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Carbon trading: Good idea only ‘if’ done right
Published on: Sunday, November 21, 2021
By: Kan Yaw Chong
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Example of a carbon store in the form of a massive tree in a forest reserve in Old Rundum. (Pic courtesy of Tham Yau Kong)
CONTROVERSY seems to be flaring up over the issue of Sabah’s Nature Conservation Agreement (NCA).

The carbon trading or emission offsetting idea originated from the 1992 Kyoto Protocol.

The essence and whole point of carbon offsets hatched in Kyoto was to help countries adapt to the adverse impacts of raging global warming coming from extra heat energy added to the atmosphere equal to exploding 400,000 Hiroshima sized atomic bombs every day, 365 days a year,  the way Prof James Hanson once dramatized how dangerously overheating earth has become, due to non-stop greenhouse gas emissions, carbon being the chief culprit.       

Notice the Kyoto idea is to adapt to but not limit overheating like the Paris Agreement!

So what is the price Sabah is willing to pay for adaptation only, bonded to a long lock down and yields subject to the powers of the free market for 100 years with the attendant fluctuations and speculative risks? 

Those who have decades of experience in REDD projects in places like Indonesia’s Aceh and even next door North Kalimantan cautioned that “the science behind the whole calculation especially on additionality on carbon emission and reduction are extremely complex.”

Dr James Alin, a lecturer in economics at the School of Business and Economics, Universiti Malaysia Sabah, agrees.   

Malaysian emissions: 8 tonnes per head per year 

Emission offsetting means emissions produced by one’s daily activities are reduced by someone else, often somewhere else. 

“Given that the emission per head Malaysian is eight metric tonnes per year and a population of 40 million, Malaysia itself has a great potential and need to develop its domestic emission-offsetting market,” Dr James opined. 

“It’s a good thing actually but the important thing is to do it right so that it inspires the confidence of everybody and not otherwise,” he stressed.            

In an interview with Daily Express, Dr James shared his academic insight and concern at length on the complex processes on the business of emission off setting. 

He said: “Working on our situation, Sabah actually has total offset reserve from Class 1 to class 7 forests.” 

“Class 1 is protected, class 2 is commercial, also Class mangroves, there is a Class for wildlife protection and also a Class 3 Domestic - the only class of Forest Reserve that would give access to people living around its fringe. Now we know NCA want to start with only Class 1 forests without people inside to be included in the deal.”  

“That means it rules out commercial forests because under the agreement Sabah is bonded for a hundred years that you are not allowed to disturb the Class 1 forests,” Dr James noted. 

“This means there is no possibility to gazette them for other purposes for 100 years because of the carbon bond.”

What is Sabah selling – any inventory of how much carbon?

“The big question is: What are we selling?” Dr James asked.  

For better grasp, Dr James distinguished between the carbon stock and carbon flow.  

“Firstly, the carbon that’s being stored inside that forest, whichever class it is, minus the forest under production, that is, the stock the carbon will be there, as along as you don’t cut it,” he said 

“Secondly, you have the flow of carbon to the entire ecosystem called the Carbon Sinking Ability.”

“These are two different things, so we are selling these two!” he clarified at the outset.  

“But before you can sell it you need to know how much you have, you need to have an inventory of carbon, storage of carbon, the sinking capacity of the forests, whatever class you want to include,” he explained.

“Do we have it?  How do you Calculate that – Carbon storage and carbon sink?”

“It’s not so easy like going to make a boundary of our land, it’s a complicated process and you need economists, you need foresters, you need a statisticians and there are tools – a scientific tools, you need to go to the jungle and take soil samples, you drill and take soil samples and take them to the laboratory to analyse them. It is a tedious process.  

“I don’t want to do it because I don’t like jungles, it’s horrible to stay in the jungle and only the park people can do it, it costs a lot of money, a lot of time.  Imagine covering a total of 2 million hectares – a very big area.

“And actually that’s not the total, the total of our forests under Sabah Forest Department is more than two million hectares,” Dr James noted.

“So the question for us is: do we have that inventory, since we are talking about selling carbon offsets? 

“If you don’t have the inventory, you don’t know exactly how much is your carbon storage, how much is your carbon sinking capacity at the moment. So what are you selling - There Is no commodity!”

“Next is how long does it take for you to come up with the inventory, who is going to do it? Tierra – the consultant company from Australia?  We don’t know because we have never heard about them.” 

“Is it Hoch Standard Pte Ltd, a new company registered in Singapore in 2019?”

