Carbon Trading: How It Works and Its Impact on Malaysia’s Green Future

Previously we discussed about the carbon pricing and carbon credits, what will be the next topic we should take note? We knew that Bursa Carbon Exchange (BCX) is going to launch the first auction of Malaysia-sourced carbon credits. Is carbon going to become something we can invest in such as the gold, stocks and cryptocurrencies?

Climate change demands a united global front, carbon trading systems are emerging as a powerful weapon in this fight. These systems create a market for carbon emissions, incentivizing companies to minimize their footprint and accelerate the transition to a sustainable future. Let’s embark on a deeper exploration of the global carbon trading landscape, focusing on the established EU Emissions Trading System (ETS) and the burgeoning China ETS, before examining how Malaysia can prepare for this evolving marketplace.

Table of Contents

What is an Emissions Trading System?

An emissions trading system sets a limit on the total amount of greenhouse gas emissions that can be released within a specific region or industry. This limit is divided into tradable allowances, essentially permits to emit a certain amount of carbon dioxide equivalent. Companies that can reduce their emissions below their allocated allowances can sell their surplus allowances to companies that struggle to meet theirs. This market-based approach fosters innovation in clean technologies – companies have a strong financial incentive to reduce their emissions to avoid buying additional allowances.

The EU Emissions Trading System (EU ETS)

The EU ETS, launched in 2005, is the world’s first emissions trading system. The EU ETS uses a cap-and-trade approach. A cap is set on the total amount of emissions allowed, and companies receive tradable allowances. Those exceeding their limit must purchase allowances from companies that emit less. EU ETS covers a significant portion of the EU’s greenhouse gas emissions, including power plants, industrial facilities, and even aviation. The cap is reduced annually in line with the EU’s climate target, ensuring that emissions decrease overtime. The EU ETS has been instrumental in driving down emissions across the EU, demonstrating its effectiveness as a tool for environmental progress.

Click here to know more about EU ETS.

China’s National Emissions Trading Scheme (ETS)

Launched in 2021, China’s National ETS is the world’s largest ETS currently in terms of covered emissions, estimated to cover around 5 billion tCO2 and accounting for over 40% of the country’s CO2 emissions. China’s ETS initially focused on the power generation sector, a major contributor to the country’s emissions. However, it’s expected to expand to other key industries like steel, cement, and petrochemicals in the coming years. While still in its early stages, China’s ETS is a significant development and bears close observation as it matures.

Click here to know more about China’s National ETS.

Beyond the Giants: A Flourishing Global Landscape

The world of carbon trading extends far beyond these two prominent systems. Inspired by the success of the EU ETS, numerous other countries and regions have implemented or are developing their own carbon trading schemes. Here are a few noteworthy examples:

  • California Cap-and-Trade Program: This program covers a significant portion of California’s greenhouse gas emissions, including power plants, large industrial facilities, and fuel distributors. A well-established system, it serves as a model for other regions exploring carbon trading.
  • New Zealand Emissions Trading Scheme (NZ ETS): This system applies to the forestry and energy and waste sectors.
  • South Korea Emissions Trading Scheme (KETS): Launched in 2015, KETS is East Asia’s first nationwide, mandatory ETS. It covers around 89% of Korea’s total greenhouse gas emissions and help the country in its objective to become carbon neutral by 2050.
Malaysia’s Preparation for Emissions Trading

While Malaysia hasn’t implemented a mandatory Emissions Trading Scheme (ETS) yet, they’ve taken proactive steps to prepare for it:

  • Voluntary Carbon Market Exchange: Launched in December 2022, the BCX allows companies to voluntarily offset their carbon footprint through trading high-quality carbon credits. This provides businesses with experience in carbon markets and helps them develop strategies for a mandatory ETS.
  • Engagement with Stakeholders: The Malaysian government is actively engaging with state governments and industry players to ensure alignment with upcoming regulations. This open communication allows businesses to anticipate and prepare for the ETS.
Preparing Malaysian Businesses for ETS

Here’s what Malaysian business owners can do to be prepared for a potential mandatory ETS:

  • Measure and Track Emissions: Start by calculating your company’s current carbon footprint. This will establish a baseline for reduction efforts and future compliance needs.
  • Invest in Efficiency: Explore ways to reduce emissions through operational changes and energy-efficient technologies. This proactive approach can minimize the need for carbon credits later.
  • Explore Carbon Offsetting Options: Familiarize yourself with the BCX platform and consider incorporating voluntary carbon offsetting into your sustainability strategy. This can give you a head start in understanding the carbon credit market.

By taking these steps, Malaysian businesses can be well-positioned to navigate the future implementation of an ETS and contribute to the country’s climate goals.

 

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Author
Lee Shu Hong
Lee Shu Hong

ESG and Sustainability Consultant

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