Long way to go for Malaysian carbon market

So far, one auction has taken place on the BCX, comprising a nature-based project located in Cambodia and a technology-based project in China.

AS Malaysia is nearing the first year anniversary of its carbon exchange, it is hard to ignore the fact that no Malaysian-based projects are onboard so far.

While the country is not short of projects capable of producing lucrative carbon credits, project owners have been reluctant to jump on the bandwagon due to several issues including the high cost of compliance to carbon credit standards and the sharp drop in carbon credit prices.

This has become a concern for Bursa Malaysia, the operator of the world’s first syariah-compliant Bursa Carbon Exchange (BCX).

Without the buy-in from Malaysian-based projects, the BCX will have a hard time in building a successful voluntary market for the trading of carbon credits.

Earlier this month, Bursa Malaysia chairman Tan Sri Abdul Wahid Omar acknowledged that several issues are preventing the owners of Malaysian-based projects from taking part in the BCX.

However, he expressed hope that at least one Malaysian-based project will be able to issue carbon credits via BCX by the second half of 2024.

So far, one auction has taken place on the BCX, comprising a nature-based project located in Cambodia and a technology-based project in China. The carbon credits from both projects were supplied by Vitol Asia Pte Ltd.

The auction, held in March 2023, saw strong interest from domestic corporates, notably government-linked companies and financial institutions, that purchased a total of 150,000 Verra-registered carbon credits.

Among the 14 successful bidders are Malayan Banking Bhd, Petroliam Nasional Bhd, Press Metal Aluminium Holdings Bhd, CIMB Bank Bhd, Permodalan Nasional Bhd and Yinson Holdings Bhd.

The Cambodian project, which is a REDD+ (Reducing Emissions from Deforestation and Forest Degradation) project, fetched a clearing price of RM68 per contract.

Meanwhile, the China project contracts were oversubscribed and cleared at RM18.50 per contract. It is a biogas recovery and power generation project.

So, what is BCX? It is a platform where corporations can buy carbon credits to offset emission footprint and meet their climate goals. These credits are generated by projects that remove or reduce greenhouse gases from the atmosphere.

The BCX will provide three modes of carbon trading, namely, auctions of carbon credits; spot trading for standardised contracts of carbon credits and off-market transactions.

The exchange only accepts carbon credits adhering to the Verified Carbon Standard, an international carbon credits standard, or better known as Verra.

ClimatEra Consulting Sdn Bhd founder and director Komathi Mariyappan tells StarBizWeek that there are many operators of Malaysian-based projects who are interested to be part of BCX.

“At our firm, we are currently assisting some nature-based projects and technology-based projects, all of which are still in preliminary stages.

“It is not true that Malaysian companies are not keen on producing carbon credits and to take part in BCX, but there are a number of pain points that prevent them from doing so,” she says.

One of the challenges is the high cost involved in developing the carbon projects.

For a small-scale technology-based project, Komathi says the cost can be in the range of several hundred thousand ringgit, which includes consultation fees, audit fees and primarily the Verra registration fees.

This is not inclusive of the plant development cost.

Typically, it is advisable for a carbon project to produce a minimum of 30,000 to 40,000 carbon credits annually to offset the transaction expenses effectively and make the project financially attractive.

Transaction cost includes feasibility studies, initial setup, third-party audit, certifying and registering the project at standard registry, monitoring and verification for issuance of credits by the registry.

Third-party audits are done by the validation and verification bodies (VVB).

With each issuance of credits, the monitoring and verification process could incur yearly costs throughout the crediting period of the project, according to Komathi.

“In the case of a small project, audits may be conducted once every few years, incurring costs that vary depending on the project’s complexity.

“Conversely, larger projects typically may require annual audits.

“Overall, the bigger the project, the more expensive it can get. For nature-based projects, the cost can be much higher,” explains Komathi.

She has previously served as the vice-president of carbon market at Bursa Malaysia.

In addition to the cost, Komathi points out that some owners of Malaysian-based projects feel discouraged to participate in the voluntary carbon market, following the drop in carbon credits prices internationally.

For example, the price of a nature-based global emissions offset futures contract on the New York Mercantile Exchange has declined by over 50% since the start of 2023.

Komathi also mentions that the establishment of a nature-based project often demands a longer lead time, frequently extending beyond three to five years before the first batch of carbon credits is issued.

In contrast, technology-based projects tend to advance more swiftly when compared to their nature-based counterparts.

“Maybe some Malaysian-based projects are in the midst of completing this process. So, we could see their auctions in the coming years,” says Komathi.

Eco-Ideal Consulting Sdn Bhd founder and chief executive officer Soon Hun Yang also says that it would take some time for Malaysian projects to be registered and able to supply locally-generated credits.

