The Federal-State question

CARBON markets are often seen as a new revenue source for forest-rich states: protect forests, measure carbon, generate credits and sell them. In reality, the decision is more complex. Forests also provide timber revenue, employment, royalties, biodiversity, water security and rural livelihoods. If carbon projects compete with established land uses, governments must understand the opportunity costs, expected returns, risks and ownership of carbon assets. Nature-based solutions (NBS) in Malaysia therefore depend not only on forests or developer interest, but also on effective governance. Investors may see carbon opportunities, while states must consider land administration, concessions, communities, legal obligations and long-term accountability.

Malaysia’s federal structure makes carbon governance particularly important. Land and forestry fall under the State List, while international climate commitments, greenhouse-gas accounting and Paris Agreement mechanisms require federal coordination. Carbon therefore sits at an important intersection: forests may be governed by states, while emission reductions can affect national accounting and international transfers. The National Carbon Market Policy, approved by Cabinet in April 2026, supports voluntary and compliance markets and recognises the need to strengthen sub-national readiness, including support for state governments and local agencies.

Sarawak illustrates what a developed state-level carbon architecture can look like. Its Forests (Forest Carbon Activity) Rules 2022 established processes for carbon study permits, carbon licences, a forest carbon registry, monitoring, reporting, carbon accounting, fees and royalties. Sarawak later enacted the Environment (Reduction of Greenhouse Gases Emission) Ordinance 2023, providing for carbon-credit units, a carbon register, levies and related governance. Such legislation turns carbon from an abstract opportunity into something government agencies, landholders and investors can administer.

Sabah is also moving in this direction through its Climate Change and Carbon Governance Enactment 2025. Together, these developments show how states can define carbon within their own land and natural-resource systems.

For other states, the first question may not be, “How many carbon projects can we approve?” but rather, “What is a carbon project in our legal and economic system?” Who owns the carbon associated with a forest on state land, alienated land or concession land? Can carbon rights be separated from timber rights? How long can those rights be granted? What happens if a concession expires or is transferred? Who is responsible if a project fails decades later? These questions determine whether a project can become bankable.

The economic issue is equally important. Carbon should not be presented to states as free money for leaving trees standing. Where forests already generate revenue through sustainable timber production, plantations or other approved uses, a carbon project has an opportunity cost. If a state can receive predictable income from timber after a rotation, it is reasonable to compare that income with the expected net return from carbon. Carbon revenues can fluctuate, while projects carry costs for feasibility studies, monitoring, verification, registry fees, community engagement and long-term management. The comparison must therefore be based on long-term net value, not simply the headline price of a carbon credit.

This is precisely why each state needs a clear carbon framework. State-level rules can reduce uncertainty by defining how developers obtain access to land, what approvals are required, how carbon rights are registered, which standards are accepted, what royalties or levies apply, how communities benefit and what happens when projects terminate. Investors can normally work with regulation. What is harder to manage is uncertainty over which agency has authority and which rules apply.

Prof. Azlizam Aziz, Dean of the Faculty of Forestry and Environment, Universiti Putra Malaysia, has emphasised that every state should develop a carbon framework reflecting its own natural resources, land-use priorities and economic circumstances while remaining aligned with Malaysia’s national carbon policies. Academia, he notes, can support states by providing scientific evidence, technical expertise and independent guidance so that such frameworks are credible, transparent and practical.

There is also a risk in moving too far in the opposite direction. If every state develops completely different definitions, registries, standards and approval procedures, Malaysia could end up with a fragmented market that is costly for investors and difficult to reconcile with national accounting. State-level governance therefore has to connect with federal policy, preserving state authority over land and forests while maintaining national consistency where carbon accounting, market integrity and international transfers require it.

The emerging federal carbon tax adds another layer to Malaysia’s carbon governance. Although the federal government has announced carbon pricing, as of June 2026 the tax rate, emissions threshold, scope and expected revenue had not been finalised. It is therefore too early to assume how carbon-tax revenue will ultimately be allocated.

States may reasonably ask how their responsibilities for protecting forests, managing land, enforcing conservation and enabling nature-based solutions will be recognised within the national carbon economy. This does not mean federal carbon-tax revenue must automatically return to the state where a project occurs, as carbon taxes and credits are different instruments. However, transparent principles can clarify the relationship between federal carbon-pricing revenue, national climate finance and state conservation responsibilities.

A credible system must also prevent double counting. Carbon credits cannot be repeatedly sold or inconsistently claimed toward different climate targets. National and state registries, together with project records, therefore need to communicate effectively. Malaysia’s National Carbon Market Policy emphasises integrity and alignment, while Sarawak’s legislation provides for carbon-credit transaction registration and measures against double counting.

State frameworks must also address communities, particularly rural and Indigenous communities using forest landscapes.

Clear rules for consultation, participation, grievances and benefit-sharing are essential to long-term project credibility and local legitimacy.

Malaysia is entering a stage where carbon policy is becoming more concrete, shifting from broad climate commitments to permits, registries, taxation, carbon rights, project approvals and revenue. This highlights the complexity of a federation where climate commitments are national, while much natural capital underpinning nature-based solutions is administered at state level. The practical challenge is aligning federal and state carbon governance as complementary layers. Federal rules can address international commitments, emissions accounting, market integrity and cross-border transfers, while state rules can establish workable land, forestry, licensing and benefit-sharing arrangements. Differences are necessary, but compatibility is essential for one credible national carbon market.

Nature-based carbon projects will succeed when conserving or restoring ecosystems becomes a credible economic option for the governments and communities managing those landscapes. That requires more than a market price for carbon. It requires clear answers to a practical question: if a state chooses carbon as part of its development strategy, how will the rights, risks, revenues and responsibilities be shared?

Until those questions are answered, hesitation from state governments should not automatically be interpreted as resistance to climate action. It may instead reflect a rational demand for certainty before valuable land and long-term revenue are committed to a new market. Carbon cannot compete successfully with established land uses through environmental arguments alone. The governance and economics have to work as well.

The views expressed here are those of the writer and do not necessarily represent the views of Sarawak Tribune. The writer can be reached [email protected]