How To Claim And Trade Carbon Credit?

• Published date: 09 January 2023
• Subject Matter: Environment, Energy and Natural Resources, Energy Law, Oil, Gas & Electricity, Climate Change
• Law Firm: Azmi & Associates
• Author: Mr M Inamul Hassan Shah and Gabrielle Lim Wai Yee

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 Petronas declared their Aspiration to achieve net zero carbon emission by 2050.¹ One of the potential ways to achieve this net zero emission goal is through the carbon credit market. Carbon credit also gained the attention in ESG investing which contributes to the reduction of carbon.² This article will focus on explaining how carbon credits work and how it will help to achieve the net zero emission goal. Most importantly, this article will explain how carbon credits can be claimed and traded followed by a further discussion on the initiative taken by Malaysia in promoting the carbon credit market.

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 European Union ("EU"), Australia, New Zealand, South Korea, California and Quebec.⁷ The purpose of carbon credits is to overall lower the amount of GHG released by the buyers. This allows companies and individuals to account for their unavoidable emissions by buying carbon credits.⁸ This concept also incentivize climate action by enabling parties to trade carbon credits generated by the reduction or removal of GHG from the atmosphere, such as by switching from fossil fuels to renewable energy or by enhancing or conserving carbon stocks in ecosystems such as a forest.⁹

Carbon trading started as early as 1997 when countries signed the Kyoto Protocol.¹⁰ The Kyoto Protocol operationalised the United Nations Framework Convention on Climate Change (UNFCCC) and was adopted on 11 December 1997.¹¹ It commits industrialised countries to limit and/or reduces GHG emissions according to the agreed individual targets.¹²

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 Malaysia¹⁴ which signed the Kyoto Protocol on 12 March 1999 and ratified the same on 4 September 2002. Trading of carbon credit is made available under Article 17 of the Kyoto Protocol as it allows countries to sell spare carbon credits to countries that exceeded their targets.

In addition to the above, the Kyoto Protocol became more effective with the coming into force of the Paris Agreement on 4 November 2016, which is a legally binding international treaty on climate change where its goal is to limit global warming to below 2 or ideally, to 1.5 degrees Celsius.¹⁵ Article 6 of the Paris Agreement...