This article first appeared in The Edge Malaysia Weekly on June 7, 2021 - June 13, 2021

AS developed nations set ambitious targets to decarbonise their economies, their trading partners, including Malaysia, risk having the door shut on exports that are seen as drivers of climate change.

In the year ahead, the EU is due to introduce or review several measures to enhance its efforts to make its economy sustainable.

Palm oil from Indonesia and Malaysia, the world’s top two producers of the vegetable oil, is among produce that will face barriers to that market for being associated with deforestation and biodiversity loss.

“To reduce the EU’s contribution to global deforestation and forest degradation, the [European] Commission will present in 2021 a legislative proposal and other measures to avoid or minimise the placing of products associated with deforestation or forest degradation on the EU market,” Ambassador and Head of EU Delegation to Malaysia Michalis Rokas says in an email interview with The Edge.

Malaysia exported RM5.36 billion worth of palm oil to Europe from January to November last year.

In April, the EU adopted a climate law to cut carbon emissions by at least 55% by 2030, compared with 1990 levels.

The EU’s action is part of a growing recognition that the world has collectively failed to engage sustainably with Nature, as noted by The Economics of Biodiversity: The Dasgupta Review, issued by the UK government in February.

The review stresses that the solution starts with accepting that our economies are embedded within Nature, not external to it.

The current rate of biodiversity loss, which scientists describe as the sixth mass extinction in our planet’s history, is fuelling extreme risk and uncertainty for our economies and well-being, says the review.

Increasing attention on the environmental risks to business has fuelled a slew of advisories from analysts such as Moody’s ESG Solutions, which recently released two new risk assessments focusing on biodiversity. “Biodiversity-related risks are rising up the agenda for companies, investors and policymakers,” Moody’s says in a May 26 report.

In the new green and social economy, competitiveness will be defined by factors that go beyond low production costs or good infrastructure, says IDEAS senior fellow Dr Renato Lima de Oliveira. “Malaysian businesses should respond by putting sustainability at the forefront of their strategy, engaging with societal stakeholders and the Malaysian government to make sure this issue is not addressed too late,” says the assistant professor of business and society at the Asia School of Business.

In the EU, biofuels are a second area where restrictions are imminent.

As renewable energy is promoted as essential for a transition to clean energy and to mitigate climate change, the EU is set to increase its use across all sectors, including sustainable biofuels in the transport sector.

“The regulation governing our biofuels regime is subject to a formal review this year,” says Rokas.

First-generation biofuels, like that made from palm oil, are set to be replaced by advanced biofuels made from feedstock such as waste, residues or algae that do not increase demand for land.

Measures to increase the use of clean energy will impact Malaysia too.

Currently, 37% of Malaysia’s power generation is coal-fired, although it aims to decrease this to 22% by 2039, according to the Energy Commission.

While the government plans to retire several coal-fired plants by 2039, removing 7gw out of 13.5gw of coal-fired capacity, new coal-fired plants are due to add 2.8gw to its coal-fired capacity up to 2037.

“We see in Malaysia an increasing share of coal in the energy mix and low renewable energy share outside large hydropower plants. The EU is ready to work with Malaysia to expand renewable energy generation, and it looks forward to the government removing investment barriers, including restrictions on foreign ownership in this area,” says Rokas.

At the regional level, an Asean-EU Clean Energy Dialogue is scheduled to start later this year. Rokas sees this as a platform to exchange experience and drive the transition to clean energy.

The EU’s ambitious energy policy can only be achieved by simultaneously being more energy efficient and increasing the share of renewables, says De Oliveira. “It is a clear signal that the market for clean energy is only going to grow and some Malaysian firms can benefit from that, such as exporters of solar photovoltaic or companies that have ventured into the offshore wind energy value chain, like Sapura Energy,” he tells The Edge in an email.

A more contentious measure that has been mooted is the EU Carbon Border Adjustment Mechanism (CBAM). The proposal for a CBAM was adopted by the European parliament in March to move towards imposing a carbon price for energy-intensive goods from countries that have less ambitious climate goals.

“The EU is determined to ensure that its declared greenhouse gas reduction targets, required to keep the temperature goals of the Paris Agreement within reach, are implemented in practice … the climate challenge is inherently global. This is why we want — and need — our international partners to share a comparable level of ambition,” says Rokas.

