As Malaysia advances its ambition to become a leading hub for sustainable finance, new platforms such as the Bursa Carbon Exchange (BCX) are taking centre stage. Financial institutions, including CIMB, are actively participating, signalling a national commitment to climate action. While carbon markets introduce opportunities, they also raise significant ethical questions that demand careful consideration from an Islamic finance perspective. Do these instruments truly align with Shariah principles, or do they present a modern ethical challenge?

Carbon credits are tradable permits representing either the right to emit one tonne of CO2 or the certified removal/avoidance of such emissions. They are key components of the global strategy to reach Net Zero targets, aiming to incentivise emission reductions and fund green projects. Malaysia’s BCX initiative highlights the nation’s commitment to leveraging carbon credits as instruments for emissions reduction and sustainable finance. Yet, the fundamental question persists: Are these market-based solutions ethically sound and Shariah-compliant?

From a Shariah viewpoint, several concerns emerge. A core issue is whether the “right” to cause environmental harm (arar) can be bought and sold. Islamic law strictly prohibits causing harm (laarar wa lairar). Can an activity that inherently causes harm be sanctioned through a financial transaction?

This leads to a potential paradox: Does purchasing credits to offset or continue emissions conflict with the Islamic duty of stewardship (khilafah) over the resources entrusted to mankind? Could it merely be a “licence to pollute”? Furthermore, questions of justice (adl) arise. Could these markets disproportionately burden developing nations while wealthier entities offset rather than reduce their environmental footprint? Currently, there is no universal Shariah consensus (ijma) on the permissibility and structure of these markets, highlighting an area that needs urgent scholarly attention (ijtihad).

To navigate this complex terrain, proactive steps grounded in Shariah are essential:

Develop clear guidance

There is a pressing need for contemporary scholarly deliberation (ijtihad) and authoritative rulings (fatawa) on carbon credits and trading mechanisms.

Institutional leadership

Regulators, Shariah advisory bodies and financial institutions must lead in developing robust, ethically sound frameworks, rather than just following market trends.

Implement practical measures

Key actions include:

The rise of carbon markets presents a crucial test for Islamic finance. Successfully integrating these tools requires a rigorous reconciliation of market utility with enduring Islamic ethical principles. Collaborative dialogue among scholars, regulators and industry practitioners is vital. The goal must be to establish a global standard for Shariah-compliant carbon markets that genuinely contribute to climate solutions while upholding the profound environmental ethics inherent in Islam.