Malaysia’s carbon credit challenge: State governments hold key

Malaysia, renowned for its lush rainforests and rich ecosystems and ranked the 12th most megadiverse country in the world, stands at a crossroads where environmental conservation meets economic opportunity.

With the escalating global climate crisis, the role of forests in carbon sequestration has gained unprecedented significance. Malaysia’s expansive forest cover presents a substantial opportunity for generating carbon credits (estimated to be in the range of US$1 billion), yet the journey toward realising this potential is fraught with complexities, primarily stemming from an intricate jurisdictional landscape.

Malaysia’s forest cover — based on the official registry of land use — stood at approximately 55.3 per cent of its land area in 2020, representing a valuable carbon sink with immense potential for climate mitigation efforts. The Malaysian economy’s heavy dependence on palm oil poses one set of challenges. The expansion of oil palm plantations has been a significant driver of deforestation and forest degradation in Malaysia; policymakers and stakeholders must balance the economic interests of the palm oil sector and forest conservation imperatives.

At the heart of Malaysia’s forestry sector also lies a jurisdictional quagmire, wherein forest management is predominantly governed by state authorities rather than federal oversight. Historically, Peninsular Malaysia and Borneo (Sabah and Sarawak) have Indigenous communities with deep connections to the land but governments have permitted extensive growth of the logging industry with regional differences in practices, regulations, and environmental considerations. This decentralisation of power poses a hurdle to the effective management and regulation of forests, particularly concerning carbon credit initiatives. Yet, despite this jurisdictional challenge, Malaysia is expected to launch its first local nature-based carbon credit through the Kuamut Rainforest Conservation Project in Sabah, a project which started a little over six years ago.

In Malaysia, state authorities often rely heavily on logging as a source of income, presenting a significant barrier to prioritising the protection or regeneration of forests conducive to carbon credit markets. The allure of immediate economic gains from timber extraction often overshadows the long-term benefits of preventing deforestation or reforesting previously logged areas. Consequently, allocating resources towards such initiatives becomes challenging, as it requires diverting attention from a lucrative industry deeply entrenched in local economies. Furthermore, Malaysia lacks a carbon tax system to set the price of carbon. The current dismal pricing of nature-based credits, hovering around US$1.50 — a huge drop from US$8-9 in 2019, largely due to criticism of the credibility and efficacy of carbon credits — undermines the investment incentive for state authorities, as the potential returns may not offset the revenue generated from logging activities. Thus, the convergence of economic dependency on logging and the undervaluation of nature-based credits creates a formidable barrier to fostering meaningful conservation, let alone reforestation, necessary for carbon credit generation in Malaysia.

The allure of immediate economic gains from timber extraction often overshadows the long-term benefits of preventing deforestation or reforesting previously logged areas.

Serious challenges also stem from the lack of uniformity in forest management practices across Malaysian states. Varying regulations, enforcement capabilities, and conservation priorities contribute to inconsistencies in carbon sequestration efforts. Without consistent protocols for measuring carbon stocks and emissions reductions from forests, the credibility and transparency of Malaysia’s carbon credit projects will continue to be called into question as investors and international stakeholders demand verifiable data to ensure the legitimacy of carbon offsets.

Moreover, issues of land tenure and indigenous rights complicate the landscape of carbon credit generation in Malaysian forests. Indigenous communities, often stewards of the land for generations, hold customary rights over vast forested areas. Any carbon credit initiatives must prioritise the inclusion and empowerment of these communities, respecting their land rights and traditional knowledge. Failure to do so not only risks exacerbating socio-environmental injustices but also undermines the long-term sustainability of carbon sequestration efforts. In response to this, verification schemes such as Verra’s Climate Community & Biodiversity Standards continue to advocate for thoughtful projects on sustainable land management to help Indigenous communities benefit from new jobs, secure tenures to land and protect traditional cultures.

Despite these challenges, Malaysia does possess inherent strengths that can be harnessed to unlock the carbon credit potential of its forestry sector. Malaysia has demonstrated a commitment to sustainable forest management through initiatives such as the Malaysian Timber Certification Scheme (MTCS), the Heart of Borneo (HoB) conservation initiative and the recent set up of the Malaysia Forest Fund (MFF) with a mandate to explore the establishment of a Forestry Carbon Offset Protocol.

Malaysia should adopt a multifaceted approach to navigate the complexities of jurisdictional governance and unlock the full potential of its forestry sector for carbon credit generation. First, there is an urgent need for enhanced coordination and collaboration between state and federal authorities to harmonise forest management policies and regulatory frameworks. This includes the development of standardised methodologies for carbon accounting and monitoring, ensuring transparency and accountability across all forestry carbon credit projects.

Additionally, meaningful engagement with Indigenous communities is essential to ensure the equitable distribution of benefits and protection of customary land rights. Empowering Indigenous peoples as key stakeholders in carbon credit initiatives not only enhances the social integrity of projects but also strengthens their resilience to external pressures.

Malaysia stands at a critical juncture where the convergence of environmental conservation and economic opportunity presents a pathway toward sustainable development. However, the realisation of Malaysia’s carbon credit potential in forestry hinges upon overcoming the jurisdictional complexities that pervade the sector. Through concerted efforts to harmonise governance, enhance transparency, and prioritise social inclusivity, Malaysia can emerge as a leader in harnessing the climate mitigation potential of its vast forested landscapes. The enactment of the much-anticipated climate change law in Malaysia, which is expected to cover issues around deforestation and potentially the governance of carbon credits, would also help streamline climate change mitigation efforts.

Renard Siew is a sustainability and climate change specialist. He serves as a supervisor at Cambridge Institute of Sustainability Leadership (CISL) and adjunct professor of climate change and sustainability at UNITAR. He is head of sustainability for Yinson, an energy infrastructure and services company participating in the Bursa Carbon Exchange.

This article was first published on Fulcrum, ISEAS – Yusof Ishak Institute’s blogsite.

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