The Ministry of Environment and Water (KASA) proposal on developing voluntary carbon market (VCM) guidelines was approved at the Cabinet meeting on September 17, 2021. The VCM Guideline serves as a reference source for all stakeholders, including state governments and private sector players, who wish to participate in carbon credit trading at an international level. The main purpose of the VCM guidelines is to ensure that the country’s interest in climate change reporting and the country’s greenhouse gas (GHG) reduction commitments will not be compromised. Based on this VCM guide, the state governments or private sector players involved must report their implemented carbon projects to KASA.
In addition, to catalyse the country’s carbon trading sector, the cabinet also agreed in principle to KASA’s proposal to develop a domestic emissions trading scheme (DETS). The Ministry of Finance, Bursa Malaysia and other relevant parties will jointly implement the development of the DETS. DETS is part of the country’s carbon pricing policy. Compared with international markets with high transaction costs and stricter technical requirements, state government authorities and the private sector can use DETS to execute carbon credit transactions at a domestic level.
These new measures of KASA will be able to greatly assist in the fight against climate change and benefit people from all walks of life. You may be wondering why I am saying this, so I hope you can spare about 5-10 minutes to continue reading this article in order to have a clearer understanding of what the carbon market is.
What is the carbon market?
The carbon market or carbon trading is about buying and selling carbon credit to limit the number of emissions that each company can emit. The goal is to reduce greenhouse gas (GHG, or “carbon”) emissions in a cost-effective manner, which in turn will reduce their impact on climate change. Carbon credit is a collective term for any tradable certificate or permits representing the right to emit one ton of carbon dioxide or an equivalent amount of different greenhouse gases (tCO2e).
The simple understanding is that you need to buy carbon credit to pollute the environment legally. Many scientists agree that if we want to avoid climate disasters, we need to reduce the carbon content in the atmosphere to 350 ppm (parts per million). Note that in June 2021, the average carbon dioxide content in the atmosphere was about 416 ppm! Therefore, many countries have pledged to achieve net-zero emissions by 2050. All countries will work together to reduce global energy-related carbon dioxide emissions and limit the global average temperature increase to +1.5°C or below.
According to BP’s research, Malaysia’s carbon dioxide emissions in 2019 were 250.3 million tons, higher than the 241.6 million tons in 2017. The primary sources of carbon emissions were from energy (power consumption), mobility (vehicles) and waste (municipal solid waste that ends up in landfills). Most economies in the world rely on burning fossil fuels to operate, and fossil fuels release carbon. Therefore, through carbon trading, these problems are expected to be effectively resolved.
The figure below shows how the carbon market works.
Figure 1
How is carbon trading implemented?
Carbon trading originated from the Kyoto Protocol, a United Nations treaty that has set goals for reducing global carbon emissions and mitigating climate change since 2005. The idea is to incentivise every country to reduce carbon emissions so that there are extra carbon credits available for sale. So how is it implemented?
Every country has an agreed limit on carbon credit. These carbon credits will be provided by the government for free or auctioned to companies in the industry. If a company significantly controls its carbon emissions, it can exchange excess credits for cash in the carbon market. If it is unable limit emissions, then it may have to purchase additional credits.
Carbon trading encourages professionals from various countries to reduce carbon emissions and enables them to create and innovate new models or methods for replacing fossil fuels. As you know, more prominent and wealthier countries generally have higher carbon emissions, which means they will need more carbon credits. In this way, these countries will effectively subsidise poorer countries that pollute more through credit purchase. More affluent countries will have more carbon credits to emit greenhouse gases, while poorer countries will have more funds to innovate and implement new ways to reduce greenhouse gases. This is a win-win situation.
Types of carbon markets
There are two types of carbon markets, the compliance carbon market and the voluntary carbon market. The carbon market can be either voluntary or mandatory. The main difference between the two is that the voluntary market is unregulated.
Compliance Carbon Market
Compliance carbon markets (CCM) are marketplaces through which regulated entities obtain and surrender emission permits (allowances) or offsets to meet predetermined regulatory targets. In the case of cap-and-trade programs, participants – often including both emitters and financial intermediaries – are allowed to trade allowances to profit from unused allowances or meet regulatory requirements.
CCM are created and regulated by mandatory national, regional, or international carbon reduction regulations. Voluntary, non-regulated entities may, in some instances, purchase CCM credits, but voluntary offset market credits, unless explicitly accepted into the compliance regime, are not allowed to fulfil compliance market demand.
