Carbon Credits 101
In March 2023, Bursa Malaysia successfully launched the nation’s very first voluntary carbon market – Bursa Carbon Exchange (“BCX”). Currently there are only 2 projects offered by BCX, including one technology-based and one nature-based project, which allow 150,000 carbon credits or “contract” to be bought. To date, several listed companies have successfully bought carbon credits on BCX, including AmBank, CIMB Bank, Petronas, Telekom Malaysia and many more.
Carbon trading is an innovative approach to mitigating the effects of climate change, where businesses and countries can buy and sell permits to emit carbon dioxide (CO2) and other greenhouse gases. Carbon trading is based on the principle of creating a market for emissions, and it operates under the premise that by putting a price on carbon emissions, businesses will be incentivized to reduce their emissions.
What are Carbon Credits and How do They Work?
Carbon credits are measurable and verifiable emission reductions from certified climate action projects which reduce, remove or avoid greenhouse gas emissions. A single carbon credit represents 1 metric ton of CO2e reduced, avoided, or removed. When a credit is claimed and used, it becomes an offset and has to be retired and is no longer tradeable.
There are mainly 2 categories of carbon credits projects:
Avoidance / Reduction Projects. These types of projects help prevent GHG emissions that would otherwise have happened. Examples of projects are:
· Renewable Energy Projects
· Efficient Cookstove Projects
· Forest Conservation / Management
· Avoided Deforestation
Removal / Sequestration Projects. These projects capture and remove GHG emissions directly from the atmosphere. Example of projects are:
· Afforestation & Reforestation eg. Nature-based solutions.
· REDD (Reducing Emissions from Deforestation and forest Degradation) Projects
· CCS (Carbon Capture & Storage)
A high-quality carbon credit is determined by the following 5 metrics:
· Additionality – Projects that are unable to exist without revenue derived from carbon credits.
· Verification – Monitored, reported and verified by a credible third-party.
· Permanence – Carbon reduction or removal will not be reversed.
· Measurability – Calculated according to scientific data through a recognized metholody
· Avoid Leakage – An increase in emissions should not occur during the monitoring period of projects
Mandatory Market vs Voluntary Market
There are two main types of carbon markets, depending on whether the emission reductions are mandatory or voluntary.
Compliance Market: Mandatory systems regulated by government organizations to cap emissions for specific industries.
Voluntary Market: Carbon Credits can be purchased by companies who voluntarily want to compensate for their carbon emissions. Voluntary offset market credits, unless explicitly accepted into the compliance regime, are not allowed to fulfill compliance market demand.
How to Develop a Carbon Credits Project?
1. Project developers and investors will be responsible for funding and developing a project that generates emission reductions or removals.
2. Standard bodies such as Verra and Gold Standard will certify and set the criteria for carbon credits.
3. Brokers will act as a middle person to facilitate carbon credit transactions between end buyers and project developers.
4. End buyers such as individuals or corporations can purchase carbon credits to offset their carbon emissions on carbon exchanges or through brokers.
Prices of Carbon Credits
In 2021, the total global voluntary carbon market valued at $2 billion, 4 folds of its value in 2020, and the market is expected to jump another 3 to 4-fold by 2030. The compliance market on the other hand, reached $850 billion in 2021 and have transacted over 15 GtCO2e.
Just like the stock market, the prices of carbon credits vary from time to time. The pricing depends on many factors, not limited to the demand of the market, types of projects, quality of carbon credits, region of projects, and year of issuance. Typically, emissions removal projects are traded at a more premium price compared to avoidance projects due to the higher demand for this type of credit as they are believed to be a stronger tool in fighting against climate change.
Besides, certain carbon credits projects also have co-benefits that help meeting the UN’s SDGs, allowing the carbon credits to trade at a more premium price. Community-based projects for example, often produce at a smaller volume compared to other projects, however, because they are able to generate additional co-benefits such as reducing economic inequality, improved welfare for the local population and etc.
In current voluntary carbon markets, the price of carbon credits can vary from a few cents per metric tons of CO2e to $15 or $20 per metric ton of CO2e for afforestation projects. In the compliance market, carbon credits are trading between $40-$80 per metric ton of CO2e.
Is The BCX’s Price High Enough to Meet the Goals of the Paris Agreement?
The simple answer is NO. The prices of both projects offer on BCX are RM68 and RM18.5 per contract. In order to meet the Paris Agreement’s goal, the minimum carbon credit price is about $40 (USD) per metric ton. Referring to the figure below, only the EU, UK and New Zealand are on the right track.
The carbon pricing is still far too low compared to other compliance markets globally. To give a better contrast, we can compare the total amount of money that IEN is needed to pay to offset its carbon emissions in Malaysia and in Europe.
IEN’s office is emitting about 25 tCO2e/year from its electricity consumption, the price to be carbon neutral if:
1. Buying REDD credits through BCX – RM 1,768
2. Buying Biogas credits through BCX – RM 481
3. IEN is located in Europe ($80 per ton) - $2,000 (~RM8,900)
The Dark Side of Carbon Credits
An investigation on Verra, one of the world’s leading carbon standards was conducted recently by The Guardian (https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe) has found out that more than 90% of Verra’s forest-related carbon offsets or nature-based solution credits are “phantom credits”, meaning the reduction they claimed do not exist. Companies that we are very familiar with like Shell, Disney and Gucci have been claiming these credits and labelling their products or services as carbon neutral.
Most of the projects fall under the REDD+ scheme and are claiming carbon credits from avoided deforestation. So how does this actually work? For example, if an organisation estimates its project would avoid 100 hectares of deforestation, by using Verra’s approved methodology, the organisation can convert it into saved carbon emissions if no deforestation takes place. The credits can then be bought by other companies to offset their emissions.
Right after a few months of The Guardian’s investigation, Verra has announced that they will noy only update its flawed methodologies in the coming months, but also phase out and replace the current rainforest offset programme, which is still under development by mid-2025.
So What’s Next for Malaysia?
It is no doubt that carbon credits can be a very powerful tool in helping nations to fight climate change and meeting their NDCs (Nationally Determined Contributions), provided that the credits’ additionality can be verified and validated and the emission reductions can be estimated correctly with a scientific method. Carbon trading has been proven as an innovative approach to mitigating the effects of climate change, and results has been seen in successfully reducing carbon emissions in various regions of the world.
Despite the government's efforts to promote carbon trading and reduce carbon emissions, Malaysia faces several challenges in implementing a national carbon trading scheme.
One of the main challenges is the lack of a comprehensive legal framework for carbon trading. Malaysia has yet to enact legislation that regulates carbon trading. In order to achieve Malaysia’s goal to cut carbon emissions by 45% by 2030 and net-zero carbon neutral by 2050, a cap-and-trade system or carbon taxing has to be implemented for the heavy polluters, such as aviation, power, and logistic industry.
Another challenge is the lack of awareness and understanding of carbon trading among businesses and the general public. Many businesses in Malaysia are not aware of the benefits of carbon trading, and there is a general lack of understanding of the concept among the public.
Nonetheless, it is good to see the government is taking baby steps with the launching of the voluntary carbon market. We believe that by introducing the right policies and enforcing them strictly, Malaysia will and can create a cleaner and more sustainable future for the generations to come.