“Hoch Standard is doing the marketing- very interesting.” 

The real issue

“But back to the real issue – we don’t have an inventory yet.”

“There is a study here and there but far from having a complete inventory of our forests’ ability to store carbon and sink carbon,” Dr James noted. 

“So if you don’t have that information, what are you going to sell?” 

“Assuming you look for investor you want, who is buying your carbon offset?”  

“Here is already a practice long in place  – In Japan, the US and even China, they go for domestic buyers first thing, the so called polluters pay via carbon trading instead of taxes.”

“Big companies in the US like for example those producing oil, petroleum, there are many, many petroleum companies in the US in their energy sector, they need to buy carbon offsets and then sectors that produce energy like electricity, especially the ones that use coal, these are potential customers at home but assuming this company (Hoch Standard) is going to do it in Singapore, why would a company in US go to Singapore to buy carbon offsets from Sabah?”

“First of all, why in Singapore? why can’t they just come here if we have already the inventory of storage capacity and sinking ability? Why can’t they just come and buy from us , why can’t they just sign the deal with us straight ?  After all, the forests are inside our geographical area anyway.” 

The rule is supposed to be this: develop domestic market

“What I am saying is, if you look at the USA which has 52 states, each and every state have their own carbon market. The rule is supposed to be like that – you offset within the confines of your business first.  If that is not enough then possible you go and buy from outside,” he noted.  

“Actually that is part of the common principle to ‘act locally and think globally.”

Past expectations on global action proven to be weak.

“I am not talking about Japan, Europe, Australia New Zealand, these are listed in Appendix 1. The idea of Appendix 1 is that developed countries, richer countries – the heavier polluters, they are supposed to buy from developing countries, poor countries.

“At that time in 1990s when Malaysia was still a lower medium income country, we were waiting – when and where are the big companies coming to buy our carbon but that was never done.” 

One company from Japan called Seraya during JICA time, they actually sponsored some projects in Kinabatangan and some forest reserves in Mahua , Tambunan. 

This Seraya company from Japan almost got to that idea of doing carbon offset – very close to this idea but as keen as Seraya was, that first process of carbon trading never consummated.” 

State must set the price to get back RM100m costs to maintain 7 classes of forests

“Now I get into process number two: Let’s say given enough time, we come up with the inventory, how are you going to put a pricing?

“In the case of a hand phone, its pricing is based on how much is your input. The price of a handphone is based on cost of production, true or not – how much labour input, how much scientific input, how much technology you paid for.

“But in the case of the carbon storage capacity and carbon sinking ability of our forests, we don’t have a factory, we did not build a carbon storage and carbon sink factory, it is all done by nature. So after we have come up with the inventor, we are the ones who will put the pricing first because we own the forests, “ Dr James pointed out.

“However, the Sabah State Government actually pays a lot of money to maintain it – RM100m per year!” he noted. 

“This is paid to make sure that Class 1 until the Class 7 forests integrity will not be disturbed. And these are cost of production and the cost maintaining – cost of conservation which should be accounted for in the Nature Conservation Agreement.” 

“So if you talk about selling, this is the cost you want to get back , true or not?”

“Because you want to sell carbon offsets, the price of your selling should be reflecting the cost of production – how much you spend per year in order to secure the Class 1 to Class 7 forests of Sabah. Then you go to the market.”

“Let’s say one company from US which says,  I need  10 tons of emissions in a month and you say, one ton is 7 euro. That means you have calculated your price based on how much how much you spend a year and your price must be more than your cost of production invested every year in maintaining all the seven classes of forest in Sabah, true? Then it makes sense.” 

“You cannot simply say, okay, nature has done the carbon store and carbon sink for us, this is the price I am going to put out, thinking the forests are free because we didn’t actually plant the trees, they grew by  themselves so  we just put a fence around it and that’s it. It is not like that, because there is a costing! 

“Yet, this is what the people who object to contract so far didn’t talk about: how are you going to set a price? Who is going to set a price? The State must set the price. Do they have the ability to do the pricing? Big question!” 

Decide how much profit 

“And once you have decided your costs, your prices reflect the cost of your production plus little bit of profit.  How much profit do you want?

“Let’s say you want to calculate, you want to get back all the investments since 1963, that is 58 years the worth of investments and you want to get it back by selling the carbon that you have been protecting with all the money spent. And this is the basis of business you know?  This is how the market works – like the one in the US I have mentioned  – you calculate.

“So then there is a company coming to us, saying, ok, I want 10 tons per month, can you supply? So we sign an agreement, I buy from you, I pay you money. but how do they know that forest actually exist because you are from the United States right?

