This article first appeared in The Edge Malaysia Weekly on September 19, 2022 - September 25, 2022

In November 2021, a carbon trading deal signed between the Sabah government, consultancy Tierra Australia and Singapore-based Hoch Standard Pte Ltd triggered a firestorm of comments and concerns.

The Nature Conservation Agreement (NCA) would allow the company to monetise non-carbon and natural capital from two million hectares of Sabah’s forests, according to environmental news portal Mongabay. For a contract period of 100 years, the company plans to sell carbon credits generated from the protection and conservation of the forest reserve.

Up to 70% of the revenue from the sale would go to the state government, with the rest going to the partners.

Various stakeholders have demanded for more transparency on the deal. For instance, where is the land area covered by the NCA? Indigenous communities who live in and near forests questioned what the NCA would mean to them. Who would have a say over the natural resources?

Moreover, if the two million hectares are already a forest reserve, can it pass the “additionality” test of a carbon credit? Does the company have the experience to restore degraded forests?

Former senator and indigenous rights activist Adrian Lasimbang has sued the state government to gain more transparency on this deal. Then, in February, Sabah’s attorney-general said the NCA was legally impotent.

Such tricky situations may become more common in the future as the demand for carbon credits rises. Organisations are seeking carbon credits to offset their emissions and reach their net zero goals.

An EY report in May projected that the volume of credits required globally would increase by at least 20 times by 2035, with prices rising to US$80 to US$150 per tonne by 2035 from the current US$25 per tonne.

Without regulations, transparency or understanding of what carbon markets are, companies may buy credits that are contentious and not recognised by their stakeholders.

The ultimate goal of carbon markets, after all, is to help entities offset carbon emissions that they cannot currently reduce. It defeats the purpose if the carbon credit projects result in net harm to the environment and communities.

“Having worked on climate change solutions for the last 20 years, I think carbon credits are one possible way to incentivise more conservation work. But the money should really go to people who are doing the conservation work. I’m very sceptical about carbon credits generated without proper regulations, transparency and involvement of the indigenous people on the ground,” Adrian tells ESG.

Carbon markets enable the trading of carbon credits, which are generated by projects that remove, avoid or reduce emissions of greenhouse gases. This could be tech-based solutions like a waste-to-energy plant or nature-based solutions, like reforestation and sustainable forest management.

There are internationally recognised standards for carbon credits like the Verified Carbon Standard (Verra) and The Gold Standard, which have rules on what qualifies as a carbon credit.

It is important for companies to go for properly certified carbon credits, says Faizal Parish, director of Global Environment Centre (GEC), a non-governmental organisation (NGO) that promotes conservation of forests, rivers, peatland and coastal ecosystems through nature-based solutions.

“I’m definitely open to the idea of carbon markets as a mechanism for mobilising finance in a timely manner. At the same time, we must know that carbon markets are not the complete solution to climate change. In the short to medium term, emissions that cannot be mitigated can be offset. In the long term, we must reduce all emissions,” he says.

It is also critical for companies, investors, consumers and other stakeholders to understand what good-quality carbon credits are.

“You should work with people who have a track record in the industry. Make sure you go to the ground and do an assessment. There are a lot of things to look out for,” says Dr Dzaeman Dzulkifli, executive director of the Tropical Rainforest Conservation and Research Centre, an NGO that focuses on restoring tropical forests in Malaysia.

“For instance, can you log the forest first and then plant trees? It is a question we have to ask. A lot of people are trying to look for loopholes to make money from doing nothing. ”

There are a few common principles when it comes to good carbon credits. Additionality is the most frequently mentioned one. Carbon credit projects have to be additional, which means the project would not have been feasible had it not been for the revenue generated from selling carbon credits. It also means that a protected forest cannot be stripped of its status to generate carbon credits.

