Introduction
Undeniably, there has been an increase on the level of awareness on how greenhouse gases ("GHG") emission has significantly affect the world every year. For companies, CSR campaigns were undertaken where pledges were made to help reduce and potentially prevent climate change by taking the initiative to reduce their GHG emission and setting the goal to achieve net zero carbon emission by 2050. Companies such as
What are Carbon Credits?
Carbon credits are certificates or permits that allow the owner to emit a certain amount of carbon dioxide or other GHG3 over a certain period time.4 1 credit permits the emission of 1-ton of carbon dioxide or its equivalent in other GHG.5 Carbon credits are tradeable and only exist in jurisdictions that are governed by a "Cap-and-Trade" system.6
Countries or regions that have already implemented the cap-and-trade system includes the
Carbon trading started as early as 1997 when countries signed the Kyoto Protocol.10 The Kyoto Protocol operationalised the
This protocol binds 37 industrialised countries and economies in transition as well as the EU.13 To date, there are 192 parties to the Kyoto Protocol including
In addition to the above, the Kyoto Protocol became more effective with the coming into force of the Paris Agreement on
Source: Reuters
How to Claim and Trade Carbon Credits
Carbon credits are a type of permit which allows the company to produce only up to a certain amount of GHG, for example, 1 carbon credit is worth the emission of 1-ton carbon dioxide or its equivalent GHG.18 The amount of carbon credits needed depends on how much GHG are emitted by the company. As a result, companies would take the initiatives to reduce the emission of GHG so that fewer carbon credits are required. Like an allowance, if the company does not use up the carbon credits, they can sell it to other companies. Alternatively, if a company needs more carbon credits, they can purchase it from others that have extra credits. Doing so is known as carbon offset where the credits are purchased to offset the company's carbon footprint.19 The above is possible via the carbon market where companies can buy and sell carbon credits20.
As Kyoto Protocol allows countries to sell spare carbon credits to countries that exceeded their targets21, carbon credit can be traded in many regional exchanges, for example, Xpansive CBL, AirCarbon Exchange and the Shanghai Environment and Energy Exchange.22 Many countries have implemented the trading system such asthe EU,
Effectiveness of Carbon Credit
Even though the main objective of carbon credit is to encourage the reduction of GHG emission and to achieve a net zero emission by 2050, there are some setbacks. Research showed that a much higher price of carbon credits is required in order to achieve the net zero emission target.24 Currently, the average price of carbon credits is below
Carbon Credits in
Another major step in achieving the net zero emission target is the launching of a voluntary carbon market ("VCM"), an initiative under the purview of the
By the end of 2022, to kick start the process, carbon credits will be sold in auction to interested buyers which would assist in the price discovery for new carbon credit products that will be listed on the VCM exchange.33 Bursa plans to offer standard carbon credit products for trading on a rules-based VCM exchange with product categories for carbon credits originating from nature-based solutions and technologies that reduce and/or remove carbon emissions.34 Bursa further explained that when a developer sets up a project, they can obtain validation and register on a certification standard and a third party will verify the results. Tradeable carbon credits will be issued with a unique serial number on the registry for each ton of GHG produced from the project. The ownership of the credits belongs to the project and the ownership on the registry changes according to the next buyer, if any.
Conclusion
Ideally, the concept carbon credits are effective to reduce GHG if it is done right. As mentioned above, there are setbacks due to the low pricing of carbon credits which may hinder the net zero emission target by 2050 and at the same time there are pros and cons to propose for higher pricing for carbon credits. Ultimately, the government plays an important role not only in regulating and enforcing the carbon trading but also educating and raising awareness on the same. A more stringent enforcement in the purchase of carbon credits pushes the country to achieve its climate targets. Like ESG,
Footnotes
Petronas , 'PETRONAS Declares Aspiration : To achieve net zero carbon emissions by 2050' (PETRONAS , n.d.) (https://www.petronas.com/sustainability/net-zero-carbon-emissions accessed26 October 2022 .- Jennifer L, 'ESG Investing with Carbon Credits - What Investors Need to Know', (Carbon Credits.com, n.d.) (https://carboncredits.com/esg-investing-with-carbon-credits-what-investors-need-to-know/) accessed
27 October 2022 . Will Kenton , 'Carbon Credits and How They Can Offset Your Carbon Footprint', (Investopedia,19 August 2022 ) (https://www.investopedia.com/terms/c/carbon_credit .asp) accessed26 October 2022 .- https://submer.com/blog/what-are-carbon-credits/.
- Ibid.
Kyle Peterdy , 'Carbon Credits', (CFI,19 October 2022 ), (https://corporatefinanceinstitute.com/resources/esg/carbon-credit/) accessed26 October 2022 .Brad Plumer , 'Around the world, cap-and-trade is still alive and kicking', (Washington Post ,5 June 2022 ) (https://www.washingtonpost.com/blogs/ezra-klein/post/around-the-world-cap-and-trade-is-still-alive-andkicking/2012/06/05/gJQACSKVGV_blog.html) accessed26 October 2022 .South Pole , 'Carbon Offsets Explained', (South Pole , n.d.), (https://www.southpole.com/carbon-offsets-explained) accessed26 October 2022 .- See https://www.worldbank.org/en/news/feature/2022/05/17/what-you-need-to-know-about-article-6-of-theparis-agreement.
