What is Carbon Trading?

Advantages of Carbon Trading with the Municipal Solid Waste Management

Carbon trading is the process of buying and selling permits and credits that allow the permit holder to emit carbon dioxide. The world’s biggest carbon trading system is the European Union Emissions Trading System (EU ETS) and it has been a central pillar of the EU’s effort to slow climate change.

The introduction of Clean Development Mechanism (CDM) to Malaysia improves the environment of the country. Besides achieving sustainable development, the carbon credit earned through CDM enhances the financial state of the nation. Both CDM and renewable energy contribute to society by striving to reduce carbon emission. Most of the current CDM projects are related to renewable energy, which has recorded 69% of total CDM projects.¹

The municipal solid waste management in Malaysia measures the potential value of carbon through the data it collects. It will then review and evaluate the benefits of carbon emission trading as an alternative investment tool and a basic framework required for its implementation.¹

Advantages of the emissions trading scheme on the waste sector 

The cost of emission units is expected to be passed on to customers of landfills (the people and organisations depositing waste) through increased prices for waste disposal. 

Users of landfills have markedly different items in their waste, which all have different potentials for landfill gas generation. Any price increases will also be affected by competition from other landfills and the management policies and priorities of the landfill owner – usually a local authority.

The combination of an absolute cap on the level of emissions permitted and the carbon price signal from trading helps businesses to identify low-cost methods of reducing emissions on site, such as investing in energy efficiency – which can lead to a further reduction in overheads.

According to the International Emissions Trading Association (IETA)², an organisation that promotes a carbon market and pricing solutions for climate change, there are various advantages on a global scale to carbon trading: 

1. Emissions trading achieves the environmental objective of reduced emissions – at the lowest cost

• Cap and trade are designed to achieve an environmental outcome – the cap must be met or there are sanctions such as fines. Allowing trading within the cap is the most effective way of minimising the costs – which is good for businesses and households.

2. Emissions trading responds better to economic fluctuations than other policy tools

• Allowing the open market to set the price of carbon has better flexibility and avoids price shocks. For example, as seen in Europe, prices will fall during a recession as industrial output, and thus emissions, will fall.

3. Emissions trading incentivises innovation and identifies lowest cost solutions to make businesses more sustainable

• The combination of an absolute cap on the level of emissions permitted and the carbon price from trading helps businesses to identify low-cost methods of emissions on site, such as investing in energy efficiency. This can lead to a further reduction in overheads and makes businesses more sustainable in the long-run. 

4. Cap and trade have proven to be an effective policy choice

• This method has proven effective for example in the US through the acid rain program, where it quickly and effectively reduced pollution levels at far lower cost than expected. 
• The International Carbon Action Partnership’s 2019 status report found that almost 40% of global GDP is now subject to emissions trading, with systems active in South Korea, China, California and the EU, among several others.

5. Emissions trading can provide a global response to a global challenge

• Allowing carbon trading reduces compliance costs and can help involve other jurisdictions or municipalities in the fight against climate change, as seen in the Clean Development Mechanism (CDM) offset program under the Kyoto Protocol that inspired China. 
• Article 6 in the Paris Agreement allows countries to work together to reduce emissions as well as establish a market-based mechanism to enhance efforts. Under this mechanism, countries with low emissions would be allowed to sell their exceeding allowance to larger emitters, with an overall cap of greenhouse gas (GHG) emissions, ensuring their net reduction.

6. As emissions trading spreads in more locations, it increases the opportunities to link systems which enhance their effectiveness and reduces costs

• Connecting emissions trading systems as per how California and Quebec have done, widens the pool of participants to trade with, which reduces costs.

Bottomline, an appropriate carbon emission trading system may provide higher economic value and more benefits towards developing sustainable income generation methods in the Malaysian environmental sector. Through this flexible approach, GHG emissions would experience a strong decline, coupled with stimulation for innovative and cleaner technologies and an overall transition towards a low-carbon economy.