Asia School of Business

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By : Pieter E. Stek, Thessa Vasudhevan and Renato Lima-de-Oliveira

October 3, 2023

Middle-income economies such as Malaysia, which are integrated into global value chains, have both significant domestic carbon emissions as well as sizeable opportunities for nature-based carbon offsets. While they face pressures to reduce carbon emissions from their international trade and investment partners, these countries are also ineligible for official development aid, and they therefore need to mobilize domestic funds to finance reductions in carbon emissions. Malaysia launched a domestic Voluntary Carbon Market (VCM) in December 2022 as part of the government’s climate change policies. The VCM appears to have been implemented relatively quickly, having only been announced in September 2021. This paper traces the origins of the VCM and analyzes the economic and regulatory context of the market in terms of the domestic supply and demand for carbon credits in Malaysia. The analysis reveals that Malaysia, as a middle-income economy that has significant potential for nature-based carbon offsets, faces a number of unique domestic political-economic challenges involving carbon trading, which are not faced by high-income economies nor by low-income economies.