Malaysia's fragmented state policies imperil nature-based carbon project development

Malaysia, despite its abundant forest resources, has seen sluggish progress in developing domestic nature-based carbon projects, with market participants expressing concerns that fragmented state policies have put the country's nature-based projects at significant regulatory and reputational risks.

Malaysia, a federation, consists of 11 western states on the Malay Peninsula and two eastern ones on the island of Borneo, namely Sabah and Sarawak. The federal government develops national economic plans and legislative frameworks, but for nature-based projects, state governments set local rules on land administration, forest management, and agriculture.

The federal government has been publishing some non-legally binding, high-level guidelines for the development of the voluntary carbon market since 2021, defining types of projects that can be developed in the country, project stakeholders involved, and requirements for project implementation and reporting of emission reductions.

West states, like Terengganu, Johor and Kelantan, plan to construct policies following the federal government's framework, while Sarawak and Sabah on the east have proactively formulated their own laws to accelerate project development, according to the VCM Handbook published in October 2023 by Bursa Malaysia, which hosts the national carbon exchange.

The proactive moves by the Sarawak and Sabah governments have effectively expedited nature-based project development on their territories. Notably, Sabah's Kuamut forest conservation project registered with Verra, has started carbon crediting. Meanwhile, Sarawak's Marudi forest conservation project, also registered with Verra, has been marked as "under development."

However, their moves also caused policy inconsistencies across the country, in terms of the requirements to be met for getting a carbon license, the conditions for profit sharing between project stakeholders and governments, as well as the measures to protect indigenous communities. Such inconsistencies, if not managed well, could impede carbon credit delivery and sabotage the reputation of buyers.

Efficiency vs. reliability

Looking at the two pilot states, Sarawak has come up with relatively detailed regulations, but the sophisticated rules also imposed greater challenges and incurred longer time for project development. Sabah's simpler regulations have enabled projects to be fast-tracked, but they left some grey areas that could trigger disputes, local project stakeholders told S&P Global Commodity Insights.

Among all Malaysian states, Sarawak is considered the most advanced in establishing carbon policies, according to the VCM handbook. Project proponents need to first obtain a carbon study permit to conduct a feasibility study and then submit detailed plans for project implementation. After that, they need to apply for another carbon license to be allowed to start carbon trading.

Sarawak has listed fees and royalties to be charged and required project proponents to pay a certain percentage of carbon trading revenue back to the government, according to local project developers. They added that some carbon credits from their projects should be reserved, instead of being traded, for meeting the state's climate targets.

An executive of SaraCarbon, whose Marudi project is Sarawak's first in line for Verra certification, told Commodity Insights that they are still waiting for the carbon license to be granted. The executive said that, despite the waiting time, it is good to have detailed rules to follow, which effectively prevent disputes.

In contrast, the Sabah government has updated local laws to recognize "carbon stock" as a product of local forests. Project proponents who plan to initiate a carbon project must obtain approvals from the Sabah Climate Change Action Council, according to the VCM handbook.

The approvals for existing projects are granted in a case-by-case manner, but SCAC will introduce overarching regulation in the near future to clearly define the conditions for granting an approval, a local project developer said, adding that the Sabah government will also sort out fees, royalties, and profit-sharing terms in the upcoming regulation.

Having projects in place before sorting out all regulations could be a problem, as the amount of tradable carbon credits and the returns of investments are uncertain, the developer highlighted.

Indigenous communities

How to mitigate negative impacts on indigenous communities is another tricky issue that must be resolved for Malaysia's carbon market to scale up, especially in the east. Indigenous groups accounted for more than half of the populations in Sarawak and Sabah, with many of them living within the forest reserves.

There have already been carbon projects and agreements accused of violating the rights of Malaysia's indigenous people.

In December 2023, the UN Human Rights Council wrote to the Sabah government, questioning that an agreement between the state government and Singapore-based company Hoch Standard was signed in secret without obtaining the consent of indigenous communities. The agreement transferred the carbon rights from 2 million hectares of local forests to the Singapore-based company.

On May 10, 2024, Sarawak's non-government organization Save Rivers released a report that bashed timber giant Shin Yang's Jalin Forest Carbon Management project, which is currently under development. The project proponents are accused of forcing Penan communities to sign documents and forbidding them to enter their forests.

"Under the current laws, carbon projects will repeat the same old story again in Sarawak; timber companies profiting from Indigenous land, while the communities remain empty handed," Celine Lim, Managing Director of SAVE Rivers, said in the report.

According to national-level guidelines, carbon project proponents must go through stakeholder consultations with indigenous peoples affected by the respective projects.

During a webinar held in May, Permian Malaysia, a proponent of Sabah's pilot Kuamut project, said their project areas are solely for commercial use, adding that there are no indigenous groups living within the area. The SaraCarbon executive also told Commodity Insights that when developing the Marudi project, they circumvented some areas inhabited by Sarawak's indigenous people.

A Singapore-based carbon trader called the impact on the indigenous community "a snake in the grass," highlighting that buyers need clear evidence that the indigenous communities are well-protected before making investments in Malaysia credits.

"People outside Malaysia will not differentiate carbon credits by states. All credits will be regarded as Malaysian credits. No matter which states or projects have problems, the brand image of Malaysian credits will be affected as a whole," another local project developer emphasized.

Platts, part of Commodity Insights, assessed nature-based avoidance carbon credit at $3.45/mtCO2e on May 24.