The fundamental idea behind a carbon policy is to price in the cost of emitting carbon dioxide emissions and other greenhouse gases to reflect their environmental impact, says Kok.
PETALING JAYA: The topic of a national carbon policy is gaining momentum with Natural Resources, Environment and Climate Change Minister Nik Nazmi Nik Ahmad saying it is expected to be in place this year.
Among others, it will provide guidance on carbon trading activities at state levels as matters like land comes under state jurisdiction.
But why does the country need one and what do countries’ carbon trading or markets entail?
Recall that as one of the signatories of the Paris Accord, Malaysia has pledged to an unconditional reduction of greenhouse gas emissions by 45% by 2030 versus 2005 levels.
It intends to achieve carbon neutrality by 2050, and agreed to stop building new coal-fired power plants – which has the highest carbon footprint of all energy types.
But to realise this, national targets must flow down so that strategies are aligned at both national and state levels.
“A carbon policy can translate the climate targets to actions across state and local councils,” says an industry player.
For example, Malaysia had pledged to retain 50% of its land mass as forests.
However, state governments in Sabah and Sarawak hold authority over land usage and environmental protection.
Ernst & Young Consulting Sdn Bhd Malaysia Climate Change and Sustainability Services leader Arina Kok says the fundamental idea behind a carbon policy is to price in the cost of emitting carbon dioxide emissions (CO2) and other greenhouse gases to reflect their environmental impact.
She points out that in July 2021, Malaysia had revised its Nationally Determined Contribution (a climate action plan to cut emissions) to expand the adaptation component with particular focus on protecting its biodiversity and mainstreaming climate resilience into urban planning.
“By implementing state-level carbon trading, the states aim to incentivise emission reductions, promote cleaner technologies, and achieve their climate and environmental goals.” Kok tells StarBiz. According to her, this will provide flexibility for entities to choose how they reduce emissions and can drive investment into cleaner or low-carbon alternatives.
In the race against climate change, carbon pricing is gaining momentum. The idea is to shift the burden for the “damage” back to those who are responsible for it, and who can reduce it.
Towards this end, countries have adopted diverse approaches tailored to their specific landscapes and demographics. This includes a carbon compliance market (CCM), voluntary carbon market or hybrid systems.
Currently, Malaysia does not have a CCM as the government does not intend to impose a carbon tax in the near future. In Dec 2022, the Bursa Carbon Exchange was launched by Bursa Malaysia to facilitate corporations in trading voluntary carbon credits.
The country is also exploring the implementation of a domestic emissions trading scheme, which works by way of exchange of permits for emission units where those that exceed their emission limits are required to buy permits from those that have emitted less.
According to one analyst, the scheme, in theory, creates an economic incentive for emission reductions to occur at the point of least cost.
However, if the scheme is too restrictive, he says it may encourage the offshoring of industries to jurisdictions with fewer constraints – a phenomenon known as “carbon leakage”, and, as such, actually fail to reduce emissions.
According to Kok, the advisory firm has observed an increasing request for carbon offsets as more companies set their climate change commitments.
“However, there is a need to provide more certainty around the quality of carbon credits, especially in delivering measurable and additional emission reduction efforts,” she adds.
Recognising the role of carbon offsets as the last alternative to emissions reduction, she notes that Singapore will only allow companies to use high-quality international carbon credits to offset up to 5% of their taxable emissions starting 2024.
“A lesson learnt from Singapore is that clear milestones are in place to prepare businesses for carbon prices, starting with S$5 (RM17) per tonne of carbon dioxide equivalent (tCO2e) for the first five years from 2019 to 2023. This will gradually be increased over time with the view to reach S$50 to S$80 (RM171 to RM274) by 2030,” says Kok.
Singapore carbon tax is levied on facilities that directly emit at least 25,000 tCO2e of GHG emissions, covering the manufacturing, power, waste, and water sectors.
Within South-East Asia, Indonesia has pledged to implement carbon tax by 2025, while the Philippines, Thailand and Vietnam are said to be considering it.
One development to be watched is the implementation of the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM), which will impact businesses importing goods into the EU.
Ahead of this, Taiwan has prepared for a carbon pricing plan that will come into effect early 2024, covering various sectors such as energy, manufacturing, transport, residential and commercial buildings and agriculture.
Similarly, Kok says Malaysian exports must also start preparing their operations to be subjected to EU’s CBAM.
“Malaysia has diverse sectors contributing to economic growth such agriculture, industrial and services.
“The EU CBAM and any upcoming carbon tax regulation imposed by other trade-partner jurisdictions is just one of the several transition risks that Malaysian businesses need to start managing to remain relevant and competitive, as the global economy embarks on a decarbonisation strategy,” Kok adds.
