Wednesday, December 7

On the cusp of carbon changes

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On a corporate level, Bursa Malaysia plays a key role in driving good ESG practices and disclosures across all listed companies in Malaysia. — AFP photo

 

THESE days, the buzz around carbon is key towards climate change. Carbon dioxide emissions from fossil fuels – the main driver of climate change – are on track to rise to an all-time high at one per cent in 2022.

This was among the key higlights from scientists during the COP27 United Nations (UN) climate summit in Egypt which is being held currently.

According to figures from AFP, emissions from oil, fuelled by the continuous rebound in the aviation industry, will likely rise more than two per cent compared to last year, while emissions from coal – thought by some to have peaked in 2014 – will hit a new record.

“Global carbon dioxide emissions from all sources – including deforestation and land use – will top out at 40.6 billion tonnes, just below the record level in 2019, the first peer-reviewed projections for 2022 showed.

“Despite the wild cards of pandemic recovery and an energy crisis provoked by the war in Ukraine, the uptick in carbon pollution from burning oil, gas and coal is consistent with underlying trends, the data suggested.”

The new figures show just how dauntingly hard it will be to slash emissions fast enough to meet the Paris goal of capping global warming at 1.5 degrees Celsius above preindustrial levels.

Heating beyond that threshold, scientists warn, risks triggering dangerous tipping points in the climate system.

Barely 1.2 degrees of warming to date has unleashed a crescendo of deadly and costly extreme weather, from heat waves and drought to flooding and tropical storms made more destructive by rising seas.

To achieve the ambitious Paris target, global greenhouse emissions must drop 45 per cent by 2030, and be cut to net zero by mid-century, with any residual emissions compensated by removing CO2 from the atmosphere.

To be on track for a net-zero world, emissions would have to plummet by seven per cent annually over the next eight years.

 

How far has Malaysia come?

Malaysia’s commitment to becoming a nation with net-zero greenhouse gas emissions by 2050 would require RM350 billion to RM400 billion in cumulative investments, mainly in the energy sector, representing 0.8 per cent of the gross domestic product (GDP) every year until 2050.

This shift includes continued investment in public transportation, tax incentives to promote electric vehicles, and the commitment to phase out coal.

This net zero emission commitment is also reinforced by the Malaysia Renewable Energy Roadmap 2022-2035, developed by the Ministry of Energy and Natural Resources.

On a corporate level, Bursa Malaysia plays a key role in driving good environmental, social, and governance (ESG) practices and disclosures across all listed companies in Malaysia.

Among some of its initiatives include the introduction of the FTSE4Good Bursa Malaysia Index as far back as 2014, recognising public listed companies (PLCs) that have improved their ESG practices and disclosures.

The number of constituents in the Index has since grown from 24 to 87, based on the last review in June 2022.

“We also have the FTSE4Good Bursa Malaysia Shariah Index, which comprises 65 shariah-compliant constituents from the FTSE4Good Bursa Malaysia Index,” said Bursa Malaysia chairman Tan Sri Abdul Wahid Omar during his speech at the ‘Invest Malaysia (IMKL) Series 1: Building Resilience Amidst Volatility’ conference in September.

Following the Sustainability Reporting Framework of 2015, Abdul Wahid saw that PLCs in the country are now disclosing Sustainability Statements and Reports annually – detailing governance structures put in place and the approach to managing material sustainability matters, covering an extensive range of ESG areas.

“The updated Malaysian Code on Corporate Governance 2021 issued by the Securities Commission further provides best practices and guidance to strengthen board oversight, as well as the integration of sustainability considerations into the strategies and operations of companies.

“The case for Malaysian companies to embed ESG factors in their business strategy and operations is clear.

“The global supply chain is now more discerning and will demand sustainable products and reject sources that are unable to comply,” he said.

These new indices add to the existing portfolio in the FBM Index Series suite that the Exchange jointly issues with index partner FTSE Russell. These additions expand the Exchange’s benchmarking offerings in the ESG, low carbon and climate risk index space to cater to evolving investors’ demand.

The FBM100LC Index tracks companies in the FBM Top 100 Index based on their ESG and carbon intensity performance, thus providing an opportunity for investors to reduce their investment portfolio’s carbon footprint.

The index methodology addresses ESG and climate change risks from multiple dimensions based on clear, transparent and targeted objectives. It is constructed using the FTSE Russell Target Exposure methodology, which applies succussive tilts to capture target exposure and climate outcomes.

The index aims to achieve a maximum 30 per cent reduction in Fossil Fuel Reserves Intensity, 30 per cent reduction in Carbon Emissions Intensity, and 20 per cent uplift in ESG Ratings.

It excludes companies involved with controversial product activities such as weapons, thermal coal, extraction and electricity generation, tobacco, nuclear power, gambling, adult entertainment, and companies involved with controversies related to the UN Global Compact principles.

