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Carbon trading coming to town

■ Voluntary Carbon Market guide and domestic emissions trading scheme are initiatives to serve as a reference and catalyst for local carbon trading market.
■ RE players/industry could benefit from DETS while it could be earnings neutral to other power generators as additional cost could be passed through.

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To develop VCM guide and DETS

● The Minister of Environment and Water Ministry (KASA) – YB Dato’ Sri Tuan Ibrahim bin Tuan Man said the cabinet has in principle agreed to KASA’s proposal on 17 Sep 21 to develop: (i) a Voluntary Carbon Market (VCM) guide to serve as a reference for all stakeholders that are keen in carbon credit transactions, and (ii) a domestic emissions trading scheme (DETS) which will be jointly carried out with the Finance Ministry, Bursa Malaysia and other stakeholders, to enhance the capabilities of industry players and to serve as a catalyst for the country’s carbon trading market.

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● The government plans to roll out DETS in phases and a single business platform will be developed, which would enable state authorities and private sector to leverage on DETS to execute carbon credit transactions at the domestic level (vs. international which has high transaction cost and more stringent technical requirements), and improve players’ environmental, social and governance (ESG) aspects.

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Renewable energy players to benefit from DETS

● According to World Bank, more than 40 countries (mainly from the US, Europe and China) have adopted or are scheduled to adopt carbon pricing through emissions trading system (ETS) or carbon tax as of Apr 21. This would cover 11.65 Gt CO2e, representing 21.5% of global greenhouse gas (GHG) emissions in 2021. The carbon prices range from below US$1-US$140/tCO2e. About 75% of covered emissions are priced below US$10/tCO2e, which is lower than the US$40-US$80/tCO2e price range in 2020 and US$50–US$100/tCO2e by 2030 (identified by High-Level Commission on
Carbon Prices) to achieve the temperature goal of the Paris Agreement.

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● We are positive on the new initiatives undertaken by KASA, as these are essential to prepare industry players for the more stringent implementation of carbon control mechanism globally and to ensure the country meets the sustainable development agenda. We expect this recent development to: (i) benefit renewable energy (RE) players through DETS, (ii) attract more investments into the domestic RE space, and (iii) be earnings neutral to fossil fuel power generators as the additional cost will likely be passed through.

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● We reiterate Overweight on the sector given: (i) we anticipate stronger EPS growth for the sector in CY21-22F vs. CY20, (ii) its undemanding CY21F sector average P/E of 13.8x vs.16.6x in CY20, (iii) decent dividend yields of c.5%, (iv) limited foreign outflows as foreign shareholding is near historical lows, and (v) overplayed ESG concerns as we see growth potential from ESG. TNB and PGB are our top picks for the sector. Key downside risks are political instability and more power reforms in the pipeline.