“The government and Bursa Malaysia needs to continue to raise awareness and provide necessary incentives for local project developers to embark on these projects,” he says.

For now, Soon laments that there is no strong demand for carbon credits in Malaysia and the existing carbon prices are not attractive.

Eco-Ideal is the consultant behind Berjaya Group’s Bukit Tagar Enviro Park, which is Malaysia’s largest power plant from landfill gas.

Moving forward, Asia School of Business post-doctoral scholar Pieter E. Stek calls for a more accessible and simplified verification system in Malaysia to encourage more Malaysian-based projects to be verified for their carbon credits.

“The country needs to have more local technical experts and VVBs to verify the projects at a reasonable cost.

“At the moment, there are no local VVBs and there are only branches of foreign VVBs offering the service,” he says.

Echoing a similar view, Komathi opines that local experts know the ground issues better.

Stek also says that international standards for carbon credits may not be suitable for some Malaysian-based projects, given local circumstances.

“Indonesia and China have their own local standards.

“If we want the Malaysian market for carbon credits to grow, having a local standard would be a way forward,” according to him.

Bursa Malaysia’s Abdul Wahid has also suggested earlier about the creation of local validation standards by rating agencies like Malaysian Rating Corp Bhd and RAM Ratings.

This would be similar to the oil palm industry, where the Roundtable Sustainable Palm Oil (RSPO) standards are used internationally but Malaysia has its own version called the Malaysian Sustainable Palm Oil (MSPO) certification scheme.

There is no membership fee for industry players to obtain MSPO certification but under RSPO, the fee could go up to several thousand ringgit including for small plantation owners.

Currently, BCX only recognises projects that are certified by Verra, which is the world’s leading carbon standard.

However, Washington DC-based Verra has its own share of controversies.

Earlier this year, following nine months of investigations, the Guardian revealed that more than 90% of rainforest carbon offsets certified by Verra are “worthless”.

The Guardian reported that only less than 10% Verra-certified credits represent genuine carbon reductions.

Stek, however, notes that the compliance to an internationally accepted certification would “make sense” if the exports of carbon credits are eventually allowed to other countries including Singapore.

Regardless, the entire process of developing a local carbon credit standard will not be easy.

With land matters coming under state jurisdictions in Malaysia, it is natural to have differences in local regulations that must be taken into account in developing a local standard.

Komathi, however, believes that Bursa Malaysia’s handbook for the voluntary carbon market – set to be unveiled next month – would help to provide a better clarity for owners of Malaysian-based projects.

The handbook would be launched during the International Greentech & Eco Products Exhibition & Conference 2023.

Commenting on the seemingly lacklustre appetite for BCX auctions among project owners, Soon says that the BCX is “not in full operation yet”.

“When it comes to local demand for carbon credits, currently there are no mandatory reduction requirements for companies so there are no driving forces to push for such carbon credit demand.

“All the transactions are purely voluntary. There would be a need to promote and facilitate the market demand,” he says.

Stek and Komathi also believe that the demand for carbon credits can only be fully realised once the “compliance” market in Malaysia is comprehensively developed.

“For now, Malaysia does not have a compliance market where the industries have certain carbon emission caps and the implementation of carbon tax.

“Once you have the cap and tax, companies will have to offset their carbon emissions and it is no longer voluntary. It would push up carbon credit prices,” Stek says.

Komathi adds that Singapore already has its own carbon tax for a number of industries.

Introduced in Jan 2019, this was the first carbon pricing scheme in South-East Asia.

“The voluntary carbon market will eventually complement a mandatory domestic emission trading scheme (DETS) to be introduced in the future in Malaysia.

“Under the DETS, which includes a single transaction platform, polluters such as oil and gas companies that have more emissions than their quota have to purchase the right from another company to emit more.”

For now, considering that Malaysia’s carbon market is in still infancy, the government recognises the pressing need to push up the demand for carbon credits.

In March, Prime Minister Datuk Seri Anwar Ibrahim said the government is committing to a seed fund amounting to RM10mil to act as an assured demand of Malaysian-generated carbon credits to kickstart the market.

At an event in Kuching earlier this month, Abdul Wahid also said that Bursa Malaysia is trying to develop a primary offering market for carbon credits.

“What we have now (BCX) is similar to the secondary offering market, where the money raised goes to the promoters.

“But in the primary market, any project can be promoted with the money raised going directly to the projects instead,” he said.

Amid challenges, the Malaysian carbon market has a long way to go before the country can see a stronger supply and demand dynamics.

After all, building an exchange is easy, but building a market is not.