Imagine you’ve got a fitness plan and had a set amount of calories you can consume in a day. If you exceed that, you would need exercise more to offset it. Carbon credits work in a similar way. Companies and countries have a limit on the carbon they can emit. However, instead of physical offsetting, they can buy credits from those who have emitted less.
It is part of a market-based approach to controlling CO2 emissions. One credit equals one metric ton of CO2 (tCO2) that has been avoided in the atmosphere. Companies that reduce their emissions below their allowable limit can sell excess credits to others. This incentivises companies and industries to adopt greener practices such as renewable energy (RE).
While sometimes used interchangeably, carbon credits and offsets are not the same. Credits are permits that ‘allow’ a company to emit one tCO2 and are usually purchased from governments. Carbon revenue flows vertically from companies to regulators, though companies who end up with excess credits can sell them to other companies.
Offsets are traded between companies. When a company avoids or removes a unit of carbon from the atmosphere as part of its normal business activity, it can generate a carbon offset. Other companies can then purchase that carbon offset to reduce their own carbon footprint.
Another market-based tool is the Carbon Border Adjustment Mechanism (CBAM). Developed by the European Commission, the main legislative arm of the European Union (EU), CBAM is designed to address carbon leakage. Leakages occur when companies relocate production to countries with less defined environmental regulations to avoid stringent emission laws, or when EU products get replaced by more carbon-intensive imports.
CBAM taxes products entering the EU based on their carbon footprint and levels the field between EU-based manufacturers and international exporters. Businesses exporting to the EU must report the carbon emissions associated with their products. They might even have to pay a tariff if their country of operations does not have a comparable carbon pricing system. This results in higher costs for businesses.
The EU is Malaysia’s fourth-largest trading partner, accounting for 9.5% of the country’s total trade in goods in 2023, valued at over RM200 billion.
Industrial products, in particular machinery and appliances, animal and vegetable fats and oils, chemical products and optical and photographic instruments are the main exports to the EU. Malaysian companies in these sectors could face increased costs if they do not comply with strict carbon regulations.
Here are some ways CBAM affects Malaysia:
Companies exporting to the EU must now track and report their carbon emissions. If their emissions exceed EU standards, they will have to pay an additional tax which increases operational costs.
Malaysian businesses will need to invest in cleaner production processes, RE, and carbon offset programs to remain competitive in the EU market.
While CBAM poses challenges, it also presents opportunities. Companies that proactively reduce emissions can gain a competitive edge by avoiding CBAM tariffs. It can also support investments in RE, sustainable manufacturing, and carbon credit projects in Malaysia.
Malaysia’s participation in the carbon market
Malaysia has been making strides in the carbon market and supporting corporations’ participation. With vast rainforests and peatlands acting as natural carbon sinks, Malaysia has significant potential to generate carbon credits through conservation and reforestation projects.
In 2022, Bursa Malaysia launched the Bursa Carbon Exchange (BCX), a voluntary carbon market (VCM) exchange. This initiative aims to encourage corporations to voluntarily offset their emissions while driving Malaysia’s transition to a low-carbon economy.
Two years later, BCX commenced continuous trading of RE certificates (RECs). A REC represents the delivery of 1 MWh of RE to the grid, and all its associated environmental benefits over non-RE sources. BCX’s offering of Malaysian RECs is holistic, comprising solar PV, bioenergy and small-hydropower sources in addition to hydropower.
For project owners, RECs generate additional revenue for each MWh of RE they produce. For corporate buyers, they aid in meeting sustainability targets. RECs bring together key stakeholders to scale up RE generation and power sustainable economic growth.
Development of a robust VCM and BCX is a step in the right direction for Malaysia. At the 29th Conference of the Parties (COP29) to the United Nations Framework Convention on Climate Change, an agreement was reached to adopt the rules on certification and trading of carbon credits under Article 6 of the 2015 Paris Agreement. International carbon markets intend to raise additional funds for decarbonisation, especially in developing countries and countries in the Global South can generate carbon credits through climate projects which can then be purchased by other countries or companies.
Carbon credits and CBAM are reshaping the way businesses approach sustainability. While CBAM may pose challenges for Malaysian exporters, it also pushes industries toward greener, more sustainable operations.
Businesses start by monitoring their carbon emissions and exploring ways to reduce them. Energy-efficient technologies and RE are a good starting point. By being conscious of choices and embracing cleaner technologies, Malaysia can be a leader in the low-carbon economy.
The journey to a sustainable future is not just an environmental necessity—it’s an economic opportunity waiting to be seized.
You May Also Find This Helpful :
Malaysia’s Roadmap to Net Zero Carbon by 2050
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The top 5 benefits of RECs for businesses and consumers
How Commercial Solar Drives Corporate Sustainability in Malaysia
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