The elephant in the room at the long-awaited launch of the National Carbon Market Policy (NCMP) was the absence of a carbon tax. After Prime Minister Datuk Seri Anwar Ibrahim announced a carbon tax for the iron, steel and energy sectors in his Budget 2026 speech, many in the market expected the launch of the policy to come with the price companies would have to pay for their carbon emissions.
However, the implementation of a carbon tax is on hold due to the geopolitical tensions in the Middle East and to avoid additional cost pressures on the people and industries, said Minister of Natural Resources and Environmental Sustainability Arthur Joseph Kurup in April. A carbon tax would come under the purview of the Ministry of Finance (MoF).
Nevertheless, the government is still taking steps in this direction. The NCMP, approved by the cabinet on April 1, is aimed at laying the groundwork before the carbon pricing instruments (CPIs) are implemented.
“We are building the foundation to ensure that when the National Climate Change Bill (RUUPIN) is tabled and CPIs such as an emissions trading system (ETS) or carbon tax are implemented, they are executed effectively. While the carbon tax is currently on hold to protect the rakyat from global cost pressures, our technical development has not slowed down,” the Ministry of Natural Resources and Environmental Sustainability (NRES) tells ESG in an email reply.
The government is in the final stages of completing RUUPIN and the National Climate Change Authority Bill, which is expected to be tabled in parliament in July. These two pieces of legislation will set the stage for CPIs to be introduced by MoF.
Before that happens, the NCMP will lay the foundation for CPIs in three ways. The first is that the policy is aimed at promoting the growth of carbon-credit-generating projects in Malaysia which can later be used by companies to offset their carbon tax.
With that supply comes the monitoring, reporting and verification (MRV) system and National Carbon Registry, which together will set the standard against which every carbon project in Malaysia will be measured and tracked.
Finally, the NCMP will clarify procedures for the international trading of carbon credits from Malaysia, in view of the rising demand for carbon credits from other countries and entities.
Building supply before demand
The government’s position is that Malaysia needs to build its carbon market ecosystem before introducing CPIs like a carbon tax or ETS. That means developing enough high-integrity domestic carbon credits before imposing a carbon tax that would push companies to buy carbon credits.
This, of course, is assuming that Malaysian companies will be allowed to offset their carbon tax with the carbon credits. In Singapore, for example, taxable companies can only offset up to 5% of their taxable emissions using international carbon credits, sourced from only 10 partner countries it has signed implementation agreements with.
The concern is that without a carbon tax or domestic ETS, there will be no demand for carbon credits. Without demand, there is little incentive for developers to bring new supply to market.
“The NCMP does not directly address the current problem with the carbon market in Malaysia. The key problem is the lack of demand for credits at this stage. When there is no demand, there is no supply. The demand needs to be created with a clear carbon pricing policy, either via a carbon tax or cap-and-trade ETS … Currently, there are no reasons to buy credits,” says Soon Hun Yang, founder and CEO of Eco-Ideal Consulting Sdn Bhd.
But the risk of moving too early is that companies may be allowed to offset part of their carbon tax but then struggle to find eligible credits. Malaysia currently has only two projects generating carbon credits that are sold on the Bursa Carbon Exchange: the Kuamut Rainforest Conservation Project and the Langkap Biogas Project.
Malaysia had projects under the Clean Development Mechanism (CDM) in the past, which generated certified emission reductions under the Kyoto Protocol framework. However, only around 40 of Malaysia’s 143 registered CDM projects are technically eligible to transition to the Paris Agreement Crediting Mechanism under Article 6.4, with four currently actively progressing, according to NRES.
“It’s really about building the system so that when the time comes for the carbon tax to be introduced, we are ready to go — there is enough supply of carbon credits for our buyers and the system actually works. So, you don’t end up in a situation where, if the carbon tax is introduced, and as a corporate buyer, you say, ‘Okay, I want to offset 10% of it’ but you don’t know where to source those carbon credits,” says Malaysia Carbon Market Association president Renard Siew.
With this in mind, the NRES ministry is starting to build Malaysia’s domestic carbon crediting capacity, beginning with the forest sector.
