The Paris Climate Agreement has driven countries scrambling to reduce and offset their greenhouse gas emissions. “Carbon markets” are created by capping the overall emission of a country, forcing the emitters to either reduce their carbon emissions or purchase “carbon credits”, such as from conservation projects, to compensate for their emissions.

Such mechanisms allow emitters to achieve their emission-reduction targets through developing “green”projects anywhere in the world, especially in developing countries. There are two types of carbon markets.

One is voluntary markets that operate on a voluntary basis and functions outside of compliance markets. In recent years, the voluntary carbon market has grown significantly. Forest carbon projects are arguably one of the most important nature-based climate solutions, with the demand for nature-based carbon credits potentially outpacing their supply.

Another compliance market is created by jurisdictions around the world to fulfil their Nationally Determined Contributions (NDCs) in emission reduction. The EU-ETS is the world”s largest compliance market to date. New opportunities may arise from the new Article 6 of the Paris Agreement published in 2021, allowing the compliance markets to cover also forest carbon credits which were previously not accepted.

Likely, demand for forest carbon credits will continue to grow in response to the expansion of both compliance and voluntary markets Malaysia has attracted attention for its “investible carbon” kept in its forests, with a sequestration rate of about 32 - 75 million tons of CO2, making it the fifth on the list among the tropical countries according to a recent study at NUS.

Following this trend, a number of forest carbon projects have been proposed in the country. Some of these are championed by the state governments – the jurisdictions that have full authority over forest and land matters in Malaysia.

The most recent large-scale proposal is the Nature Conservation Agreement (NCA) in Sabah which has been widely reported by both local and international media.

However, it became famous for the wrong reasons – the feasibility and sustainability of the project were closely questioned by the stakeholders and observers, triggering considerable doubts over the deployment of such projects. Given the increasing interest in forest carbon in the country, the case of NCA has provided some important lessons for the future development of forest carbon projects in Sabah and Malaysia.

First, transparency is the basic tenet of any forest carbon project. The lack of transparency in the NCA has created unwanted panic among local communities. There is a fear that they may lose access to the forest or even their rights to land. This is also the main reason why the project has sparked a fierce public debate, reliving the past experience with highly opaque large-scale land- based projects. As such, trust-building should be prioritised in forest carbon projects, particularly those in landscapes with indigenous communities.

Second, the stakeholders must be adequately informed about the concept of “additionality” under the Paris Agreement. It dictates that additional emission reductions or removals “are additional to any that would otherwise occur”.

However, additionality highly depends on counterfactuals - emissions or reduction in emissions “that would otherwise occur”. For example, carbon sequestrated by forests that are already protected, such as those covered in the NCA, normally does not have “additionality”, unless there is convincing evidence demonstrating that the forests are under immediate threat. Contrarily, additionality can be granted to forest restoration projects that only occurred due to human interventions. Addressing this issue requires carefully constructed and rigorously tested predictive models to quantify additionality of a forest carbon project based on historical trends and field evidence.

Third, as forest carbon projects involve forest-dwelling communities as well as other land users, they will be faced with problems related to social equity. The key question would be who has the right to benefit from the “sales of carbon”. In the case of the NCA, the broker, Hoch Standard, will receive 30pc of the revenues from the project, while the remaining 70pc is earmarked for restoration. It would be important to clarify how a project like this can contribute to the “economic development for people living in and around the forests”. Involving the key stakeholders in co- designing the scheme will be necessary to address the issue of fairness and justice.

Fourth, carbon sovereignty remains a tricky issue to navigate for forest carbon developers. In the case of Malaysia, the thirteen states retain full jurisdiction over land-use matters and policies. While the federal government has committed to emission reduction targets for land use, land-use change, and forest (LULUCF) in its Nationally Determined Contributions (NDCs) required by the Paris Agreement, the emergence of the global market for forest carbon credits has invoked concerns over the obligation of the states. There are possibilities that the states may initiate or approve forest carbon projects, bypassing the federal government, and sell the mitigation outcomes from LULUCF in the form of carbon credits in global markets, instead of having them counted towards Malaysia”s NDCs. The federal minister”s ignorance about the NCA in Sabah justifies the need to commence state-federal discussions on issues related to carbon sovereignty as soon as possible.

Fifth, the complementarity of forest carbon projects with other conservation projects may need to be carefully thought through. A very narrow focus on carbon may risk displacing other conservation efforts, such as biodiversity protection, as a high-carbon area may have low biodiversity, and vice versa. One must be careful with the idea of maximising profits from carbon stock accumulation. Instead of focusing on a universal carbon pricing system, a holistic financing mechanism that covers multiple ecosystem services, climate, biodiversity, and livelihoods, such as the “payment for ecosystem service outcomes” may be a more practical avenue to finance forest protection.

Sabah is an interesting case to explore financing mechanisms for conservation, despite the recent controversial NCA, due to its advancement in adopting a “jurisdictional approach” (JA).

To ensure the sustainability of its oil palm sector, the state has committed to developing an official platform to align all stakeholders” activities in conservation and development in the land-based sectors. The platform also naturally serves as a foundation for developing state-wide forest carbon projects as it cuts across all the land-use sectors. Importantly, the JA may fit into the “cooperative approach” stipulated in the Paris Agreement – jurisdictions may directly transfer the emission reductions from forest carbon projects from one to another and counted toward the receivers” NDCs. Developing feasible and sustainable forest carbon projects in Malaysia will still be a daunting task, but it is worth exploring as a means to finance conservation in places like Sabah.

Dr Goh Chun Seng 
Jeffrey Sachs Center on Sustainable Development (JSC)
Email: [email protected]

This article was first published in The Daily Express, 1 May 2022.