A shariah version of the index is available where further screening is applied on the constituents to only include shariah-compliant companies.

 

Illustration of the proposed VCM exchange. Source: Bursa Malaysia

 

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 rules-based VCM exchange.

“There will be distinct product categories for carbon credits derived from nature-based 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.”

 

Flowchart of carbon creation. Source: Bursa Malaysia

 

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.

“Why then would a company do so? With ESG gaining traction, companies are increasingly being pressured by their stakeholders to ensure they are doing their part in managing their carbon footprint. Companies that proactively demonstrate this will be able to boost their brand equity as a responsible organisation.

“On the flipside, not doing so could lead to reputational repercussions, which may in turn impact revenue.

“Failure of companies to transition to low carbon practices (or failure to at least show their commitment) would also make it difficult for them to access funding – resulting to higher cost of capital – as both lenders and shareholders are increasingly looking at sustainability criteria when providing capital.”

 

‘Far from global carbon change agreement’

TODAY, countries are still somewhat far from agreeing on technical details for running global trading in carbon offset credits after one week of talks at the COP27 United Nations (UN) climate summit held in Egypt, according to negotiators and observers, with delays threatening to blow a 2023 deadline.

According to a Reuters report, carbon offsets allow countries or companies to pay others to cut greenhouse gas emissions to offset their own. While companies are already trading carbon offset credits in private markets, the so-called Article 6 of the Paris Agreement would fix rules enabling countries to partly achieve their national climate targets by buying such credits.

The hope is that international rules backed by the entire world could attract billions of dollars into carbon-cutting projects, but countries have struggled for years to agree on what the rules should look like, what projects should be eligible, and how to ensure they are having a real-world impact.

Countries applauded each other at last year’s climate summit in Glasgow for agreeing on broad principles governing carbon markets, breaking six years of stalemate. But that deal pushed trickier technical work to subsequent summits including the current COP27 meeting in Sharm El-Sheikh.

Already at COP27, countries have kicked to 2023 a decision on the rules for which types of projects can produce credits – from solar farms, to projects to avoid deforestation.

The Reuters article say countries will need to decide on those methodologies next year or risk running into a 2023 deadline when carbon-cutting projects registered under old UN rules have to apply to be part of the new system.

Accordinf to carbon markets expert Pedro Martins Barata, applying to join the new system without knowing what rules will govern it would be difficult.

This comment comes as drafts of the rules being discussed are still riddled with brackets that indicate which sections have yet to be agreed.

“Glasgow was a real breakthrough…it doesn’t send a great signal if all the sudden they get caught up on the technical issues,” said David Burns, a policy expert and negotiations observer for the non-profit World Resources Institute.

Voluntary carbon offset markets have struggled to gain trust for years. Campaigners including Greenpeace have criticised offsets as a figleaf for polluters who want to avoid cutting emissions.

“The door is still open for countries to meet their climate targets with accounting tricks rather than real action,” said Gilles Dufrasne, an expert and observer at the talks at non-profit Carbon Market Watch.

But the nearly 200 countries at the UN summit could yet reach a decision on rules for country-to-country offset trades.

Key sticking points also include whether there should be a centralized body where trades are reported, a system the European Union supports. The United States prefers a more diffuse, decentralised system.

As countries struggle to agree, private markets with no global standards are moving forward.

Credits worth US$2 billion traded in 2021 – almost four times the previous year – with around 500 million credits representing 500 million tonnes of CO2 equivalent changing hands, according to Ecosystem Marketplace.

Private initiatives like the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Carbon Credit Quality Initiative (CCQI) have drafted guidance on what they see as a high-quality carbon offset.

But debates continue on issues such as whether a credit should also take into account biodiversity and human rights.

A consensus at the United Nations would send a strong signal to private markets on what their standards should be, said Barata, who also co-chairs an expert panel for ICVCM.

“At COP27, we need to give companies and countries a clear process for how to implement carbon markets in a way that prioritises transparency and social and environmental integrity,” he said.

 

KPMG saw that in the Asia Pacific region, many governments are already pushing for increased renewables to reduce greenhouse gas emissions and drive energy transformation. — AFP photo

 

KPMG: Decarbonisation through renewable energy

AS more and more countries respond to climate change and announce their commitments to Net Zero, supporting mechanisms and measures continue to bloom. Renewable energy, one of the major components to achieve decarbonisation targets, has started to become mainstream worldwide.

Global accounting firm KPMG saw that in the Asia Pacific region, many governments are already pushing for increased renewables to reduce greenhouse gas emissions and drive energy transformation, resulting in a more friendly environment for the development of the renewable industry.

