ESG to drive demand for carbon credits

PETALING JAYA: The need to meet environmental, social and governance (ESG) compliance could spur demand for carbon credits in Malaysia.

Currently, the country does not have a carbon compliance market unlike Singapore, which introduced this mechanism in 2019 to incentivise the move towards net-zero by 2050.

However, its adoption of a voluntary carbon market (VCM) via the launch of the Bursa Carbon Exchange (BCX) in December 2022, could trigger domestic project development, said RHB Research.

“Despite the absence of domestic carbon credits in the inaugural auction, the participation of 15 local buyers in transactions involving 150,000 carbon credits points towards the eagerness for ESG compliance and could further spur demand for carbon credits in the country,” the research firm said in a regional thematic research on carbon trading.

It added that the RM10mil seed fund to foster the generation of domestic carbon credits announced recently, is likely to increase the supply of Malaysian carbon credits in the future, although the timeline appears uncertain at this point.

“As these nature-based or technology-based projects tend to take time to execute, the introduction of domestic carbon credits on the BCX might not be immediate.”

The research firm said a supportive regulatory framework is necessary to spur demand for carbon credits, which should involve incentives for adoption of green practices along with incentives for emissions reductions, which is the carrot-and-stick approach.

“While the government has been generous in providing tax reliefs and funds to encourage businesses to adopt climate-friendly practices, the “stick” end of the carrot-and-stick approach is still a work in progress.

“Malaysia has yet to introduce any carbon pricing tools, such as a carbon tax or emissions trading system to incentivise businesses to lower and offset emissions,” added the research firm.

RHB Research said under the 12th Malaysia Plan, a feasibility study is being conducted on carbon pricing tools with the aim of recommending a suitable carbon tax system.

Notably, it said Bursa Malaysia has given a second half 2023 timeline guidance for the launch of its carbon trading platform that will enable carbon credit holders to trade with carbon credit seekers.

“This, combined with the introduction of more carbon credits from future auctions, should spur better price discovery of carbon credits and encourage trading activity on the platform.

“However, we understand that the income generated for Bursa Malaysia from such trades is expected to be immaterial in the formative years.”

According to RHB Research, Malaysia’s forest and land use play a significant role in mitigating climate change impact.

As of 2020 data, Malaysia has a total forested area of 18.05 million hectares – adhering to its commitment to retain at least 50% of its land area under forests and tree cover. However, it noted that forestry falls under the jurisdiction of the respective state governments, with the federal government’s executive authority limited to technical assistance and the provision of advice.

While Malaysian plantation and timber companies may possess large plots of forested land, RHB Research said it does not foresee them benefiting financially from the VCM.

“These companies are large deforesters and emitters of greenhouse gases and any carbon credits they may receive from potential forest restoration projects will be prioritised to offset their own internal emissions first.”

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