The regulation of the Islamic carbon market is an important part of capital market growth that requires next-focus action by the government. Financial experts are well aware of the complexity of reconstruction from conventional products according to Shariah rules, as well as designing new products to suit the carbon market structure under Islamic finance. NORITA JA’AFAR explores.
These complexities involve an entire spectrum of matters to consider, from the data profile of the carbon owners and its organization, monitoring of capital adequacy, risk management, over- and under-estimation of the carbon credits and the future projection of the carbon credits to the credits tradeable structure. Nevertheless, having seen how Malaysia has had a strong footprint in the Islamic Shariah space globally, certainly the eventual establishment of a Shariah board supporting independent regulators and experts in environmental science and economics will be just a matter of time.
Effective collaboration between key government agencies, stakeholders, industries and international bodies is key to successfully achieve Malaysia’s commitment to reduce the country’s greenhouse gas (GHG) emissions measured against the GDP to below 45% of 2005 levels by 2030. This was updated on Malaysia’s intended Nationally Determined Contribution (NDC) committed to the United Nations Framework for Climate Change in August 2021.
This is the reason for the cooperation between the Ministry of Environment and Water, Ministry of Finance and Bursa Malaysia. Malaysia also reported in 2016 the GHG avoidance achieved by the forestry sector (20,307.5 Gg CO2 eq), followed far behind by the energy sector (9266.3 Gg CO2 eq) and the waste sector (6315.6 Gg CO2 eq).
CO2 eq (equivalent) is a measurement used to compare emissions based on their global warming potential. Notably, the mitigation actions from land use, land-use change and forestry (LULUCF) were from reducing deforestation, sustainable management of forest and conservation of carbon stocks.
Therefore, the carbon offset industry being organized by the public sector via the voluntary carbon market (VCM) cannot come at a better time, with special focus to be given to LULUCF, agriculture and waste.
The VCM is a government-enabled platform that enables Malaysian carbon emitters and absorbers to trade carbon credits with clear international standards and protocols; and to adopt, verify, register and commercialize via the Domestic Emission Trading System. Bursa Malaysia’s latest announcement on its MoU collaboration with global VCM standards and certification body VERRA is an indication that Malaysia will not reinvent the wheel by establishing its own framework.
However, the VCM is not useful without the involvement of the private sector, which needs to prepare and organize themselves. This is the reason Kitaran Tabah was founded which is Malaysia’s first homegrown carbon offset service provider. Transforming Malaysia’s LULUCF into global economic assets is to prepare owners and stewards of LULUCF to generate significant longterm-revenue from the massive global carbon credits market. This revenue is based on metric tons of carbon dioxide (CO2) absorbed by the asset.
Local project developers have taken a leap in carbon offsets by undertaking the first project in blue carbon, although the challenge in Malaysia is most landowners do not have the scale in size for a carbon offset program. This also includes the adoption of the aggregation model for LULUCF and other plantation projects in order to
achieve scalability.
Monetization of the assets is achieved by leveraging on the portfolio of partners who will pay carbon offsets prepared by experts. Each metric ton of CO2 equates to one carbon credit. These carbon credits are a valuable resource for carbon emitters either purchased directly or via retailers, brokers or financial institutions.
Carbon offsets income has multiple benefits, especially for owners of economic assets. For example, revenue from one client will ensure long-term conservation of their mangrove forest. Stewards of these assets, in particular the community and non-governmental organizations (NGOs), will also benefit and show better commitment in conservation with the flow of income stream. Carbon credits secured represent a new, long-term revenue stream for smallholders and a fresh round of capital required for further investment.
However, the heart of carbon offsets is not about making money on carbon credits. The major benefits of making carbon offsets mainstream in Malaysia will go beyond climate change. There will be improvement of air quality, protection of biosphere and business sustainability that provides long-term environmental, economic and social benefits.
Institutionalizing carbon offsets: Ecosystems for ecosystems
Leveraging on the VCM, the project developer and ecosystem partners create a binding force as below which enables Malaysia to use carbon offsets as a new major economic asset:
- Verified carbon standard.
- Global and local community of carbon credit buyers from industries such as energy, construction, transportation, and manufacturing.
- Forest scientific community to substantiate carbon sequestration.
- Technology in hardware, software, and data needed to implement and sustain conversion activities of the environmental asset.
- Carbon retailers, brokers, online exchanges and related financial institutions.
Make it happen now
The global market is ready and waiting for Malaysia and its stakeholders to enter this new VCM, part of Malaysia’s commitment in the NDC with an implementation time frame from 2021 to 2030. With the VCM, Malaysia is on the cusp of creating a new green economy and asset class.
Some teething issues are expected, which are experienced by other countries which have undertaken the same journey. But this can be mitigated by sticking to recognized international standards, avoiding shortcuts and keeping things simple and transparent as promoted and implemented by project developers.
Combined with technology-enabled sectors such as renewable energy and carbon capture, land and project owners as well as their ecosystem
partners stand to deliver significant multiple benefits to Malaysian investors, enterprises and households for generations to come. With carbon credit as an alternative asset class, it is only a matter of time that the Islamic carbon market will be a major driver in moving the needle for the VCM in Malaysia.