In the Budget 2025 speech, the Prime Minister announced Malaysia’s plan to introduce a carbon tax on the iron, steel and energy industries by 2026 towards encouraging the use of low-carbon technology. This initiate coincides with the commencement of the European Union’s (EU) Carbon Border Adjustment Mechanism definitive regime – a carbon tariff imposed on carbon-intensive products imported into the EU to equalise discrepancies in carbon prices globally. While this is a promising step, further details on the implementation of the carbon tax have yet to be disclosed.
As the country anticipates more information on the carbon tax and continues its journey towards the global goal of net-zero emissions by 2050, the adoption of carbon credits serves as a crucial tool to combat climate change in the meantime. The urgent need to address greenhouse gas emissions has led to a rise in the use of carbon credits as a market-based mechanism to incentivise emission reductions.
What Are Carbon Credits?
In simple terms, carbon credits are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases. One credit allows the emission of one ton of carbon dioxide or the equivalent of other greenhouse gases. Companies or individuals can purchase these credits to offset their emissions, helping them meet sustainability targets or comply with regulatory requirements. For example, if a company emits 1,000 tons of greenhouse gases in a year, it will need to purchase 1,000 carbon credits to offset its carbon footprint.
Carbon Credits In Malaysia
Malaysia has been actively integrating carbon credits into its climate strategy to meet its pledge of achieving net-zero greenhouse gas emissions by 2050. As part of this commitment, Malaysia is developing policies and infrastructure to support the carbon credit market and has launched various initiatives to facilitate carbon trading. Among these initiatives is the establishment of the voluntary carbon market (VCM), which allows companies to purchase carbon credits to voluntarily offset their emissions.
Understanding Carbon Credits Trading
The carbon market refers to the trading of carbon credits. It can be divided into two main types: compliance market and voluntary market.
In the compliance market, a carbon permit is a government-issued permit allowing a company or entity to emit a specific quantity of carbon dioxide into the atmosphere. On the other hand, in a voluntary market, a carbon credit refers to a specific quantity of carbon dioxide avoided, reduced or removed from the atmosphere. The participants of the VCM include various entities that engage in the trading and offsetting of carbon credits outside of regulatory compliance requirements. These participants can range from companies, organisations and governments to individuals who voluntarily take part in offsetting their emissions or supporting climate projects.
The trading platform of the VCM serves as a marketplace where the buying and selling of carbon credits occur. It provides a centralised platform for participants to trade verified emission reductions or carbon offsets. The platform facilitates transparency, efficiency and liquidity in the carbon market by connecting buyers and sellers, enabling transactions and ensuring the integrity of carbon credits.
Voluntary Carbon Market In Malaysia
Malaysia’s voluntary carbon trading is facilitated through the Bursa Carbon Exchange (BCX), the world’s first Shariah-compliant multi-environmental product exchange that facilitates the trading of carbon credits and renewable energy certificates via standardized contracts.
The BCX offers three modes of trading:
(a) Auction
An auction is conducted by BCX to facilitate price discovery for new products, unless otherwise specified. Sellers must provide a reserve price to participate, while buyers must submit sealed bids electronically through the BCX platform to make a purchase. Bids will be ranked based on price, volume, and time. The auction clearing price is the price at which the total quantity of bids received does not exceed the total offered quantity. All successful bidders will pay this clearing price.
(b) Continuous trading
Both the seller and buyer can electronically submit bid and offer orders on the BCX trading platform. These bids and offers will be matched by the BCX’s central order book using a price-time algorithm.
(c) Off-market transactions
A seller and a buyer are allowed to engage in an off-market transaction, utilizing the BCX trading platform for clearing and settlement, for any trades negotiated and matched outside the BCX’s central order book. This arrangement decreases counterparty and delivery risk for both parties. Such transactions are commonly referred to as block trades or over-the-counter transactions.
BCX classifies carbon projects into standardized products based on contract specifications, including project type (nature-based or tech-based) and project geography (located in or outside Malaysia). Currently, only carbon projects issued by Verra from 2016 onwards are accepted on the BCX trading platform.
Malaysia’s First Carbon Credit Auction
The BCX recently marked a significant milestone by conducting Malaysia’s first nature-based carbon credit auction with carbon credits from the Kuamut Rainforest Conservation Project in Sabah. The auction of the domestic forest protection and regeneration project was cleared at RM 50 per contract.
This milestone represents a crucial step in admitting the first Malaysian natured-based carbon project onto the BCX, thereby showcasing Malaysia’s capacity to develop its own carbon projects complying to international standards. With this auction, it also establishes a benchmark price for voluntary carbon credits for Malaysian nature-based carbon projects.
Conclusion
As BCX continues to evolve, it remains exciting to observe how the Malaysian government navigates its carbon market’s development. A robust carbon market –characterized by strong demand for carbon credits, a strong ecosystem to supply carbon credits, and a rules-based marketplace for trading – could play a pivotal role in advancing Malaysia’s climate ambitions.
With the anticipated introduction of a carbon tax by 2026, it will be particularly interesting to see how the combination of both carbon credits and carbon tax further shapes the evolution of Malaysia’s carbon market, fostering a comprehensive approach to achieve the net-zero emissions by 2050.
21 November 2024