Implementing carbon market challenging, needs rethinking

By: Professor Dato Dr Ahmad Ibrahim 

The group which calls themselves Friends of Sustainable Malaysia has been hosting knwowledge sharing sessions for close to two years now. Since the formation in late 2023, a number of topics has been discussed. These included topics on COP 28 and 29 meetings, circular economy, smart cities, oil palm biomass, and the carbon market. The group which is now affiliated with UCSI’s International Institute of Science Diplomacy and Sustainability, IISDS, collaborates closely with MIGHT. The plan is to widen the partnership with like minded organisations since the big agenda is to improve the public understanding of sustainability. This is seen as crucial to the success of sustainability. For the session on carbon market, the group hosted the conversation in partnership with the Academy of Sciences Malaysia, ASM, the country’s leading science think tank. Going by what transpired, there is still much to do to effectively move the carbon trading agenda for the world.  

Few would dispute that the carbon market is a key strategy in achieving Net Zero emissions. The market offers mechanisms for pricing carbon, incentivizing emission reductions, and facilitating investments in low-carbon technologies. However, it comes with both challenges and opportunities that shape its effectiveness. What are the opportunities of the carbon market? First talks about financial incentives for emission reductions. By putting a price on carbon, businesses and industries are encouraged to reduce emissions through efficiency improvements, cleaner production processes, and renewable energy adoption. 

Next, the carbon market encourages technological innovation. The carbon market stimulates investments in low-carbon technologies such as carbon capture and storage (CCS), renewable energy, and sustainable agriculture.  Furthermore, programs like the Clean Development Mechanism (CDM) and voluntary carbon markets enable developing countries to benefit financially from climate-friendly projects. Many companies use carbon credits to meet their Environmental, Social, and Governance (ESG) goals, enhancing their reputation and attracting sustainability-conscious investors. A well-regulated carbon market can generate revenue for governments through carbon taxes and auctions, which can be reinvested in green infrastructure and social programs. The Paris Agreement’s Article 6 allows for international carbon trading, enabling countries to collaborate in emission reduction while meeting their climate goals cost-effectively. With the US again pulling out of the Paris Agreements, this is another set back for sustainability. The US is a major contributor to global emissions.

There are challenges of the carbon market. These were alluded to at the recent conversation where we had speakers from the newly minted Carbon Market Association of Malaysia, Bursa Malaysia, and an international consultant Roland Berger. One concerns the lack of standardization and transparency. Different regions have varying carbon pricing mechanisms (cap-and-trade vs. carbon tax), making global coordination difficult. Concerns over double counting (where multiple entities claim the same emission reduction) are real. It can undermine market credibility. The risk of greenwashing was highlighted. Some companies buy carbon credits without making actual reductions in their own emissions, leading to superficial climate action. 

Price volatility and uncertainty is another concern. Carbon prices fluctuate due to market conditions, policy changes, and economic factors, reducing long-term investment confidence.  There is also the issue of limited coverage. Many carbon markets cover only large industries, leaving sectors like agriculture, transportation, and small businesses outside regulatory frameworks. Carbon leakage was raised as a challenge. If carbon pricing is too high in one region, businesses may relocate to countries with lax regulations, shifting rather than reducing emissions. There are challenges in verification and enforcement, especially concerning costs. Ensuring the legitimacy of carbon credits (especially in voluntary markets) requires robust monitoring, reporting, and verification (MRV) systems. 

While the carbon market presents a valuable tool for achieving Net Zero, its effectiveness depends on strong governance, transparency, and integration with broader climate policies. Addressing existing challenges through better regulation, innovation, and stakeholder collaboration can enhance its role in global decarbonization. The current unilateral initiatives in carbon market are not healthy. Cases of using carbon as a new form of tariff barrier came up for mention. This can further exacerbate the protectionist trend in world trade that we already see developing. This is where the WTO can play a useful role to ensure that carbon trading is also fair and just. 

Professor Dato Dr Ahmad Ibrahim

The author is from the Tan Sri Omar Centre for STI Policy, IISDS, UCSI University, and is also an Associate Fellow at the Ungku Aziz Centre for Development Studies (UAC), Universiti Malaya. He can be reached at uacds@um.edu.my.