Bright spark in a dull market? Optimism precedes Malaysia’s first forest-based carbon credits

Set at an indicative floor price of 50 Malaysian ringgit (approximately US$10) per tonne of carbon dioxide equivalent (tCO2e), the Kuamut credits will be auctioned on 25 July on the Bursa Carbon Exchange (BCX). The credits are based on the protection and restoration of 84,000 hectares of tropical rainforest in the state of Sabah.

This floor price is higher than the current average market price of other forest-based carbon credits in the region. A recent report by data analysis firm Ecosystem Marketplace showed that carbon credits tied to forestry and land use recorded a decline in average prices of 4 per cent to US$9.72 last year, backed by a sharp drop in volume and value traded.

More recently, Singaporean carbon exchange Climate Impact X saw its nature-based contracts, Nature X (CNX), holding steady at US$1.3 per million tCO2e on Monday, according to data from the exchange. The CNX benchmark represents the spot price of credits from large, well-accepted Reduced Emissions from Deforestation and Forest Degradation (REDD+) projects in the secondary market. They are based on 11 projects across Southeast Asia, Africa and Latin America, including the Rimba Raya and Katingan Mentaya projects in Indonesia and the Keo Seima project in Cambodia.

However, the Kuamut project stands out from other regional forest-based carbon projects for its additional community and biodiversity co-benefits as well as a high external rating, said Andy Yap, carbon markets lead for South and Southeast Asia at specialist sustainability consultancy ERM. The project’s co-benefits have been verified by standard setter Verra under the Climate, Community and Biodiversity standard, while independent ratings agency BeZero has also given the project its highest ex ante rating for an improved forest management (IFM) project, which suggests a high likelihood that the project will remove or avoid a tonne of CO2e.

“More importantly, one cannot underestimate the importance of how this first locally originated project significantly reduces jurisdictional risks and issues of transparency or lack of trust,” said Yap. The most recent carbon project affected by government action is Indonesia’s 36,000-hectare Rimba Raya project, which the Indonesian authorities revoked the licence of last month citing an unauthorised transfer of the licence to a third party and a failure to fulfil financial obligations to the state.

The Kuamut project, on the other hand, is a public-private partnership between the Sabah state government via its forestry department and project developer Permian Global. It is operationally supported by Indigenous community organisation Pacos Trust and the South East Asia Rainforest Research Partnership, a scientific initiative based on collaboration with leading British universities.

IFM project premium?

Being an IFM project, created based on Verra’s VM0010 methodology for improved forest management via the conversion of logged forests to protected ones, also differentiates Kuamut from other regional forest-based carbon projects, said Charles Bedford, founder and chief impact officer at carbon credits investment firm Carbon Growth Partners. Whereas REDD+ projects often focus on protecting native forests, IFM projects seek to protect forests previously designated for production.

Such a project requires legal protection from the government as well as on-the-ground restoration efforts and working with local communities to ensure that they benefit from the project, Bedford told Eco-Business. As such, the project “should receive high prices,” he said.

“With Indonesia on a regulatory ‘pause’, it is terrific to see Malaysian projects come on line,” he told Eco-Business. “Preservation and restoration of [rainforests in] Borneo is a huge high priority for carbon and biodiversity.”

Notably, IFM projects have seen an uptick in prices last year, Ecosystem Marketplace data showed. Although they were in the shortest supply compared to REDD+ and afforestation-reforestation and revegetation (ARR) projects, IFM-backed carbon credits averaged a price of US$16.21 in 2023.

“This trend supports qualitative data indicating more interest and investment in project types that generate nature-based carbon removal credits,” said the report.

The price of carbon credits from improved forest management projects rose 11 per cent in 2023 although they make up the smallest share of credits in the Forestry and Land Use category. Image: State of the Voluntary Carbon Market 2024/ Ecosystem Marketplace

The reputation of project developer Permian Global should also give credence to the US$10 beginning price floor, Bedford said. Permian Global is behind the Katingan Mentaya project, which aims to protect and restore peatlands in Central Kalimantan, as well as the Rio Cautario Conservation Project in Brazil. Although the Katingan Mentaya project came under fire in 2021 for allegedly overstating its emissions reductions, both Permian Global and Verra have refuted these allegations.

In fact, Yap said, the US$10 floor price of the Kuamut project is low relative to the RM68 (US$14.48) clearing price of BCX’s inaugural nature-based carbon credits, which were auctioned last year and based on the Southern Cardamom project last year.

“Personally, I am optimistic,” he told Eco-Business. “In fact, I would not be surprised to see some participation from foreign companies with operations in Malaysia this round, as a clear means of contributing back [to the country’s decarbonisation efforts], which was not possible previously.”

At a briefing webinar last month, Muhammad Rizal Azmi, assistant vice president of business development and sales at BCX said that the indicative floor price of the Kuamut credits would be “marked to market”, meaning the price would be adjusted to reflect the asset’s latest market value, and finalised a month before the auction.

“[US$10] is an indicative floor price based on where we believe the market may be at,” said Permian Global managing partner Ed Rumsey during the webinar. “Our hope is that there will be lots of participants who are very keen to purchase these credits and they’ll bid the price up, because the more revenue generated for the project, the more good work we can do.”

‘Good corrective phase’

Trading on BCX has been muted since last year’s auction, with a recent check by Eco-Business showing no trading activity on the exchange since the last week of May. The Southern Cardamom project has also faced recent setbacks – it was temporarily suspended from CIX’s Nature X contract in December last year, months after Verra opened an investigation into the project after reported human rights violations.

This market weakness is not unique to Malaysia or the region however, as carbon markets globally have been sluggish for over a year. “The entire carbon market has been slow for the last 18 months as a variety of structural issues are resolved at the standards level,” said Bedford. The Integrity Council for Voluntary Carbon Markets (ICVCM) only just approved four “high integrity” carbon credit certifiers two months ago, with Verra making the cut last month after making “significant changes” to its procedures.

Standards for forest-based carbon projects in particular are being overhauled after media reports last year questioned whether forest-based projects were sequestering the amounts of carbon their developers promised. In fact, the methodology used for the Kuamut project, which is Verra’s VM0010 methodology for IFM through the conversion of logged forests to protected ones, is also pending updates.

“In the meantime, existing forest carbon projects will have to be evaluated on their own merits, as opposed to being presumed to meet the new standards,” said Bedford.

Price weakness has also affected project developers. “The problem we’ve seen is that the price is so low that often it’s causing stress among developers as well as participants,” Alex Cox, head of climate markets at specialist sustainability consultancy ERM told Eco-Business.

Unfortunately, non-rated or poorly performing projects that have faced criticisms and fetched lower prices have led to a “contagion effect” across the market, he added, affecting high-quality projects that are struggling to raise funds.

“On the buy side, corporates are still nervous to buy carbon credits on the spot market. But if suppliers can prove a higher quality product, they can [command] higher prices,” said Cox.

ERM’s Yap added that overall, carbon market actors continue to show positive collaboration and “a desire to make this work.”

“In any nascent market, I think it’s normal to see some setbacks and go through this stage of market frameworking and parity in pricing,” he said. “This is a good corrective phase where standards are tightening and investors are becoming more cautious.”