“In case of palm oil mills, you can put a machine to measure how much you emit but in the forest there is no machine to put there to measure exactly the carbon storage and carbon sinking. 

“So they need to send auditors which you have to repeat every year or two, it’s not like, oh, we have forests, just go and sell because there is a lot of carbon there, it’s not like that.”

Sabah is not special in the market out there

“The people who buy they are very vigilant, they are paying a lot of money and you are selling at let’s say 70 euros per ton for 10 tons, maybe 100 tons, maybe a thousand tons or 100,000 tons over a period.

“There is a market out there and Sabah is not the only place in the world that has forests, we are competing with the rest of the world who are sitting on forests. So this market is not like special to us.

“You are, once you go to the market it’s a free market enterprise so you need to compete!

“What is the rule of buying and selling?  Buyers will always buy at the cheaper price, sellers always want as high as possible. Then that is what the market power is.

“So essentially once you are in that market already you will be subjected to the market forces which Is like any commodity, sometimes it goes up most of the time it goes down. When it goes up, easy for you to sell. When it goes down, then what do you do?

“In a conventional commodity, the buyers protect themselves, the sellers also protect themselves by hedging which is quite complicated.”

Fluctuations and real issues objectors don’t talk about 

“If you really want to go to this market you need to understand that this is complicated because there are fluctuatins, like any commodity.

“At this moment, the price of carbon offsetting is very high because it follows the fuel price, the oil price, it follows other commodities because many countries are recovering so they are engaging production or starting to produce so you need carbon – the price is good. At one time it reached 70 euros per ton but that is actually very small.”

“Actually there is nothing new about carbon trading. The market started long before the Kyoto protocol, 1970s but small scale. In the history of about five decades of this market for emissions in existence, we don’t have good records actually. At 70 euros per ton, how much is palm oil? RM5,000 or 1000 euros per ton palm oil! 

“So if you are talking about selling your carbon offsets at 70 euros, how long it is going to take for you to recoup all your investments over the past 58 years? Or you just want to recover last year’s expenditure of RM100m maintaining these forests, how many carbon offsets would you need to sell in order to get RM100m? 

“People can calculate. Do they have have it ? This is actually what those people objecting the NCA idea should talk about,” Dr James asserted.

“They should talk about this not about native people will be left out, not being consulted, no prior consent from them because why would you need native consent in the Class 1 forest, for example, where there are no people. There maybe people next to it but that’s beside the point. 

“Why would you say they own the forests, they don’t own the forests, it’s the people who pay that RM100m every year, who own the forests so we are  the tax payers contributing to the RM100m – the  cost of maintaining Sabah’s seven classes of forests that goes into paying the network of staff, enforcement etc”     

‘The Devil is in the details’

“The way I see it is the State Government has to spend money after signing the agreement because it is doubtful it will come from the Singapore company.

“But assuming they do and don’t ask the State Government to pay for whatever, they still have to convince people to buy. But unless the pricing is already done, I can’t think that out. 

“Of course, people may say they don’t see the forest for the trees, so don’t be too worried about the details. But the devil is in the details though,” Dr James noted.  

“People should look at the details of what I said – how this emission market works, the public needs to know.

“So that’s the basis of that market. There are rules because if they don’t have a rule especially in the US and China,” he said. 

A surprise from Yunan 

“China, like the US, is surprisingly very big in this market where every city had a market for emissions, for example, Fujian or Yunan, but I give you an example of Yunan which is most popular.

“Yunan is home to the Xishuangbanna Man and Biosphere Reserve Unesco millions of hectares big which is home for elephants – the only elephants in China.

“The provincial Government f Yunan sells the carbon storage and carbon sinking ability. So the Yunan Prefecture Government has been selling carbon offsets of its park- a huge Unesco site of Man and Biosphere and it is not a small one. 

“You go as a tourist to the city, you will see tourism, you will see how people participate in it, the economy is so good. Millions and millions of tourists come in yet that is a small revenue, the bigger revenue was coming from that carbon offset.

“The Yunan provincial Government is selling the offset to the energy sector in Yunan itself because Yunan has a big population - more than that of Malaysia. So they sold it to automobiles, they sold it to any polluters. There were a lot of polluters because for the past 30 years China has been experiencing remarkable economic growth. When you have growth, it means you have pollution.

