Investors and project developers are split over the need for a clearly regulated pricing mechanism for carbon projects in Southeast Asia.
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Speaking on a panel discussion at the Malaysia Carbon Market Forum on 8 August, bankers and project developers had very different concerns about how to mobilise capital to finance climate impact projects.
While investors argued that a regulatory framework is a crucial deciding factor that guides investment decisions, developers say such requirements do not have to be too rigid for financiers to start investing in carbon projects.
Arshad Nuval Othman, sustainable finance head from CIMB Islamic Bank, said a carbon pricing mechanism, whether an emission trading system or carbon tax, is a key consideration for financiers looking to invest in carbon projects.
He said the value of the regulation-driven compliance market compared to the voluntary carbon market shows why there is a greater push from investors to insist on carbon pricing mechanisms before bankers can confidently fund a project.
The global compliance carbon market is valued at about US$1 trillion, while the voluntary carbon market is worth US$2 billion.
“I would not be doing justice to this panel as a Malaysian banker from an Asean bank if I did not shed light on the financing ecosystem [in Malaysia]. The prerequisite is still the same – we still need a carbon pricing mechanism,” he said, adding that the conversations with bankers typically revolve around carbon policy and offtake agreements for project financing to be dispersed.
Although Malaysia currently does have a carbon pricing mechanism in place, a carbon tax for hard-to-abate sectors is likely to be announced in the upcoming federal budget for 2025, said Dr Ching Thoo, secretary general of Malaysia’s natural resources and environmental sustainability ministry at the same event.
Suraj Vanniarachchy, vice president, global carbon, Macquarie Group, said that a lack of clarity over policies causes financial institutions to delay deploying capital and that developers need to show concrete results to convince investors.
“Developers also need to be able to deliver what they say on paper because [carbon projects] are not short term. They need long-term investments and monitoring, reporting and verification.
If the developer is not able to deliver the same economics [throughout the project period], it’s difficult for us to invest,” he said, highlighting that monetising carbon credits from projects is essential for investors like himself.
He said Singapore has set a good example as a leading buyer in the Asean region by signing memorandums of understanding (MOUs) to procure carbon credits from several countries, and has actively helped businesses navigate local market conditions.
Knowing such bilateral agreements are in place provides investors with greater clarity and confidence, said Vanniarachchy.
Developers struggling to secure funding
Project developers had a different take on regulation and how climate projects should be funded.
Dr Riza Suarga, president of the Indonesia Carbon Trading Association, noted how challenging it has been for him to engage with investors over the last three years.
“For me as an owner and developer in Indonesia, it has been very tough getting funding, especially from overseas. Fortunately, we have a lot of different opportunities coming from family offices within Indonesia,” he said.
Suarga, who is also president and CEO of carbon project developer Agraus Resources, said “high integrity” is the only prerequisite for trading in carbon credits and there are plenty of examples of high-quality carbon projects already available in the market.
He said there was no need to “reinvent the wheel” in markets that lack policies but instead collaborate to recognise the carbon frameworks already in play in other markets.
“There’s already a whole bunch of standards and registries available on the market. Indonesia also recently agreed to align with the Asean framework for carbon markets, which is another good alternative solution.”
A Southeast Asian standard for carbon markets was proposed by Malaysia’s natural resources and environmental sustainability minister, Nik Nazmi Nik Ahmad, last month.
“I think while we are waiting for Article 6 to materialise, the Asean movement can be one of the solutions. And a government like Malaysia, while developing its framework, can learn from the successes and failures of other nations,” he said.
Article 6 of the Paris Agreement outlines how countries can use the carbon markets to meet their climate goals.
Suarga said he turns to family offices in Indonesia for funding since there is too much scrutiny from banks on the compliance of carbon projects. While it’s due diligence is important, bankers should be able to take risks to fund some of these projects, he said.
“I really hope that bankers can see that, and instead of waiting for much more stable regulations, which we don’t know when [will come into place], someone needs to take care of climate change issues now,” he said.
Nick Laidlaw, managing director international at Worldview International Foundation, a climate solutions non-profit, said carbon projects can be successful, even without concrete pricing schemes in place.
His organisation launched a mangrove restoration project in Myanmar in 2012, and has since expanded to six Verra-verified carbon projects.
He said there was no need for a “perfect system” in to kickstart carbon projects, but experienced investors and project developers are needed to work with governments to get projects up and running.
Although securing funding appears to be the main problem for developing markets like Malaysia and Indonesia, reputation is another issue.
Suarga said that startups with a background in palm oil, coal, oil and gas have been finding it difficult to get funding for projects given their checkered environmental legacy.
“You cannot just flip your hand and start doing carbon projects. Nobody likes that. I think money is not the only thing (that talks) in carbon,” he said.
