**2. Literature Review**

### *2.1. Carbon Trading in Malaysia*

The biomass renewable energy (RE) project's implementation in the carbon market is a cooperative mechanism that depicts high innovation under the bioenergy policy agenda. The implementation is planned with the intention of providing aid to developing countries to achieve sustainable development and to comply with climate change mitigation strategies [1]. The implementation is also aimed at assisting the developed world to comply with their commitment to reducing GHG emissions [12] and provide new opportunities in investments, technology transfer, building skills, and knowledge to create a sustainable future in Malaysia.

The CDM project activities have become one of the mitigation and emission reduction strategies in Malaysia and other countries in Southeast Asian regions, such as Singapore, Thailand, Indonesia, and the Philippines [12]. These countries are also engaged in carbon emission policies relating to the SDG standard and are focused not only on the energy sector but also on the agricultural and forestry sectors. In the Association of Southeast Asian Nations (ASEAN) countries, the CDM has been very successful in engaging with RE project application and GHG reduction [13]. As the carbon trading mechanism can be employed in separate projects, its effectiveness in encouraging RE use in developing nations, particularly in Asia, has a grea<sup>t</sup> potential impact on the energy industry.

In the palm oil industry, the Malaysia Palm Oil Board (MPOB) has continually prioritized research and development (R&D) to enhance sustainability in relation to palm oil. Moreover, the issues related to sustainability and productivity are core elements of consideration for the MPOB, consisting of various strategies to maximize the connection between economic development and environmental sustainability. Hence, the palm oil industry's future growth is based on a sustainable framework and the adoption of innovative technologies.

Malaysia's governmen<sup>t</sup> has put considerable efforts into RE's development in the palm oil industry and into finding an alternative approach through various support and promotion programs to address the new carbon pricing instruments. The Nationally Appropriate Mitigation Actions (NAMAs) is one of the alternatives for supporting the CDM activities' continuity. Malaysia's palm oil industry has endeavored to implement projects that are relevant to RE production, such as RE supply, biofuel, biomass, biodiesel, and other bio-related production [14]. RE is known as the most adaptable type of low carbon and sustainable power source because it can contribute towards long-term emission reduction within the energy usage of electricity, transportation, and energy intensity [15]. The ratification in the UNFCCC discusses and implements the strategy for reducing carbon emissions [16] and one of the strategies noted was to have businesses innovate and invest in carbon trading projects that can be applied in the country's palm oil industry.

### *2.2. CDM in the Palm Oil Industry*

As [17] mentions, the palm oil industry in Malaysia has grea<sup>t</sup> potential to be engaged in carbon trading projects. The amount of biomass and palm oil production has been noted to increase from time to time [18] and, therefore, it assumes a strategic role in enhancing RE consumption and delivering a sustainable future. The RE production from palm oil mill e ffluent (POME), biomass, composting, and bioenergy residues can prove beneficial for di fferent sectors in moving forward to a new market mechanism. This goal is one of the directions for carbon trading project implementation.

As of 2015, there were registered CDM projects with a total investment of approximately USD1,530 million in certified emission reductions (CER) transactions and holdings in Malaysia's pending account, with 2,789,528 CER [5]. The biomass production accounted for 80.1% of Malaysia's CDM pipeline or 76.9% of all registered projects [14]. The data on the CDM project undertakings in Malaysia shows a massive biomass production volume from milling and plantation activity [19]. The data for 2015 indicates that project activities involved processing oil palm excesses, biofuel, biomass, methane capture, and co-composting using either solid or liquid waste collectively. Table 1 provides a breakdown of the projects' undertakings and their distribution in the palm oil industry according to project type.


**Table 1.** 2015. Project undertakings (clean development mechanism (CDM)) and their distribution in palm oil producers by project type [5,14].

\* POME = Palm oil mill e ffluent.

The CDM projects' status in Malaysia has been given due consideration due to the sharp decline in the carbon market following uncertainty in the future global carbon market [14]. According to the data by the Ministry of Natural Resources and Environment (MNRE) [14], 35.8% of Malaysia's RE-based CDM project pipelines are from biomass energy. Most of the palm oil mills generated biomass by capturing methane gas from POME treatment and used it as a fuel source for generating electrical and thermal energy for either on or o ff-site consumption. The Palm Oil National Key Economic Areas (NKEAs) plan, for instance, targets achieving 100% compliance by all the mills that have implemented biogas recovery projects by 2020. Moreover, this initiative has put in place a policy designed to re-operationalization all CDM methane avoidance projects in the palm oil sector [14]. In addition, the relevant public policies, including the National Renewable Energy Policy Action Plan (2010) and the Economic Transformation Programme (ETP), are focused on enhancing the utilization of local renewable energy sources as a way of contributing towards the security of the nationwide supply of electricity and to sustainable socio-economic development.

According to the 2015 Malaysian governmen<sup>t</sup> report [20], the nationally determined mitigation contributions (NDCs) demonstrate the government's commitments to minimize the intensity of GHG emissions by 45% by 2030 relative to the intensity of emission of gross domestic product (GDP) in 2005. The amount of GHG emissions is made up of 35% on a non-restricted basis and an additional 10% as the condition upon proof of paymen<sup>t</sup> of climate funding, transfer of technology, and capacity building from developed countries [20]. As indicated in Table 2, the biennial report [21] made available by the MNRE gives a summary of the reduction of emissions as of 2013 and possible emission reduction in 2020. The comparison in emission reductions between 2013 and 2020 shows a huge reduction in emissions with the palm oil industry mitigation action. The statistics sugges<sup>t</sup> that specific mitigation actions have been put in place to ensure the nation meets it's target in the NDCs report to the UNFCCC.


**Table 2.** List of achieved emissions reductions in 2013 and projected for 2020 [21].

> \*FiT= Feed-inTariff.

With the potential development in carbon trading projects, the CDM projects' CER in Malaysia have contributed a total of 9,844,435 CER issued as of April 2015 [14]. However, the CER oversupply has reduced its price and it is unable to meet the high transaction costs incurred in verification. As discussed in the Conference of Parties 21 (COP 21) in Paris, carbon trading projects require longer-term outcomes to ensure optimal growth in sustainability; hence, developing countries can grow economically and achieve their respective emission targets with a low economic cost. Other studies have focused on how well carbon trading projects function; however, the numerous prospects for initiating CDM project activities in the palm oil industry will demonstrate significant achievements in the future [13]. Furthermore, the subsidies provided for the CDM's financial allocation have received criticism from many organizations who have contended that the allocation has been subject to unethical and unsuitable implementation in reducing carbon emissions. Based on various sources and the detailed exploration by the Standards and Industrial Research Institute of Malaysia (SIRIM) and the Malaysian Palm Oil Council (MPOC) [22], the slow-moving carbon trading and engagemen<sup>t</sup> in Malaysia within the palm oil industry is because of the lack of knowledge and uncertain development within the carbon market and trading opportunities [23,24], which have led to various questions and dilemmas in the carbon market system involving the palm oil industry in Malaysia. However, as presented in Table 3 below, the total CER issued are higher within the palm oil industry. The development towards the SDGs aims to enhance renewable energy development in Malaysia and would bring material and positive outcomes to the palm oil industry [14].


**Table 3.** Potential and certified emission reductions in Malaysia's CDM pipeline in the palm oil industry [14].
