Carbon Credit Market: A Work in Progress
- Nottingham Economics Society
- Jun 15, 2023
- 5 min read
Updated: Aug 24, 2023
Launched on December 9th, 2022, the Bursa Carbon Exchange (BCX) is the world's first Shariah-compliant voluntary carbon market (VCM) and Malaysia's premier government-backed carbon exchange. It aims to provide a transparent and regulated marketplace for companies to buy carbon credits cost-effectively, promote high-quality carbon credit creation, and support Malaysia's commitment to reducing carbon intensity by 45% by 2030 (compared to 2005) and achieving carbon neutrality by 2050.
On March 16th, 2023, the BCX conducted its inaugural carbon credit auction, intended to facilitate price discovery and provide reference prices for carbon credit trading and potential domestic carbon credit issuers. The auction carried out electronically, attracted 15 buyers from various Malaysian industries, who purchased a total of 150,000 Verra-registered carbon credits from technology-based and nature-based projects in China and Cambodia. No local carbon project was offered.
Evaluating the Auction's Outcome
BCX's CEO, Datuk Muhamad Umar Swift, considered the first auction successful, citing strong interest and healthy price signals from the domestic corporate sector. He also stated that the auction showcased a proven market mechanism that enables price discovery.
However, all credits sold at the minimum reserve price, indicating a conservative approach taken by the buyers, which may be expected for the first auction on a relatively new exchange. A closer examination of the buyer list reveals some familiar names, with about half of them being local financial corporations (e.g., AmBank, CIMB, and Maybank) and just a few with heavy carbon footprints (e.g., Petronas and Malaysia Steel Works). The prevalence of government-linked corporations or non-heavy greenhouse gas emitters suggests limited interest from private entities that need to offset their emissions. As a result, the auction's outcome may not truly reflect a promising price discovery or market mechanism.
Affirmative Leading Role
“With great power comes great responsibility," Bursa Bhd, the preeminent trading platform in Malaysia and one of the largest bourses in ASEAN, assumes a significant role as a representative of the nation. Being a government-linked company, the launch of BCX affirms Malaysia's commitment to spearheading and facilitating initiatives that emphasize sustainability and address global warming. As an increasing number of international leaders prioritize combatting climate change by implementing regulations on producing and importing goods and services, Malaysia's participation in this unified effort is vital in multiple aspects.
Market Role
The central role of BCX is to serve as a marketplace for carbon credit, enabling local businesses and companies to meet international environmental standards cost-effectively, thereby enhancing their global competitiveness. This is especially important for an exporting nation like Malaysia. For instance, the European Union (EU) has introduced the Carbon Border Adjustment Mechanism (CBAM), which mandates exporters disclose the carbon footprints of their products, potentially subjecting them to a tax if carbon emissions during production surpass the established threshold.
According to the EU trade policy website, the majority of Malaysian exports to the EU consist of industrial products (e.g. machinery and appliances, plastics, rubbers, etc), accounting for over 90% of trade. As these products tend to leave substantial carbon footprints, having a carbon trading market at home provides convenience. It enables easy compliance, especially for the 750 Syariah-compliant listed companies and their private counterparts.
Educational Role
While Malaysian companies are no strangers to the concept of “carbon neutrality” or “reducing carbon footprints”, there remains a considerable information and knowledge gap regarding how to get there. For a company to be “carbon-savvy”, it needs to acquire a whole new range of specialities, including carbon trading, carbon reporting accounting standards, and differential carbon-related legal requirements in different jurisdictions and etc. They may also have to change the ways they operate their businesses or adopt new technologies. To this end, BCX plays a major role in bridging the gap, by providing necessary guidance and compelling listed companies to implement carbon-centric business strategies.
Bursa Malaysia has announced enhanced sustainability reporting requirements for listed companies on the Main Market and ACE Market. These requirements include mandatory climate change reporting, obligating listed issuers to disclose climate-related risks and opportunities as well as their governance, strategy, and targets to address them. Ultimately, these measures will bolster the overall resilience, competitiveness, and investment appeal of listed issuers on the international stage.
The Economic Potentials of The BCX
As a Shariah-compliant platform, the BCX can uniquely attract both local and foreign investors who seek to contribute to combating climate change while aligning their investments with religious beliefs. The launch of a Shariah-compliant BCX is essential for Malaysia, boasting 750 Shariah-compliant listed companies in 2021. Moreover, the Shariah-branded BCX occupies a distinctive niche in the international market, particularly in oil-producing Middle Eastern countries, akin to Malaysia’s unique leading role in the international halal food market.
Secondly, the global Voluntary Carbon Market (VCM) reached $2 billion in 2021 and is expected to grow even larger as it integrates into global efforts to fulfil climate pledges. A McKinsey analysis indicates that although demand is currently low in Malaysia, up to one-third of the country's top 80 companies have voluntarily adopted emission-reduction targets, many of which may require carbon credits to achieve their goals. Consequently, the demand for carbon credits is projected to increase, as most of Malaysia's emissions stem from the energy, heavy-industrial, airline, and maritime sectors. Climate and sustainability-related regulations are likely to become more stringent in the future.
This influx of investment funds can incentivize the development and adoption of eco-friendly projects in Malaysia, promoting job creation and boosting national income. Furthermore, investment funds channeled through the BCX could be crucial for Malaysia, a crude oil-producing country, to diversify its economy or transition to clean energy.
A Work in Progress
As prominent as the role of BCX and as promising the potential of a Malaysian carbon exchange market as it may sound, there is a long, arduous journey ahead.
The lacklustre auction is partly resultant of a small pool of domestic carbon buyers and sellers and the lack of a supporting regulatory framework tailored to carbon credit trading. Nor are there (negative) incentives like carbon tax which mandates carbon emission reduction or offset.
BCX, as a pioneer in this field, should work on both arms of the market. On the supply side, it should lead the efforts to encourage local firms to set up their own carbon projects, instead of selling carbon credits from offshore projects. To create demand, it should develop a robust and transparent framework for verifying and monitoring carbon credits, while striking a balance between price and quality, as high carbon credit prices can lead to increased costs for companies and consumers. To these ends, the educational role that BCX plays in improving knowledge about carbon offsets is indispensable.
It should also work closely with legislators and the relevant authorities, in carving out bills and policies, which are tailored towards the unique circumstances and economic structure of Malaysia, and which would pave a clear path towards reaching the carbon neutrality goal of the country.
Conclusion
Although the inaugural auction of the BCX may have fallen short of delivering its promise, it has the potential to play a transformative role in Malaysia's journey towards carbon neutrality and sustainable development. Its establishment is undoubtedly a step in the right direction, just as our neighbour countries Singapore and Thailand took similar moves, launching CIX (Climate Impact X) and FTIX (Federation of Thailand Industries) in 2022.
However, it is crucial to acknowledge the challenges and potential issues surrounding the carbon offsetting market. Greenwashing, the credibility of carbon offset projects, and the need for rigorous monitoring, verification, and enforcement mechanisms are all areas of concern that warrant further examination and discussion.
As Malaysia progresses with the development of the BCX, it is essential to keep these challenges in mind and work towards addressing them. By doing so, the country can ensure that the carbon market complements broader efforts towards achieving a sustainable and low-carbon future.
Additional readings and references:
Stek, P.E., (2023) Malaysia’s new voluntary carbon market disappoints. Eco-Business. https://www.eco-business.com/opinion/malaysias-new-voluntary-carbon-market-disappoints/
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