“If the land is already gazetted [as a forest reserve], then the additionality is not there, because you’re already protecting the land under a regulatory framework. But if it is a forest connector, marginal land, former tin mining site or destroyed mangrove forest, there is potential for restoration, rehabilitation or protection,” says Ralph J Dixon, CEO of YTL-SV Carbon Sdn Bhd, one of the biggest carbon credit project consultants under the Clean Development Mechanism (CDM) and global voluntary markets.

A key question to ask is who owns the land. The time period in which the land was degraded or deforested is also important. This is to prevent instances where a land is intentionally degraded and then rehabilitated years later to generate carbon credits.

“For Verra, evidence has to be provided that the underlying project area for afforestation or reforestation, wetland restoration and conservation or other land management projects is not stripped of native ecosystems to create carbon credits,” says Pooja Bansal, principal consultant of YTL-SV. 

Such evidence is not required if the clearing or land conversion occurred at least 10 years before the proposed project start date, she adds.

Some standards require project owners to set aside credits as a buffer for uncertainty. This is to account for risks of wildfire or encroachment of development into the project area.

Another principle is that the carbon reductions or removals from a project must be permanent. “If you start issuing credits from a forestry project which may be logged in 10 years’ time [for example], destroyed by wildfire or encroached by communities, industries or agriculture, then permanence is not there,” says Dixon.

Establishing permanence can be difficult if the status of the land is unclear. This is a challenge in Malaysia as local communities who traditionally live near or in forests often do not have adequately recognised rights to the land, observes Faizal.

This is related to two other principles. One is the avoidance of leakage. If a forestry project negatively impacts local communities and displaces them to another area, the community may begin extracting natural resources there for their survival. This is considered a leakage or a shift of emissions to another location due to the carbon credit project.

“That’s why a project should be holistic, involve communities who live there and support a sustainable livelihood,” says Dixon.

The other is that there should be no net harm, whether it is to the environment or communities.

“For example, the Orang Asal in Sabah and Sarawak may have used resources in the forest for thousands of years. Then, in the name of making a carbon project, you kick them out and say they are degrading the forest when in fact, they’re the ones looking after the forest. This is a very big concern about carbon projects. Many such cases have occurred around the world,” says Faizal.

A mechanism to ensure equitable sharing of benefits is needed, he adds. “Sometimes, private players finance the system and take a profit from selling the credits. There may be no benefit sharing with the community when they’re actually using community land or houses [to generate renewable energy from off-grid solar power plants].”

Finally, good carbon credits must avoid double counting. A carbon credit, once issued and retired, can only be counted towards one party’s carbon budget. Registries like Verra and Gold Standard are important in keeping track of these credits. “Each credit comes with a traceable number issued by the underlying registry. Once it’s retired on the registry, you cannot reuse that offset,” says Pooja.

Many companies have engaged in tree-planting activities and report the emissions reduced from these activities. Is this valid? It depends.

If 1,000 trees were planted, you cannot count full emission reduction from all trees, says Faizal, because it is likely that not all will survive. It is important to question whether the species planted is suitable for the specific environment and what the status of the land is.

GEC has helped companies do mangrove tree planting activities with local communities. Faizal says that in some cases, they inform companies of the potential amount of carbon offset. “But we don’t know of any companies that are offsetting [their emissions] with it. We’re also telling them that because of the issue of land rights, we cannot say that this tree will definitely remain there for 30 years.”

The NGO prioritises projects on land where it has a supporting letter from the local authorities. However, ensuring permanence is a constant battle. “We’ve had to fight various efforts to degazette forest reserves, like the case of the Kuala Langat Forest Reserve. Together with local communities, we rehabilitated the area for five years at the request of the state government and stopped the peat fires. Then, the state government degazetted the reserve for development. We were able to stop that but it may not be the case for other areas,” says Faizal.

This kind of activity can be used by companies to reduce their emissions, but it should be subject to audit, says Dixon. To sell it as an offset, however, will require scale and verification.

“Most [carbon credit] buyers require traceability of the credits they purchase, which should have a unique serial number on a particular registry. A clear chain of custody is an important feature of carbon credits,” he says.

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