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The first session of Climate Governance Malaysia’s Director’s Masterclass Series 2025 was held on 24th February 2025 as an online webinar.
Renato Roldão, Member of the Task Force for International Carbon Pricing and Markets Diplomacy at DG CLIMA, European Commission, provided an overview of the EU’s carbon pricing mechanisms in his opening remarks. He highlighted the EU Emissions Trading System (EU ETS) as a key driver of emissions reductions, with covered sectors cutting emissions by 47.6% since 2005 and a 16.5% drop from 2022 to 2023 alone, largely driven by the transition to renewable energy and improved energy efficiency.
He also noted that the EU has experienced great success in decoupling emissions from economic growth, with emissions falling by 37% since 1990 while the economy grew by 68% in the same period. With the EU ETS covering approximately 36% of the EU’s total greenhouse gas emissions, he pointed to this as evidence that a well-designed ETS can drive emissions reductions without hindering economic development.
However, Renato emphasized that the EU ETS cannot exist in isolation and operates within a broader policy framework. Examples of policies working alongside the EU ETS include the Effort Sharing Regulation (ESR), which covers non-ETS sectors, and the Land Use, Land-Use Change, and Forestry (LULUCF) Regulation, which focuses on carbon sinks and removals. Along with the EU ETS, these complementary policies are continuously refined to align with the EU’s evolving climate targets, including the upcoming 2040 emissions reduction goal as part of its next Nationally Determined Contribution (NDC).
Reflecting on lessons from two decades of the EU ETS, he stressed the importance of robust and transparent monitoring, reporting, and verification (MRV) systems, urging Malaysia to establish a strong data foundation for any future carbon pricing mechanism, whether an ETS or a carbon tax. He also highlighted the need for flexibility to ensure resilience against external shocks such as financial crises and geopolitical disruptions. Additionally, fairness within the system is crucial, with mechanisms such as the Social Climate Fund introduced to mitigate social and economic impacts on vulnerable communities. Aligning the ETS cap with climate targets has also been critical, with the EU implementing a linear reduction factor to ensure a steady decline in emissions over time.
Outlining recent and upcoming ETS reforms, Renato noted that the EU expanded the system’s scope in 2024 to include maritime transport and will launch ETS2 in 2027, extending coverage to additional sectors. Furthermore, free allocations will be phased out in favor of increased auctioning to enhance the system’s efficiency and effectiveness.
Following Renato’s presentation on the EU ETS, Datin Seri Sunita Rajakumar, Founder, Non-Independent Director, and Council Member at CGM, initiated a discussion on the complexities of balancing sustainability ambitions with trade competitiveness. She highlighted concerns that the EU’s Carbon Border Adjustment Mechanism (CBAM), while designed to prevent carbon leakage, could be perceived as an anti-competitive trade barrier, particularly for countries with less stringent emissions regulations. Renato acknowledged these challenges, emphasizing that CBAM remains a learning process for both the EU and global markets. There are also similar mechanisms emerging in jurisdictions such as the UK and Thailand, reflecting a broader trend toward integrating carbon pricing into international trade. CBAM is also designed to be WTO-compliant (World Trade Organization-compliant) and proportional, ensuring fairness by treating EU and non-EU producers equally. Recognizing the importance of international dialogue in facilitating CBAM implementation, Renato also noted CBAM’s role in accelerating decarbonization efforts.
Datin Seri Sunita further explored the challenge of aligning carbon pricing policies across jurisdictions, particularly when trading partners lack mandated emissions reporting and when competitiveness gaps persist due to existing subsidies. Renato responded that the EU is actively conducting studies to assess different carbon pricing mechanisms and address these disparities. Acknowledging the "diplomacy gap," CBAM’s implementation follows a phased implementation, gradually replacing free allocations over the next decade, and is designed to foster convergence while supporting countries in their carbon pricing efforts.
Expanding the discussion to broader climate policy, Datin Seri Sunita questioned how the EU is reshaping climate baselines given that global warming has already exceeded critical thresholds. Renato reaffirmed the EU’s commitment to its ambitious targets, including a proposed 90% emissions reduction by 2040 under the European Climate Law. Achieving these goals requires continuous policy refinement, strengthened carbon markets, and an increased reliance on carbon removals and natural carbon sinks. Rather than seeing climate policies as a constraint, the EU aims to position sustainability as an enabler of economic growth and innovation.
Datin Seri Sunita also highlighted the increasing complexity of climate diplomacy, particularly as some trading partners deprioritize climate action while the EU advances stringent policies and climate modeling. Renato acknowledged these geopolitical challenges but reiterated the EU’s commitment to its targets, viewing the green transition as an opportunity for economic transformation and competitive advantage rather than a burden.
Shifting the conversation to biodiversity, Datin Seri Sunita raised the challenge of applying lessons from carbon markets to biodiversity credits, particularly in aligning ASEAN’s voluntary carbon markets with conservation efforts. Renato expressed strong support for integrating biodiversity co-benefits into carbon markets, emphasizing the need for high-integrity carbon pricing projects which should enhance, rather than compromise, biodiversity. Datin Seri Sunita then brought up the difficulty of pricing and comparability, as nature-based solutions and biodiversity credits lack the fungibility of traditional carbon credits, complicating valuation and market integration. Noting the EU’s Directorate-General for Environment (DG Environment) current development of legislation for biodiversity credits and carbon removals, Renato suggested further dialogue with relevant departments to exchange deeper insights.
Concluding the Masterclass, Datin Seri Sunita reaffirmed carbon pricing’s role as a crucial tool for global decarbonization. While sustainability ambition may appear to be slowing, the momentum remains unstoppable, with increasing climate risks potentially making carbon pricing ubiquitous.
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