Malaysia's Voluntary Carbon Market is about to go live

Background

Back in May 2022, Malaysia's stock exchange (Bursa Malaysia) announced that it was eyeing to develop the voluntary carbon market (VCM) ecosystem in Malaysia. Before this announcement, Bursa Malaysia (BM) had signed an MOU with Verra, a US-based organization that has been managing the world's leading voluntary carbon market program, the Verified Carbon Standard (VCS) Program, since 2007.

As per the latest update released by the Ministry of Finance's (MOF) deputy secretary general Datuk Johan Mahmood Merican on 30 Nov, the market is about to go live on 09 Dec 2022.

The VCM will be maintained and operated by BM. The Ministry of Finance and the Ministry of Environment and Water will serve the role of regulator, especially in introducing new carbon credits into the market. Based on a collection of information, the market will be implemented in the mechanism of auction. The carbon credits generated from the high-quality offsetting projects, such as afforestation or shifting to less carbon-intensive fuels, will be introduced on the VCM platform for buyers to bid.

Benefits

This is a significant step ahead for Malaysia to pave the way towards its target committed in the Paris Agreement, countrywide carbon neutral by 2050. And the market will account for the following benefits.

• To spark the awareness of climate change and greenhouse gas emission reduction among people and industries

• To give enterprises the chance to discover their certified ESG contributions to the society

• To discover the price of carbon emission reduction

• To encourage investment in carbon emission reduction projects

• To facilitate more green financing for carbon reduction projects.

Challenge

While still in its infancy, more details about the VCM need clarifications. The concerns and challenges that people have about the existing VCMs are also applicable to the Malaysian one. What we can see so far includes:

• Unlike compliance carbon market, this VCM is only for trading the voluntary carbon reduction which might not drive hard enough for the enterprises and institutes to think over how their plan on carbon neutral shall be aligned with the national target.

• As the details of the MOU between BM and Verra are not publicly available, the only thing we are sure is that every unit of voluntary carbon credit shall be generated and verified following Verra’s VCS (Verified Carbon Standard). And highly likely, the credits to be traded on BM’s VCM need to be registered with Verra in advance. However, it’s still unknown if the credit can be further sold to the buyers on other VCS following markets.

• There are a few registries (sometimes also called standards) worldwide for voluntary carbon reduction crediting, like Verra and Gold Standard both of which operate internationally, and some other smaller ones and regional ones which only cover certain industries or countries/regions. But there is still no such a mechanism to enable the credits from the different registries to be convertible or made compatible. In other words, the credits registered under one standard can’t be transferred to another by default. Interestingly, potential credit suppliers are allowed by BM to indicate under which standard the credits are registered while filling out the application form. We still need to understand whether and how BM is going to allow for the credits under the various standards. The figure hereunder gives a glimpse about the market shares in terms of voluntary carbon crediting.

• Verra requires the credits under its VCS have to be verified and validated by a Verification and Validation Body (VVB) that is approved by Verra. Nevertheless, the listed VVB’s are not clear to be either available in Malaysia or geographically qualified to carry out the verification and validation work within Malaysia. Therefore, a possible situation is that carbon reduction projects might not be verified in a timely manner because of the lack of VVB.

• It's unclear what types of projects that the credits are created from can be transacted on the market. To the best of our knowledge, the credts are only categorized as nature-based and technology-applied.

• As of now, even on the verge of VCM launching, we still don’t know how frequently the auction will be held.

What next

Malaysia still has a great potential to enlarge its VCM by trading volume. As of Aug 2022, only 13 VCS projects with around 1 million mt of annual emissions reductions are registered or in development in Malaysia. In addition, other policies in parallel should be considered in conjunction with the VCM to help Malaysia reach its carbon neutral target by the mid of this century. These policies may include but not limited to the setup of compliance carbon market with cap-and-trade scheme, stimulating to purchase electric vehicles and private investment on EV charging network, gradually decreasing the subsidy for the fossil fuel, initiating the deregulated electricity market and allowing the renewable electricity and its associated certificate (REC) to be transacted directly between generators and consumers.

Finally, BM has opened the portals soliciting registrations by the interested buyers and suppliers.