The EU’s trading partners have expressed concerns and estimated potential losses due to the proposed tax. Countries that have raised questions about the move include the US, Russia, China, India and Brazil.

Commenting on the EU’s measures, including the CBAM, Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed said, “Malaysian companies need to look ahead and develop robust green strategies to reduce greenhouse gas emissions and resource consumption. Climate change mitigation and pollution prevention have increasingly become of paramount importance as businesses continue to seek social licence to operate.”

He said this in his keynote address at a webinar organised last month by Climate Governance Malaysia on the climate and sustainability ambitions of Malaysia’s trading partners.

In 2016, Malaysia launched its Green Technology Master Plan 2017-2030, but since the outbreak of the Covid-19 pandemic, attention has been focused on economic stimulus measures that include support for carbon-intensive industries.

Addressing the issue of a clean energy transition, Mustapa tells The Edge in an email: “While the green agenda is indeed very important to Malaysia’s long-term strategic interests, it has to be balanced by the present energy requirements of our economy. This requires a gradual phasing out of coal, rather than a disruptive approach.” (See accompanying report.)

The National Energy Policy, which is due to be announced in the third quarter of this year, is aimed at addressing current and future challenges, he adds.

A future carbon border adjustment tax can deeply affect the competitiveness of Malaysian exports, says IDEAS’ De Oliveira. “Because Malaysia’s energy matrix is predominantly based on coal-fired power plants, some of them recently built and expected to be operational for decades, the risk is that exports from Malaysia will be taxed at a higher rate than those of its competitors. In addition, this can have negative effects in attracting future foreign direct investment.”

The mantra of the global movement to curb climate change is to achieve net-zero emissions of greenhouse gases as soon as possible to limit global temperature rise to well within 2°C but preferably to a maximum of 1.5°C, a goal espoused at the Paris climate talks in 2015.

To date, 59 countries have set net-zero targets, according to data cited by the World Resources Institute. Most of them, including the EU nations, have pledged to achieve this goal by 2050.

Pressure to tackle climate change can be expected to increase significantly by November, when governments are due to meet at the next climate summit, COP26, and commit to new long-term goals to tackle the climate crisis.

In April, UN Secretary-General António Guterres called on the international community to make 2021 a make-or-break year for climate action.

Climate change watchers have sounded an anxious note about the gap between intention and practice in the race to curb emissions.

A recent report put the total cuts pledged by countries representing 30% of global emissions at less than 1%, said Guterres. “Ending the use of coal is the single most important step the world can take to ensure the temperature rise is limited to 1.5°C.”

Malaysia’s pledge as part of the Paris Agreement is not ambitious: it is to become more energy efficient by 45% by 2030 compared with 2005, notes De Oliveira. In that scenario, total emissions are still expected to go up.

“The government, businesses and civil society need to take this issue seriously. It is both a matter of preserving the planet and future-proofing the economy,” he says.

Developing countries such as Malaysia, which is one of 12 mega biodiversity sites in the world, can be expected to feel the heat from global opinion rising a few notches quite soon.

According to a May 27 report by Moody’s ESG Solutions, the three sectors most impacted by biodiversity-related controversies are mining and metals, food and energy. Between December 2016 and April 2021, its analysis of 5,097 cases showed allegations involving biodiversity were most frequently seen in the US (90 cases), Indonesia (60 cases), Malaysia (30 cases) and Australia (24 cases). These four countries account for 60% of the controversies (see table).

“Indonesia and Malaysia are among the countries mostly associated with biodiversity controversies due to the prevalence of companies involved in the cultivation of palm oil … the sourcing of palm oil has come under heavy criticism due to its negative impact on the forest ecosystem, endangered species and — in some instances — illegal land clearance for palm plantations,” the report notes.

Using the UN’s frameworks to assess the scale, scope and remedial nature of the controversies, Moody’s ESG Solutions’ survey found that 93% of cases showed a “high” or “significant” level of severity in its database of over 20,000 cases involving environmental, social and governance issues.

The survey found that in 43% of the cases, the companies involved did not respond to the allegations. And in just 19% of the cases, they took remedial or proactive steps in response to the controversies.

“Nevertheless, we would expect the response of companies to such controversies to improve as biodiversity exposure and risk management moves up the investor and regulatory agenda,” says the report.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.