The first step is the development of a national forest carbon crediting mechanism, known as the Forest Carbon Offset (FCO) programme, which is being led and administered by the Malaysia Forest Fund (MFF) under the purview of the NRES ministry. The FCO programme — now in its final stages of development, with an official launch targeted for June 2026 — is aimed at becoming a key source of high-quality, high-integrity Malaysian carbon credits.
The NRES ministry and MFF have been designing the first set of domestic carbon project methodologies, focusing on high-impact, nature-based solutions. These include afforestation, reforestation and restoration; improved forest management; reducing emissions from deforestation and forest degradation; and wetland ecosystems. These pilot programmes are critical for testing the baseline settings and MRV systems, as well as ensuring environmental integrity and investor confidence in domestic carbon credits.
Meanwhile, Malaysia Green Tech and Climate Change Corporation (MGTC) is in the early stages of developing Malaysia’s technology-based carbon standard. This will cover carbon-credit-generating projects like methane gas capture from landfills to generate energy.
“Other sectors such as transport, energy, waste, and carbon capture, utilisation and storage (CCUS) are only indicative and may be considered later, subject to readiness and policy decisions. There is no fixed timeline set or stated as expansion will depend on factors like data availability, methodological readiness and alignment with national priorities. It also will be influenced by market conditions,” says the NRES ministry.
Malaysia needs to quickly build the tech-based carbon credit pathway because these credits can often be generated faster than nature-based credits, says Siew. He notes that Malaysia should not have separate agencies, with one handling nature-based credits and the other, tech-based credits. Instead, there should be one overarching body or standard that manages all the carbon credit methodologies.
This is because projects can involve both nature-based and technology-based components. A project in the palm oil sector, for example, could involve land-use or nature-based elements alongside energy efficiency, methane capture, waste management or other technology-based emissions reductions.
If a project developer has to go to MFF to verify one part of the project and another agency such as MGTC for another, the process will become cumbersome and uncoordinated, he points out.
What is not measured cannot be priced
The carbon market has often come under fire due to controversies in various countries where there are projects with little transparency and doubts about their true impact on the ground.
That is why a credible MRV framework is crucial, and is the NRES ministry’s priority at this stage. MRV is a standardised framework for measuring and verifying carbon reduction projects to ensure that one carbon credit is equal to one tonne of carbon dioxide (CO2) removed or captured. This will prevent greenwashing and protect the reputation of Malaysia’s carbon market, ensuring that what is claimed has been verified and the projects are credible.
“Our goal is to ensure that by the time any CPI is live, our industries are MRV-ready and proficient in calculating their emissions. This removes the technical shock when compliance becomes mandatory,” says the NRES ministry.
A project such as a restored forest or a methane-capture system at a landfill is monitored against a baseline of what would have happened without it. An accredited third party then verifies the numbers before credits can be issued.
For an MRV system to hold up, it needs to be built through proper industry consultation and be open to independent scrutiny, says Ivy Wong, CEO of Malaysia at Permian Global.
“Designing the registry should not be just academic, desktop or theory-based. More importantly, views from stakeholders with operational or ground-truthing experience are not only relevant but also essential,” she adds.
Permian Malaysia, a subsidiary of Permian Global, manages the Kuamut Rainforest Conservation Project.
The NRES ministry says it is finalising the standardised reporting templates and will soon begin extensive industry consultation to ensure their usability. The National Carbon Registry is also under development.
The registry, which will keep track of all verified carbon projects in Malaysia, is important to demonstrate transparency and avoid double counting of emissions reduction or avoidance claims. It is a foundational component of both Article 6.2 transfers and a future domestic ETS.
Article 6.2 is a mechanism under the UN Framework Convention on Climate Change (UNFCCC) that allows countries to trade with one another verified emissions reductions through bilateral agreements.
Countries like Singapore that want to purchase carbon credits to offset their emissions and meet climate targets may look to carbon-credit-generating countries like Malaysia. Article 6.2 is the mechanism for them to do so via internationally transferred mitigation outcomes (ITMOs).
Under Article 6.2, Malaysia has signed memoranda of understanding with Singapore and South Korea, while cooperation with Japan under its Joint Crediting Mechanism is still in negotiations.
A carbon registry is important because it enables the tracking, authorisation, recording and corresponding adjustment required to ensure the emissions reduction from a project is not claimed by more than one country to meet their climate targets.