- Carbon Market Solution, 'History of Emissions Trading', (Carbon Markt Solution, n.d.) (https://www.carbonmarketsolutions.com/emissions-trading/history-of-emissionstrading/) accessed
27 October 2022 . - UNFCCC, 'What is the Kyoto Protocol?', (United Nations Climate Change, n.d.), (https://unfccc.int/kyoto_protocol?gclid=Cj0KCQjwteOaBhDuARIsADBqReinIQ-0Q5mJ14Dp1w2DB0td2Q9U-K8_CfjaZZkY-P_YcUA5bjawe6saAjxpEALw_wcB) accessed
27 October 2022 . - Ibid.
- Ibid.
- Ibid.
- United Nations Climate Change, 'The Paris Agreement', (UNCC, n.d.), https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement?gclid=CjwKCAjwh4ObBhAzEiwAHzZYU4fzcPcpQuhuGP-zff2VCqHq0K-EgoArWVWRxW4AtI61C5NKZ67kEBoCYQkQAvD_BwE
- (n 10).
- Ibid.
- Investopedia, 'Carbon Credits and How They Can Offset Your Carbon Footprint', (Investopedia, n.d.), (https://www.investopedia.com/terms/c/carbon_credit.asp#:~:text=One%20credit%20permits%20the%20emission,limit%2C%20which%20is%20reduced%20periodically.) accessed
27 October 2022 . - Climate Trade, 'How to buy carbon credits to offset your footprint', (Climate Trade, n.d.), (https://climatetrade.com/how-to-buy-carbon-credits-to-offset-your-footprint/) accessed
27 October 2022 . Will Kenton , 'Carbon Credits and How They Can Offset Your Carbon Footprint', (Investopedia,19 August 2022 ), (https://www.investopedia.com/terms/c/carbon_credit.asp) accessed27 October 2022 .- United Nations Climate Change, 'Emission Trading', (UNFCCC, n.d.), (https://unfccc.int/process/the-kyotoprotocol/mechanisms/emissions-trading) accessed
27 October 2022 . Will Kenton , 'Carbon Trade: Definition, Purpose, and How Carbon Trading Works', (Investopedia,1 September 2022 ), ( https://www.investopedia.com/terms/c/carbontrade.asp) accessed27 October 2022 .- European Comission, 'International Carbon Market', (
European Commission , n.d.), (https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/internationalcarbon-market_en#:~:text=The%20number%20of%20emissions%20trading,Switzerland%20and%20the%20United%20States.) - Samson Opanda, 'Carbon Credit Pricing Chart : Updated 2022', (8 Billion Trees,
14 April 2022 ), (https://8billiontrees.com/carbon-offsets-credits/new-buyers-market-guide/carboncredit-pricing/) accessed27 October 2022 . - Ibid.
- Prerena Bhat, 'Carbon needs to cost at least
$100 /tonne now to reach net zero by 2050: Reuters poll', (Reuters,25 October 2021 ), ( https://www.reuters.com/business/cop/carbon-needs-cost-least-100tonne-now-reach-net-zero-by-2050-2021-10-25/) accessed on27 October 2022 . Yap Leng Kuen , 'How Malaysia scores on ESG', (The Star,2 August 2022 ), (https://www.thestar.com.my/business/business-news/2022/08/02/how-malaysia-scores-onesg#:~:text=MALAYSIA%20may%20be%20in%20the,relative%20to%20other%20Asean%20countries.) accessed28 October 2022 .- Fintech News Malaysia, 'Here's How Malaysia Is Stepping Up Our ESG Efforts', (
Fintech News ,6 June 2022 ), (https://fintechnews.my/31329/various/esg-malaysia/) accessed28 October 2022 . - UNDP, '
Malaysia ', (UNDP Climate Promise, n.d.), (https://climatepromise.undp.org/what-we-do/where-we-work/malaysia#:~:text=Malaysia%20increased%20its%20mitigation%20ambition,2030%20compared%20to%202005%20levels.) accessed28 October 2022 . Dr Wee -nee Chen, 'Bursa Malaysia Voluntary Carbon Market Exchange',Bursa Malaysia .Bursa Malaysia , 'Carbon Emission Trading: Bursa's Voluntary Carbon Market Exchange', (Bursa, n.d.), https://www.bursamalaysia.com/reference/insights/bursa_broadcast/sectorial_series/carbon-emissions-tradingbursas-voluntarily-carbon-market-exchange- Jennifer L (n 26).
- Jennifer L (n 26).
- Reuters, '
Malaysia's bourse to launch voluntary carbon market by year-end', (Reuters,15 August 2022 ), (https://www.reuters.com/business/malaysias-bourse-launchvoluntary-carbon-market-by-year-end-2022-08-15/) accessed28 October 2022 .
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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