“So far looking at our numbers in terms of revenue, compared to tourism, ecotourism revenues is small but compared to manufacturing revenues, offset revenue is very small. Conventional or traditional economic sectors like agriculture, the revenue from traditional sectors are still higher but carbon offset revenue is something although I don’t know the exact revenue from offset in Yunan.

“But in Sabah’s case as I already said, to get back that RM100m, you need to sell lots of carbon offsets.”

Speculation in emission trading and danger 

“In the stock market you don’t know who buys. What you see is just a number in the computer, you sell this amount, someone reads what you see is just a number, agrees to how much he/she wants to buy, I sell you this much. You don’t see who is buying and you don’t really care. So you will see often where the price goes down someone tries to call buy it and wait as they don’t really need this carbon offset  but they make money out of speculating. 

“So this is the nature of the market – dangerous for if you think about financial sustainability of emission trading. That danger is always there.

“It happened again and again, in different countries and in different times because this market for emission is no different from the other markets. People think they can make money now that price is high because economies are recovering but maybe soon will become lower.  

“It had happened before, it happened to California which experienced blacked out when independent electricity providers were not able to operate because they ran out of money so that is the consequence of that market free market, it’s not straight forward because once you go to the market you are subject to the dictates of demand and supply because you have signed   a bond  for hundred years, you are not allowed to touch it so you lose that freedom and control to do anything you like to your own forests because you have gone into international waters.”

Dr James: Forestry biggest revenue earner – RM500m

“Actually the time has come for emission trading hatched by those who came up with the idea of monetisation of our forests because when you look at Sabah Forestry Department, they bring almost half a billion every year from export alone of sawn logs and sawn timber.

“These two are worth every year half a billion and out of that RM500m,  RM100m is to pay the cost of maintaining the seen classes of forests,  so you still have 400m profit but  that one is cutting the tree,” Dr James noted. 

“So actually the Sabah Forestry Department is still the biggest revenue earner for the State, from timber export alone, still very important, oil and gas second, palm oil probably third 

“The question is: Can this carbon offset really bring revenue comparable to that?  I doubt it. If carbon offset can bring lots of profits, so profitable that they can bring half a billion a year, well, don’t cut the timber lah, just keep it there, this is how they should think.”

Do it right for confidence  

“As I said, carbon trading is nothing new, do it right, it boosts confidence. A classic example is the case of Costa Rica which has a large swathe of forests surrounded by geothermals. 

“In 1997, this is interesting, the Costa Rican sold their carbon offset to a European country so that country assigned their offsets to a company in  their country. 

“The State Government should move forward the same way, let’s say sign with Singapore to focus on the Singapore market and then Singapore assigns to their own polluting company. It is good for confidence.  

Develop emission offsets market at home 

“But for us to start this emission trading we have to start with our own polluters, our sectors like palm oil, gas and timber, these are polluters and about 70 billions of our GDP came from these three sectors. So what it means is we have a forest the State Government should sell these offsets to these polluters. 

“This is how people start their market in China, the USA where they started with geographic confines and only then we can say to rest of world that we have offset our carbon foot prints,” Dr James said. 

“We can sell to our nine coal-fired power plants which emit consume 21 million tons of coat per year to produce 7,730MW of electricity per year, the car manufacturing companies, the airlines, Sabah State Government can sell to AirAsia because AirAsia is polluting. 

“Although AirAsia is buying new aircraft that are actually fuel saving but still polluting. Malaysia Airline, Petronas and the rest like the palm oil industry – so many ways to reduce emissions – like you a direct you emit you buy offsets for the damage rather than by very unpopular taxes.” 

Emission offset market no great job creator 

“On the other hand, we must recognise the limits of offsets. Carbon trading does not create job employment. Those who create jobs are the sectors buying the offsets, like Petronas, the more they buy the more jobs but the act of selling the offsets doesn’t produce many employment beyond the people who do the inventory, auditing and that’s not many.. 

Dirt cheap price defeats the whole carbon offset market 

“Worth noting is price of offsets can be cheap for many reasons. For example, if there are substitutes. If they don’t buy carbon offsets they can do something else by buying technology that produces less carbon dioxide.  

“Toyota for example, instead of producing bigger cars like America they produced smaller models, use hybrid cars, use electric cars  so that they don’t need offsets, it will reduce offsets. 

“This is the thing, if the price of carbon offsets is expensive they use the money to buy technology but if when the price of offsets is dirt cheap like china selling at seven euro per ton, you don’t have reason to buy technology, you might as well buy the offsets. In that chronic case, you defeat the purpose of having this carbon offset market,” Dr James pointed out.  

 

Dr James





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