly from the atmosphere — regardless of location — using chemical or physical processes. This contrasts with CCUS, which captures emissions at their source, such as a steel plant.

Malaysia’s most promising “high-hanging fruit” for excess carbon reduction lies in advanced bioenergy and synthetic fuels, building on the country’s well-established bioenergy sector and abundant biomass resources, says Dong.

The integration of BECCS represents the next frontier, offering potential for net-negative emissions. Further, investment in synthetic fuels such as e-fuels and green ammonia produced from renewable hydrogen and captured CO could diversify Malaysia’s low-carbon portfolio and support emissions reduction in multiple sectors, says Dong.

“We expect leveraging palm oil residues, municipal waste and agricultural by-products could enable the scaled production of cellulosic ethanol, bio-jet fuel and biogas, supporting decarbonisation in hard to electrify sectors such as heavy transport and industry,” she says.

Achieving commercial viability will require targeted incentives, robust governance of feedstock sustainability, technology demonstration projects and collaboration with international buyers for advanced fuel offtake, says Dong.

Malaysia produces nearly 200 million tonnes of biomass annually from palm oil residue, agricultural residue such as rice husks, coconut fibres, urban waste and forestry by-products, which makes BECCS a practical and locally relevant negative-emissions option, adds Siti.

Meanwhile, DAC remains at an early stage in Malaysia, but Dong believes the technology could become viable after 2035, as global costs decline and domestic CO storage capacity is developed.

She says the key milestones to watch include the scaling of pilot DAC plants to megaton-level abroad by 2030, the evolution of carbon removal credits and the launch of domestic demonstration projects linked to storage hubs.

“We expect Malaysia can position itself for future DAC adoption by tracking international technology advances and leveraging its low-cost renewables and significant CO storage potential. Financing DAC will require public sector support, blended finance structures and risk-tolerant capital, given the high upfront costs and uncertain long-term returns, as highlighted in our previous research,” she says.

Malaysia must formally define its 1.5°C-aligned carbon budget, grounded in what is fair and equitable, and pair it with a robust carbon price that forces polluters to pay the true cost of emissions, says Adam Farhan, co-founder of RimbaWatch.

A carbon budget sets the maximum amount of greenhouse gases (GHG) Malaysia can emit while staying aligned with the 1.5°C pathway.

To calculate this budget, factors such as historical emissions responsibility, Malaysia’s per capita share of the global population, and its equitable portion of the remaining global carbon space must be considered, explains Adam. From there, sectoral budgets can be set with year-by-year reductions, ensuring industries cut emissions on a clear path to net zero by 2040.

“We would look at reducing our emissions through a science-based methodology by defining a fair share carbon budget for Malaysia that is aligned with a global 1.5°C pathway and ensuring that all our future contributions to emissions are aligned with that [budget],” he adds.

If a budget tells Malaysia how much it can emit, a price puts a cost to that emission. This is where carbon pricing comes in.

In fact, Adam says, one of the most critical measures for systemic change is to heavily priced carbon. The price of one tonne of carbon should include multiple dimensions, such as the public health costs associated with pollution, the adaptation costs required to address climate impacts and even the mortality costs tied to carbon emissions, he says.

The revenue generated from carbon pricing must be channelled into growing sustainable solutions, such as the expansion of renewable energy, investment in public transport and other climate-friendly initiatives, says Adam.

Pieter Stek, senior lecturer at the Asia School of Business adds: “The idea is basically that if you emit carbon, you cause damage to the environment. But currently, you don’t pay for the damage you cause when you drive your car, when you run your factory or when you turn on your power plant. The idea is to internalise some of that cost. Basically put a tax on you based on the amount of carbon you emit. And that will then encourage you to either reduce production or switch to cleaner technologies.”

A high carbon price can be achieved through a direct tax or by organising a compliance market with relatively limited supply, which would also lead to higher prices, says Stek. “We need the high carbon price to incentivise firms to reduce their carbon emissions. Without the carbon price, it is difficult for firms to justify bold GHG emission reduction plans to their shareholders,” he says.

For Adam, Malaysia must explore mechanisms such as a carbon tax on big polluters to ensure that it becomes too expensive to emit beyond a 1.5°C limit. Such a mechanism must not allow for offsets which promote business as usual and focus on actual, stringent emissions reductions.

“Compliance markets might work if it relies purely on permits or allowances directly from an overarching carbon budget, but we do not believe that purchasing allowances from other companies should be encouraged either. In general, we advocate for a tax rather than markets,” he says.

But, Stek says implementing a carbon tax in Malaysia could face pushback. “Our concern is if you do a carbon tax in Malaysia, you’ll have a lot of pushback especially if the carbon tax starts to influence something like petrol prices,” he says.

Meanwhile, a market-based mechanism allows flexibility, he says. For example, steel producers might choose to buy out coal power plants and use their emission credits, achieving the same overall reduction in emissions. This system enables businesses to decide the most efficient way to decarbonise, rather than having top-down mandates.

“By having a kind of market-based mechanism, you let business players make those decisions, rather than the government enforcing it. Those are the reasons why you would do it,” says Stek.