Awaiting the key Voluntary Carbon Market exchange
ANOTHER key initiative by the bourse is the Voluntary Carbon Market (VCM) exchange to be launched later this year.
Abdul Wahid said this will enable companies to voluntarily purchase carbon credits from climate-friendly projects and solutions to offset their carbon emission footprint and meet their voluntary climate goals.
“It will also label products to differentiate between carbon credits sourced in Malaysia and globally,” he added.
“The VCM will act as a catalyst, encouraging investments in high-quality offsetting projects that can generate positive environmental and societal benefits,” according to Bursa Malaysia’s chief executive officer Datuk Muhamad Umar Swift.
In a statement, Bursa Malaysia said it intends to offer standardised carbon credit products for trading via a rulesbased VCM exchange.
“There will be distinct product categories for carbon credits derived from naturebased solutions and technologies that reduce or remove carbon emissions,” it explained.
“The VCM exchange will aggregate carbon credits that share similar traits and fundamentals, with vintages 2016 onwards.
“Additionally, the exchange will also label products to differentiate between carbon credits sourced in Malaysia and globally.
“By year end, a supply of carbon credits is to be sold by way of auction to interested buyers.
“The auction will enable price discovery for the new
standardised carbon credit products that will be listed on the VCM exchange.
“The clearing price from the auction will establish a baseline demand for carbon credits in Malaysia, which will provide a reference point for secondary trading for market participants.
“In addition, it will help provide clear price signals to support the development of domestic carbon credit projects.
“To achieve a lower carbon footprint over time, corporates can use these carbon credit products to voluntarily offset their existing climate impact alongside other internal carbon reduction initiatives.
Hong Leong Investment Bank Bhd (HLIB Research) said the rationale to ‘price’ carbon can be understood from the economic concept of ‘externalities’ – a cost/benefit caused by a producer that is not financially incurred/received by that producer.
By pricing carbon, monetary value can be put on the cost of carbon emission; as well as low-carbon opportunities such as clean technology, carbon capture, green mobility and others.
“If carbon is priced, its negative externalities – through crops destroyed, property damage from flooding and sea level rise, heat waves, drought, etc. – can be shifted back to those who are responsible for the emissions,” HLIB Research explained in a special note on the matter.
“Pricing carbon also encourages the undertaking of projects that reduces carbon (a positive externality) that would otherwise not be financially viable.”
The firm highlighted three main mechanisms for pricing carbon: Firstly is the VCM which allows companies to voluntarily buy and ‘retire’ carbon offsets/credits, to fulfil their voluntary emission reduction targets or to create ‘carbon neutral’ products.
“Secondly is the Emissions Trading System (ETS) whereby the regulator sets a fixed limit for the quantity of CO2 that can be emitted – called a ‘cap’ – and
issues a corresponding amount of permits to producers either directly or via auction.
“Producers that want to emit more than their allocated cap must purchase additional permits from those that have a surplus.
“Lastly is the carbon tax, in which the regulator sets a fixed limit for the amount of CO2 emission, and then taxes every ton of CO2 emitted in excess of that limit.”
HLIB Research said the three methods were not mutually exclusive but rather, complementary in nature.
For example, some countries allow carbon credits bought on a VCM to offset (partially) the carbon tax exposure.
The “creation” of carbon credits begins with a developer setting up a project that would avoid/reduce/remove carbon from the atmosphere.
Such projects could be technology based (such as RE, energy efficiency, waste disposal, industrial gasses, household devices, transport, tech-based removals, and others) or nature based (such agriculture/soil carbon, forestry, other land use, blue carbon, and others).
Once the project is up and running, the results are monitored (the extent of emission reduction) and verified by registries.
Globally, there are four major registries, namely, Verra (the largest accounting for almost 70 per cent of voluntary carbon credit issuances), Gold Standard, American Carbon Registry and Climate Action Reserve.
Once the registry has verified the project’s results, it then issues a carbon credit which is essentially a certificate with a unique serial number, representing one tonne of carbon dioxide emission avoided/ reduced/removed.
Upon issuance of the carbon credit, it is owned by the project developer who can then eventually sell it on the VCM.
The first credit issuance can be done two to three years after project commencement.
At the initial stage, Bursa intends to offer at least four types of standardised carbon credits (contracts) on its VCM exchange.
These include contracts that are either nature-based or tech-based from projects within Malaysia or globally.
Project developers that own carbon credits which satisfies the exchange’s contract specification may be onboarded and traded.
Purchasing and retiring. Most buyers of carbon credits on VCMs do so to offset their carbon emissions or to create “carbon neutral” products
– this is done by “retiring” the purchased credits.
Once the carbon credit is retired, it is marked as such and ceases to exist on the exchange (it can no longer be traded).
On the other hand, there are also some buyers that purchase carbon credits for trading purposes to benefit from potential price appreciation.
“Why would one voluntarily buy carbon credits?
“As its acronym suggests, buying carbon credits on the VCM and subsequently retiring them is purely voluntary rather than mandatory,” HLIB Research opined.