IN an era defined by environmental consciousness and sustainable practices carbon trading has emerged as a pivotal player in the fight against climate change.
As the world unites in its commitment to reduce carbon emissions and mitigate their impact on our planet, carbon markets have blossomed into a dynamic arena where economics and environmental responsibility intersect.
The global carbon credit market traded value stood at USD978.56 billion in 2022 and it is expected to reach USD2.68 trillion by 2028.
Sarawak is eager to be an international player in this as carbon credits would provide the state with a new source of revenue ranging from RM315 million to RM1.039 billion annually.
Last year, Sarawak amended its Land Code and Forest Ordinance to enable the state to participate in carbon trading but currently there is no legislation in place at the federal level.
Premier Datuk Patinggi Tan Sri Abang Johari Tun Openg has brought up this matter to Deputy Prime Minister Datuk Seri Fadillah Yusof who is also Plantations and Commodities Minister, stating how carbon is a commodity as defined by the United Nations (UN) thus it should come under under his ministry.
“If this can be done, it means that carbon trading can be done. We are the only state in Malaysia pioneering in carbon trading. Parameters and legislation must be in place for us to trade carbon which in Sarawak we have acted upon,” Abang Johari said.
New Sarawak Tribune recently spoke to Southridge Malaysia Sdn Bhd director Dr Jane Koh who shared insights on carbon trading, pricing, tax and market.
Koh is a sustainability scientist who holds a postgraduate degree from Universiti Putra Malaysia (UPM) on the political ecology of forestry carbon credit, and she is also a chemical engineer having graduated from Imperial College London.
She specialises in forest, mangrove and peatland carbon credit project development as well as carbon offset and carbon pricing at the policy level.
BUYING AND SELLING OF SERVICES
Koh said carbon trading revolves around the buying and selling of services, not physical goods.
She also said it encourages entities like businesses to find a way to reduce their operations’ greenhouse gas emissions and mitigate climate change.
“You are not buying physical carbon, you are buying a service that avoids, reduces, or removes greenhouse gases including carbon dioxide from the atmosphere. Carbon credit is produced from this.
“However, it is important to note that carbon credit can also be known as emission allowance, verified carbon unit, or certified emission reduction and so on. One carbon credit describes an amount of greenhouse gas emission reduction or removal from the atmosphere with global warming potential equivalent to one metric ton of carbon dioxide,” she said.
Elaborating, Koh said carbon pricing instruments include the carbon tax and emission trading system.
“This is a very effective instrument to get countries and companies to reduce their greenhouse gas emissions thus contribute to efforts for climate change mitigation,” she said.
She said the European Union Emission Trading System (EU ETS) is the world’s first major carbon market and remains the biggest one.
It is a cornerstone of the EU’s policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively.
“The EU ETS started in 2005 and last year they traded about 15 billion carbon units so there is a lot of volume in it,” she said.
TYPES OF MARKET
Koh said entities and individuals buy carbon credits for various reasons and there are two main types of carbon markets, namely, regulatory compliance market and voluntary market.
She said the regulatory compliance market is used by companies and governments that by law must account for their greenhouse gas emissions.
“The regulatory compliance market is regulated by mandatory national, regional or international emission reduction regimes. For this market, there are laws and regulations on carbon pricing that creates ETS,” she said.
On that note, the Kyoto Protocol created the first international regulatory market via three mechanisms namely Clean Development Mechanism (CDM), Joint Implementation (JI) and International Emission Trading.
The Kyoto Protocol came into effect in 2005 and operationalised the United Nations Framework Convention on Climate Change (UNFCC) by committing industrialised countries and economies in transition to limit and reduce greenhouse gas emissions in accordance with agreed individual targets. It was replaced by the Paris Agreement in 2016.
CDM continues to function as carbon credit standards, until it is scheduled to phase out in 2025. Nevertheless, some CDM concepts are used in other carbon credit standards.
These include additionality, which is, emission reductions or sequestration must be additional to any that would occur without the project and the greenhouse gas emissions after the implementation of the project must be lower than in the business-usual case.
Permanence refers to when accounting for credits, the length of the carbon storage and the risk of loss (natural or human disturbances such as fire, flood, or pest outbreak) are an important issue.
