PETALING JAYA: Malaysia is poised to become one of the top carbon markets in Asia, according to global consulting giant McKinsey & Co.
It said such a market would not only help the country in meeting its climate targets but would bolster new economic activities.
Carbon markets are a key tool for countries to cut their greenhouse gases and meet the Paris agreement commitments.
McKinsey & Co partner Vaibhav Dua, in responding to queries from StarBiz, said Malaysia has substantial natural endowments that could help it generate carbon credits. For example, it has about 18 million hectares of forest cover.
“Our modelling suggests that the country could generate up to 40 tonnes carbon dioxide equivalent (40 MtCO2e) of carbon credits annually through activities such as restoring degraded forests, mangroves and peatlands, and through better land management.
“According to the consultancy’s analysis, Malaysia is among the top 10 countries in the world with the highest potential to generate credits through nature-based sequestration,” he said.
In the coming years, he added that demand for carbon credits could pick up in Malaysia. Almost one-third of the top 80 Malaysian companies have declared emission-reduction targets.
Vaibhav said: “Many of these companies operate in the energy and industrial sector, where, despite in-sector emissions reductions, carbon credits may be required to compensate for residual emissions.
“It may only be a matter of time before demand for carbon credits in Malaysia picks up. Realising this market growth would require the right market design and provision of timely support to help new players scale in this space.”
A carbon credit refers to any tradeable certificate or permit representing the right to emit a set amount of carbon dioxide or the equivalent amount of a different greenhouse gas.
Vaibhav said both types of carbon markets – compliance and voluntary – are complementary and would be needed in helping Malaysia decarbonise.
Voluntary carbon markets help companies that have made voluntary climate commitments or that are looking to sell “carbon neutral” products purchase carbon credits.
The purchase of carbon credits helps capital flow to companies that develop carbon mitigation projects such as nature-based sequestration projects, he said.
Compliance carbon markets allow the government to put a mandatory carbon price on emissions for companies covered by the regulation, creating incentives for companies to invest in decarbonising their operations.
He said for both voluntary and compliance markets to work well in tandem, each market should operate on clearly defined rules and there should be clear principles on the two markets’ interface.
Commenting on the economic front, McKinsey & Co engagement manager Rohan Jain said the potential for annual 40 MtCO2e of carbon credits could create a new US$0.5bil (RM2.32bil) to US$1bil (RM4.63bil) market for carbon credits in Malaysia.
He said the carbon markets could be a helpful instrument to enable Malaysia to meet its climate targets and keep companies competitive and create new economic activities in the country.
Firstly, he said meeting Malaysia’s climate commitment of carbon neutrality by 2050 would require not only reducing emissions but also maximising the carbon sequestered in its natural environment.
Carbon markets are an effective instrument to support these objectives, he said.
Secondly, Rohan said carbon markets could help local companies meet their own climate targets, for example, by compensating for their hard-to-abate emissions.
In some geographies, meeting climate commitments could be important to raise competitive financing, he said.
He said customer sentiment globally is also shifting towards climate friendly companies, noting that high-quality carbon credits could be used to create new offerings such as “carbon neutral” products and services.
“Finally, generating carbon credits requires a host of new activities such as developing and executing carbon projects, validating carbon project design and verifying effective execution of carbon projects.
“New services such as carbon financing, trading and advisory will also be demanded. Such services do not currently exist in Malaysia and will help create new capabilities in the country,” Rohan said.
Vaibhav said as companies work on reducing their greenhouse gases emissions, they must also think about their requirements for offsets, particularly for the “hard-to-abate” emissions.
Despite best efforts to prevent and reduce emissions, he said there may be some residual emissions at any point of time that would be either technologically unfeasible or too expensive to mitigate.
“Carbon credits can help compensate for these residual emissions provided they meet rigorous environmental integrity standards and are used in limited quantities to address residual emissions.
“International initiatives such as the Science-Based Targets Initiative also consider carbon credits as an option for neutralising residual emissions.
“Companies that do not actively shape their demand for offsets might be exposed to supply shortage and market price risks in the longer term,” he said.