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Carbon Pricing and the Business Case for Emissions Reductions and Nature Conservation in Malaysia

Updated: Feb 26, 2023

by Darshan Joshi, The Asia Foundation

closing remarks from Chairperson of CGM appended below

updated on 26 February 2023 for the link to the Research Summary

The foundations of tackling climate change are an exercise in addressing a variety of market failures. The most prominent of these are the oversupply of GHG emissions and undersupply of sequestration can be addressed by well-designed carbon pricing instruments.

Carbon pricing can play a key role in transforming energy markets and strengthening incentives to conserve and rehabilitate natural capital by enhancing the economic feasibility of adopting low-carbon solutions. The degree to which they do so, however, is dependent greatly on instrument design, complementary policies and directives, sectoral contexts, and stakeholder readiness.

On 16 February 2023, The Asia Foundation (TAF) Malaysia in collaboration with the Institute of Strategic and International Studies (ISIS) Malaysia and Climate Governance Malaysia (CGM) hosted the launch of a study assessing carbon pricing and its impacts and roles in driving the low-carbon transition across Malaysia’s energy and forestry sectors.

Key stakeholders from the public and private sectors, NGOs, think-tanks and academia were all in attendance, contributing to a lively interchange between participants who each brought unique knowledge and perspectives on the vast issue of climate change.

Some of the key takeaways from the report, include:

1. Substantial emissions reductions can be realized only by eliminating coal from the electricity mix and pursuing carbon-free energy sources instead. While replacing coal with natural gas will reduce emissions in the short- and medium-run, a persistent reliance on gas will cause a long-term upwards trend in absolute emissions.

2. Continuing economic and population growth will cause an upward trend in energy demand, adding further weight to the importance of energy efficiency measures and investment in renewable energy.

3. Even before accounting for carbon prices, the costs of generating electricity from coal are already on par with small hydro and biogas, and higher than offers received during the last large-scale solar bidding cycle. Biomass and successful bidders under LSS3 reach parity with coal at a carbon price of MYR 26/tCO2e, while natural gas prices are higher than all low-carbon sources in the absence of carbon pricing, and only reach parity with coal at a carbon price of over MYR 175/tCO2e.

4. The top five states in terms of investible carbon volumes are Sabah, Sarawak, Pahang, Terengganu, and Johor. Combined, they sequester just under 500,000 tons of CO2e annually. Incentives to invest in the conservation of these carbon sinks depends on the opportunity costs, i.e., the returns from exploitation.

5. Yet carbon is not the only factor of importance in the context of conservation; exploitation can disrupt ecosystems and engender a variety of economic damages. These are not accounted for through carbon pricing instruments.

Focusing solely on carbon stock accumulation can trigger unwanted consequences across other ecosystem services, causing the neglect of highly biodiverse, low-carbon areas.

6. In terms of carbon pricing instrument design, this study recommends Malaysia adopt a gradualist approach to carbon pricing. This entails defining a clear timeline for the gradual ratcheting up of carbon prices and policy scope, from a lenient starting point and culminating in an economy-wide instrument that prices carbon at levels commensurate with evidence of the social costs of the GHG emissions externality.

It also recommends developing mechanisms to ensure the recycling of carbon revenues towards furthering Malaysia’s climate efforts across adaptation and mitigation, and channeling funds towards protecting low-income and vulnerable populations.

Contributors to this report are:

Darshan Joshi, climate consultant with The Asia Foundation in Malaysia, and a consultant with the World Bank’s hub in Malaysia.

Dhana Raj Markandu, energy consultant and engineer formerly with Tenaga Nasional Berhad and the Malaysia Nuclear Power Corporation.

Professor Gopalasamy Reuben Clements, conservation scientist and associate dean of Research and Postgraduate Studies in the School of Medical and Life Sciences in Sunway University. He is also a senior fellow with the Jeffrey Sachs Center on Sustainable Development.

Dr Goh Chun Sheng, program leader of the Master in Sustainable Development Management (MSDM) at Sunway University, also an associate at Harvard University Asia Center.

Alizan Mahadi, Director at the Institute of Strategic and International Studies (ISIS) Malaysia.

Extracts from closing remarks by the Chairperson of Climate Governance Malaysia:

We are very grateful to all contributors for their hours of work on this important report and The Asia Foundation [TAF], Robin Bush in particular, for initiating this. This collaboration between TAF, ISIS and CGM is an important contribution to the body of literature on carbon pricing and incentivizing, contributing insight and meaningful data. The conversation on this piece of work started with wanting to “price public good” which in hindsight was extremely ambitious and we ended up within a subset of the wider provision of ecosystem services by nature: how can we correct this classic market failure by looking at the possible pricing of carbon from the demand and supply perspectives [emissions and sinks].

ISIS’ Alizan Mahadi referred to the “gradualist approach” which should encompass the value chain starting with energy efficiency first [as was eloquently argued by World Bank’s Mei Lin]. Let’s focus minds and attention by putting a number to what we want to manage eg mandating green buildings or by pricing carbon more closely to the total cost to society, including negative externalities eg removal of subsidies such as fuel at the pump [although recognizing that targeted subsidies need to be carefully implemented to prevent leakages and runaway inflation, resulting in a heavier burden on consumers].

We spoke about the need to spotlight large emitters and to consider mandatory pricing regimes all while ensuring we are not outsourcing our carbon footprint to other countries [which will need a border adjustment type of intervention].

We don’t have an incentive or policy structure which facilitates climate ambition but this country and this region is addicted to fossil fuels, we are the factory for the world. Many countries are outsourcing their emissions footprint and environmental destruction footprint to this region, all while wanting goods to be produced efficiently and cheaply. It is very likely oil and gas will remain in the energy mix hence investments in technology solutions are urgently needed.

As for biomass solutions: while the focus was on emission intensities of different fuels, which is useful, we should also turn our attention to the entire value chain of emissions where the net carbon footprint of biomass is likely to be significantly lower [eg carbon is sequestered in the same year, does not require annual replanting, minimal services from the large refining and processing industries and reduced transportation costs as it is not barged in from another country].

Carbon tax alone has not worked in any country; we need a raft of highly specified and precisely defined policies and interventions to maneuver the economy in the intended direction of travel.

Danaraj aptly described a “‘infinite number of multiverses” but there is a high correlation between scenarios and impacts, so we need significantly more timely data.

I am personally glad that in the presentations large hydro was classified separately from Renewable Energy, against the backdrop of a significant and increased momentum to protect biodiversity.

Reuben eloquent described we would be in “deep, deep trouble” and Alizan too cautioned the climate emergency was “not some thing any country can avoid”.

We have just had the warmest January on record since 1850 and and lowest Antarctic sea ice extent for January [despite the prolonged La Nina influence in the tropical Pacific], this is demonstrating the powerful role played by anthropogenic GHG.

Many stakeholders don’t consider the 1.5 degrees [Celsius] of warming target to be feasible, based on 1.2 degrees of warming already to-date. The world is currently headed for 2.4 degrees of warming [Climate Action Tracker] or 2.7 degrees [COP26] of warming through 2100 [compared to preindustrial levels]. The United Nations Security Council just had their first session to discuss security risks arising from sea level rise.

Whether mitigation or adaptation efforts, as we heard described, it is not just about sinks and biodiversity and ecosystem services but also the huge cost of loss of lives, damage to property and extinction of species - it’s just the right thing to do. We need to ensure a JUST transition.

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