The first auction on the Bursa Carbon Exchange (BCX), Malaysia’s new voluntary carbon market, took place on March 16 with around RM7.7 million in carbon credits sold. Although the auction was described in the official press release as evidence of “strong interest and [a] healthy price signal by the domestic corporate sector”, it must be noted that all credits were sold at the minimum reserve price set by Bursa Malaysia, and that Bursa itself appears to have been one of the 15 buyers.

Viewed from this perspective, the claim by Bursa Malaysia chief executive officer Datuk Muhamad Umar Swift that “we now have a proven market mechanism which provides price discovery” seems somewhat questionable. The BCX has been launched at a time where there is broad agreement that Malaysia needs some kind of carbon pricing scheme to realise its international climate change commitments.

However, no carbon tax or other clear driver of a Malaysian carbon market has emerged as yet. Although the government has hinted at the introduction of a carbon tax for several years, it continues to subsidise carbon emissions through its petrol subsidies. Even without a carbon tax, it can be argued that the anticipation of a tax, a net-zero commitment by some large firms such as Petronas, and pressure from foreign investors and customers, is creating domestic demand for carbon credits.

If the first BCX auction is a guide, then domestic demand appears weak. Similarly, there is no domestic supply of carbon credits on BCX yet. The carbon credits that were auctioned on March 16 are from greenhouse gas reduction projects in Cambodia and China. China itself has a voluntary carbon market, but it was suspended in 2017 due to a lack of standards and transactions.

While Prime Minister Datuk Seri Anwar Ibrahim’s announcement of financial support for green technology startups and a RM10 million fund to generate carbon credits may increase the supply of Malaysian carbon credits in future, there is actually already a small but lively Malaysian carbon market ecosystem. This ecosystem consists of carbon credit project developers, local certifiers and sellers, including projects supported by Malaysian state governments.

None of these projects made it to the first auction on the BCX. Why is that?

The reason is that carbon reduction and offset projects are often transacted through direct negotiations between buyers and sellers. This is because carbon reduction targets tend to be long-term, and the development of carbon credits through nature-based solutions or emission reductions, likewise, take time. Such transactions do not appear on a spot carbon exchange like the BCX.

A second concern is fungibility: carbon credits are not all created equal. Aside from concerns over their certification, research done by MBA students from the Asia School of Business for Malaysian carbon and environmental, social and governance (ESG) firm Kitaran Tabah Sdn Bhd shows that the prices of carbon credits from nature-based solutions vary depending on the inclusion of other sustainable development goals (SDGs) in a project.

That is to say, nature-based carbon capture projects that support the local community through education or poverty reduction, or that conserve biodiversity (for example), command higher prices. Such value-added has led to the growing popularity of ‘blue carbon’, generated from the protection of coastal ecosystems in Malaysia.

This means that a spot carbon market like the BCX will function primarily as a market of last resort: with sellers providing carbon credits with the lowest social and biodiversity value-added, and buyers who have failed to plan adequately for their carbon footprint reductions. While there may be a place for such a platform within the broader Malaysian carbon market ecosystem, this also signals its limitations. At best, the BCX will represent only a small slice of total carbon credit trading in Malaysia.

While Bursa Malaysia’s attempts to spin a disappointing first auction is understandable, it should not lead to complacency about the progress Malaysia is making in terms of its carbon reduction commitments. The auction’s lack of substance and real price discovery shows that a great deal of work still needs to be done, especially by the government. There is an urgent need for a carbon tax and other regulatory infrastructure.

The government should step up and make the hard policy choices necessary to fulfil Malaysia’s climate change commitments, starting with the termination of extremely expensive and harmful subsidies for carbon fuels. Dr Pieter E Stek is a postdoctoral scholar at the Center for Technology, Strategy and Sustainability (CTSS) at the Asia School of Business in Kuala Lumpur.