Thirdly, leakage which means the emissions of greenhouses gases outside the project area, that is indirectly resulting from project activities.
For example, if the afforestation of agricultural land leads to the migration of people who used to farm this land and who then clear forest somewhere else.
Koh said the voluntary market is the trade of carbon credits on voluntarily basis.
“In comparison, the voluntary market it is not imposed on anyone (or by the government). Some companies purchase carbon credits in this market to show that they are doing something for mankind and the environment.
“This is one of the ways for companies to show that they are doing carbon offsetting thus they can declare that they are working towards net zero emissions goal,” she said.
CARBON PRICING AND TAX
Under the umbrella of carbon pricing instruments, two predominant categories emerge, namely, carbon tax and emission trading systems.
Koh said it is important to understand that carbon tax does not refer to a tax on carbon credit but rather it pertains to a tax on emissions themselves.
She said the percentage of carbon tax differs depending on the country as they have the means through laws and regulations to impose such tax.
“For example, European countries like Sweden and Norway impose a very high carbon tax so the effective carbon price can be as high as USD140 per tonne. Singapore carbon tax started as SDG5 per tonne and it is revised to SDG25 per tonne this year. This is the regulatory compliance market.
“For the voluntary market, the carbon price is a little bit lower because people or entities are not required to purchase carbon credits. This market comprises willing sellers and buyers,” she said.
SARAWAK’S FUTURE IN CARBON TRADING
Even though Sarawak has amended its Land Code and Forests Ordinance to pave the way for carbon trading as well as carbon capture, utilisation, and storage (CCUS), Koh pointed out that Malaysia still needs to enact parameters and legislation for this.
She pointed out that the amendments to Sarawak’s Land Code and Forests Ordinance have enabled the production of carbon credits in the state.
“At the moment, Sarawak can only sell carbon credits, but the state government cannot impose carbon tax,” she said.
Koh who is on the consultant panel in the World Bank Partnership for Market Implementation for Malaysia said works are underway to prepare the country for climate change laws and carbon pricing among others.
“While the state government has jurisdiction to impose certain taxes, most of the taxes in our country are imposed by the federal government. However, we do not have legislation on carbon pricing yet and this is being worked on by various agencies,” she said.
Nonetheless, she commended Abang Johari for his stewardship in placing Sarawak at the forefront of sustainable and green economy as well as doing its part in the mitigation of climate change.
“I think Sarawak is the most advanced state considering that we have laws in place to enable this matter. We also have other laws that environmental integrity is preserved, and communities are involved,” she said.
Koh suggested the state government consider providing some incentives to carbon project developers to push out these projects quickly.
“If a project is not financially attractive, people will not invest in it. Undertaking carbon projects requires a large investment, from paying the land lease to getting professionals to conduct assessments and surveying works.
“It may take one to two years before you can register to carbon project to agencies like Verra,” she said.
Verra is a nonprofit organisation that operates standards in environmental and social markets including the world’s leading carbon crediting programme called the Verified Carbon Standard (VCS) programme.
Noting how Malaysia does not have a vibrant carbon market yet, Koh said there is a lack of professionals such as carbon project developers as well as auditors who can validate and verify these projects.
“This means we will need to import talents from overseas and it will cost a lot. This is something the state government can work on, to build the capacity and encourage businesses to come in,” she said.
THE POTENTIAL OF NATIVE CUSTOMARY RIGHTS (NCR) LAND
On the Premier’s proposal and encouragement for the Dayak community who have vast assets in the form of Native Customary Rights (NCR) land to venture into carbon trading and storage, Koh said this is a very good suggestion.
“As a fellow Sarawakian, I think this is indeed a good suggestion. However, this goes back to the scale of economics and mechanism of producing carbon credit.
“If the NCR land is a degraded forest and you must put in efforts to restore it then there is additionality. When you restore the forest and make it a carbon project, entities or people will buy carbon credits for this as it contributes to climate change.
“This means NCR land that is considered as good forests has no additionality so there may not be any potential for carbon credit generation,” she said.
Koh said another factor that must be considered is the size of the NCR land as this will determine whether it will make an economically viable carbon credit project.
“There are many factors that must be taken into consideration when it comes to a viable carbon credit project. Based on my estimates, the size of the NCR land must be approximately 5,000 hectares of mangrove areas or peatland,” she said.