Such a registry is needed if Malaysia introduces an ETS because it will serve as a ledger for allocating emissions allowances to facilities that fall under the carbon tax, tracking the movement of credits and ensuring the integrity of the enforcement mechanism.
An ETS — a form of CPI sometimes used alongside a carbon tax — works by capping total emissions for regulated sectors. Companies in those sectors that emit more than the cap will have to buy allowances from those that emit less.
The registry is being built by MGTC, which is also developing the participation guidelines that will set out how market participants navigate the system and what their responsibilities are. The registry is expected to be run by a new entity or authority acting as the regulator under RUUPIN.
“Thus, we foresee that in 2026 or 2027, intensive industry workshops on the National MRV Framework will be done before full operationalisation of the National Carbon Registry and voluntary pilot reporting. It is only when the industry is ready and the infrastructure is set that the activation of compliance mechanisms will be implemented fully,” says the NRES ministry.
Exporting carbon credits at the expense of Malaysia’s climate targets?
A question that observers have asked as Malaysia gears up to export carbon credits to other countries and foreign entities is that if too much of these emissions reduction claims are given to others, how can the country meet its own climate targets?
Malaysia has committed to achieving net zero emissions by 2050, but according to the government’s Long-Term Low-Emissions Development Strategy released last year, even with the additional measures taken, the country will not achieve this target.
The other climate target Malaysia has committed to is the nationally determined contribution (NDC), which is to peak greenhouse gas emissions between 2029 and 2034 and achieve an absolute reduction of 15 million tonnes to 30 million tonnes of CO2 equivalent by 2035 from the peak level. The path to achieve both targets together is currently not clearly laid out in publicly available official documents.
The concern is that Malaysia could export too many credits and later find itself short of the reductions it needs to meet its NDC. If that happens, the country may have to buy back more expensive credits in the future.
There currently isn’t a formal ceiling on how many carbon credits can be transferred overseas. Nevertheless, the NRES ministry says a limit is being looked at to prevent overexporting.
“We first need to take stock of new and existing projects that intend to authorise their credits and compare that against our current NDC achievement and policy evolution. This is a continuous process that will involve tracking and monitoring Malaysia’s carbon market and projects,” says the ministry.
“Under the current NCMP framework, the authorisation for corresponding adjustments is subject to a strategic limit. [Countries] typically earmark amounts that are usually no more than 10% to 15% of the total mitigation potential for Article 6 export in any given vintage year.”
The demand for carbon credits may ramp up as 2050, which is the net zero deadline set by many countries and entities, approaches.
Another source of demand will come from international aviation players, as the International Civil Aviation Organisation’s Carbon Offsetting and Reduction Scheme for International Aviation requires airlines flying international routes to reduce emissions according to a set timeline, which can be done by purchasing high-quality carbon credits.
From another perspective, however, the funding available from foreign countries and entities via the sale of carbon credits could boost the growth of projects in Malaysia that would not otherwise have happened.
“Importantly, this needs to be thought of not as a zero-sum situation, but as an enormous opportunity to develop domestic energy efficiency and renewable energy, and to drive circularity across all sectors of the economy, leveraging foreign exchange, while maintaining integrity through the corresponding adjustments mechanism,” says Gary William Theseira, adjunct associate professor at the Asia School of Business.
This is where the Marginal Abatement Cost Curve (MAC Curve) under the NCMP comes into play as it sets the boundaries for what projects can be considered for Article 6 cooperation with other countries and domestic priorities. The MAC Curve identifies which emissions reduction solutions are cheaper and should be prioritised for domestic implementation, and which are higher-cost or harder-to-abate measures that may require international cooperation under Article 6.
Some activities that are high cost or require specialised foreign technology that would not happen without international finance include carbon capture and storage for hard-to-abate industrial clusters, large-scale electrolysis and sustainable fertiliser production, sustainable aviation fuel and direct air capture or specialised biochar projects that sit in the “high-cost” bucket of the MAC Curve.
Sectors that are essential for Malaysia’s own baseline NDC target achievement and are generally excluded from Article 6 authorisation to avoid overselling the country’s ITMOs include utility-scale solar and wind, general energy efficiency, and primary forest protection.