Voluntary Carbon Markets (VCM)
Voluntary carbon markets (VCM) allow carbon emitters to offset their unavoidable emissions by purchasing carbon credits emitted by projects targeted at removing or reducing GHG from the atmosphere. It is good to note that these carbon emitters voluntarily purchase carbon credits to offset their emissions. Companies can participate in the voluntary carbon market either individually or as part of an industry-wide scheme. But what we can’t deny is that some voluntary offset buyers are often driven by specific considerations such as safeguarding their reputation, ethics, and corporate social responsibility (CSR).
Over time, the VCM has evolved into a powerful and effective method to tackle climate change by driving resources to projects, which deliver independently verified and additional emissions reductions on a global scale. By the end of 2019, the market had achieved over 608 million tonnes of CO2e in emission reductions or removals, which is the equivalent of more than 131 million cars taken off the road for an entire year.
The figure below shows the types of carbon credits used by CCM and VCM.
Figure 2
Domestic Emissions Trading Scheme (DETS)
A domestic emissions trading scheme (DETS) is a system that sets emission caps for greenhouse gases emitted by primary emission sources to ensure emissions reduction. It works on the principle of ‘cap and trade’. The government then imposes a limit (cap) on total emissions in one or more sectors of the economy. Companies in these sectors are required to hold one permit for every ton of emissions that they release. They may either receive or buy credits and can trade them with other companies.
Emissions trading schemes (ETS) around the world
- Australia’s Carbon Price Mechanism. The Carbon Price Mechanism (CPM) is the key element of the Clean Energy Future package. The CPM requires that any facility that emits above the annual threshold must surrender their emission permits to the government. The threshold is 25 thousand tonnes of CO2e. In 2012 the scheme imposed obligations to offer licenses on 377 liable entities, accounting for about 60% of Australia’s greenhouse gas emissions.
- New Zealand ETS. The New Zealand (NZ) ETS began in 2008 as a scheme specifically covering the forestry sector. In July 2010, it was amended and expanded to cover stationary energy, fishing, industrial processes and the liquid fossil fuels sectors. Participants are required to surrender emission permits (NZUs) to protect their greenhouse gas emissions liability. Most participants receive free allocations of NZUs, and these can be traded amongst participants.
- South Korean ETS. In November 2012, South Korea’s cabinet approved and adopted rules for a mandatory ETS after legislation received bipartisan support in the country’s unicameral National Assembly. The proposed scheme will cover at least 60% of national greenhouse gas emissions from all industries and buildings and include more than 450 participants (maybe as many as 600). Three initial phases have been outlined: 2015–2017, 2018–2020, and 2021–2026.
- Kazakhstan ETS. The Republic of Kazakhstan mandated a national ETS on 1 January 2013. The scheme covers plants in the manufacturing, energy, mining, metallurgy, chemicals, agriculture and transport industries which emit more than 20 thousand tons of CO2 per year. This scheme covers 178 participants and about 80% of national emissions.
Malaysia’s annual GHG emissions (1990-2016)
Figure 3 below shows Malaysia’s total annual GHG emissions from 1990 to 2016.
Figure 3
According to Malaysia’s biennial update report (BUR-3), Malaysia’s GHG emissions from 1990 to 2016 mainly originated from energy (79.44%), industry (8.57%) and agriculture (3.35%). KASA secretary-general Datuk Seri Dr Zaini Ujang, promised that they will also pay more attention to Land Use and Land Use Change and Forestry (LULUCF) emission at the 12th edition of the World Class Sustainable Cities (WCSC) 2021 on September 27, 2021. During his speech, he mentioned that Malaysia’s current GHG emission level (excluding LULUCF) stands at 10.016 tons of CO2 equivalent per capita, which is similar to other countries such as Japan and Singapore. Therefore, it is necessary to take concrete action to reduce emissions.
Conclusion
In short, the carbon market is an effective way to improve GHG emissions. It allows us increase our digital awareness of GHG emissions and protect the environment, while still being able to generate decent profits. Prime Minister Datuk Seri Ismail Sabri bin Yaakob, stated in the 12th Malaysia Plan (12MP) 2021-2025 in Parliament on September 27, 2021, that Malaysia aims to become a carbon-neutral nation as early as 2050. As long as the government has a good plan and people in the industry cooperate with it, I believe that we will definitely achieve this goal!