“In addition to the Net Zero targets at a national level, renewable electricity procurement at the corporate level is a vital action to take for walking the talk on commitments of RE1001 and science-based targets,” commented Niven Huang, ESG leader for KPMG Asia Pacific and KPMG in Taiwan in a special report on the matter.

“The need for corporate renewable power in the Asia Pacific region is growing rapidly due to the global supply chain requirements and local carbon reduction regulations.

“However, many obstacles are yet to be overcome in order to create a robust demand and supply market.

“The impact of climate change is beyond our imagination. The cost of inaction is even higher. Asia Pacific is one of the most vulnerable regions to climate change on this planet.”

KPMG noted that Corporate Power Purchase Agreement (CPPA) schemes offer an effective way to help decarbonise countries’ power consumption not only by increasing corporate investment in the renewable energy sector, but also by providing large power consumers an effective tool to meet their sustainability commitments.

With dedicated commitment and advocacy from corporations, CPPA has the potential to accelerate energy transition across the Asia Pacific region, said KPMG global infrastructure power sector lead Steven Chen, who focuses on current CPPA market in Asia Pacific.

“However, every market in this region has varying levels of maturity in electricity market liberalisation and regulatory framework, which makes green energy procurement even more challenging,” he explained.

“According to the RE100 annual report in 2020, 42 per cent of its new members are from the Asia Pacific region.Corporations are looking for ways to power their regional operations, supply chains and product life cycle with clean energy.

“They have also identified Asia Pacific region markets such as China, Japan, South Korea, Taiwan, Singapore and Indonesia as the most challenging markets for achieving 100 per cent renewable electricity.”

The report highlighted that the CPPA market in Asia Pacific is not fully developed but showing significant potential for growth.

As of 2020, 12 per cent of cumulative CPPA volume was originated in Asia Pacific, led by India and Australia.

The Asia Pacific market has been a challenging market for businesses to source renewable electricity due to limited availability, regulatory complexity and high costs, but it also offers the biggest opportunities for clean energy investment and growth.

Evolving regulatory framework to implement changes to the CPPA framework.

“Taiwan, South Korea, the Philippines and Vietnam now stand out for regulatory reforms to enable CPPAs,” the report said. “In Taiwan, the liberalisation of the renewable energy market allows corporations to purchase green energy from the generators. South Korea opened its renewable energy market to third-party PPAs this year with state-owned utility KEPCO as an intermediary.

“Vietnam is piloting synthetic direct PPA mechanisms for renewable energy projects at a scale from 400MW to 1,000MW to be implemented from 2021 to 2023.

“In the Philippines, the implementation of a green energy option program offers choice for large power users to source their own electricity from renewables.

The phase-out of generous feed-in-tariff (FiT) scheme is expected to increase the appetite for CPPAs.”

In many Asian markets such as Japan and Vietnam, the report said that renewable energy projects have benefited from high FiT, making CPPA a less attractive option then.

However, as FiT rate starts to decline, markets are shifting to auction mechanism. This has resulted in CPPA becoming an alternative for developers to secure fixed.

“Economics and net-metering are driving the rooftop solar installation and increasing adoption of on-site PPA,” it added.

“With the falling costs, rooftop solar can provide cheap and clean power for the corporate buyers. In some markets, renewable energy developers are able to offer 15-30 per cent discount to the grid tariff for commercial and industrial users. Enabling policy such as netmetering also provides fertile ground for rooftop solar growth.”

Meanwhile, KPMG also saw growing company interest in CPPA across Asia with the intention of achieving their sustainability pledge.

“The RE100 membership continues to grow and diversify – with 42 per cent of new members coming from the Asia Pacific region. Multinational corporations with sustainability commitments are looking into greening their Asian supply chain.

“In 2019, Google signed its first solar PPA in Taiwan from a 10MW PV installation to power its data center. In Singapore, technological firms such as Microsoft and Facebook are actively procuring renewable energy, ranging from 50MW to 100MW.

“Asia Pacific is progressing towards a low-carbon energy future. Many countries have set decarbonisation targets to reduce greenhouse gas emissions and transition from fossil fuel to low carbon alternatives. Energy suppliers and generators are expected to continue to develop renewable energy products and services that are suitable for all types of businesses.

“One of the drivers for CPPA is the government push for increased renewable energy. Though the power generation mix of most Asian countries is dominated by fossil fuel, the deployment of renewable energy has been accelerated in some jurisdictions through a series of policy mechanisms, such as feedin-tariff, auction, and renewable energy certificates.

“Many Asian markets operate under the regulated power market in which the state owned utilities have monopoly over the power supply. However, Taiwan, South Korea, the Philippines and Vietnam have carried out regulatory reforms to enable off-site PPAs.

“In terms of procurement options, onsite solar PPAs are the most common form and continue to grow due to the competitiveness against grid supply.

“However, there is potential for increasing direct PPA or virtual PPA as the market liberalises.”