Carbon pricing and its role in decarbonising Malaysia

Despite having a relatively modest population size, Malaysia’s CO2 emissions reached approximately 291 million metric tons (Mt) and has a relatively high per capita emissions of 8.6 Mt/capita. This places Malaysia on par with countries like China and Japan. In 2022, the energy sector itself was responsible for around 79% of total emissions. Could the implementation of carbon pricing in Malaysia be an effective measure to reduce carbon emissions? This is worth a closer look, considering that the increase in total emissions and emissions intensity runs counter to global trends to reduce absolute emissions. Norway, despite being a fossil fuel-producing country heavily reliant on its petroleum sector, is taking significant steps to be carbon neutral by 2030. Malaysia’s efforts to achieve net zero emissions by 2050 and reduce carbon dioxide intensity against GDP by 45% by 2030 could be delayed if similar and effective policies and measures are not implemented.

Carbon pricing is a market-based instrument that seeks to influence behaviours of businesses to reduce their greenhouse gas (GHG) emissions by attaching a cost to these emissions. Following the ‘polluter pays’ principle, it creates financial incentives for businesses to lower their carbon footprint by internalising the costs of emissions, making them accountable for the environmental costs of their emissions. 

Carbon pricing mechanisms can take the following forms:

As we can see from the illustrations, both carbon tax and cap and trade systems incentivise the reduction of emissions by setting a price on emissions but differ in their fundamental functionality: taxation sets the price of emissions and allows the quantity to adjust, whereas cap and trade systems set the quantity of emissions and allow the price to adjust. Malaysia launched the Bursa Carbon Exchange (BCX), which allows the trading of carbon offsets, credits and renewable energy certificates (RECs). This initiative aims to encourage industry participation in the carbon market.  

2021 projections from PwC and the World Economic Forum (WEF) indicate that by having an international carbon pricing floor, assuming that the carbon price is implemented as tax or through the auction of emissions allowances, can generate additional 'carbon fee' revenues, ranging from 0.3% to 1.9% of the business-as-usual GDP depending on the sectors and economies covered globally by 2030.

In the long run, besides reducing overall carbon emissions, robust carbon pricing can also act as a catalyst for investments in climate adaptation and mitigation projects. These projects include the development of innovative low-carbon technologies, the adoption of renewable energy sources and energy efficiency measures, as well as the implementation of energy transition initiatives under the National Energy Transition Roadmap (NETR). Additionally, revenue from carbon taxes or trading of allowances can be used to support industries affected by the transition through free allowances and funding climate change research and development.

Countries have taken different approaches to pricing carbon either through a carbon tax or an emissions trading system. For example: 

• The European Union (EU) is one of the world’s earliest and most established ETS mechanisms, often used as a benchmark for other countries. ETS has generated over €175 billion (US$192 billion) in revenues since 2013 and helped bring down emissions from European power and industry plants by approximately 47%, compared to 2005 levels. 

• Norway first introduced its carbon tax in 1991 and is levied against both producers and consumers of petroleum products as an energy source. An estimated NOK 67.4 billion (US$6.75 billion) through carbon tax is expected to be generated in 2024. The collected tax is typically directed into the general budget, and indirectly supports environmental and climate initiatives. The funds are also used to support renewable energy projects, energy efficiency measures and research and development in green technologies. Norway is also a part of the EU ETS.

• Japan first introduced the Japan Voluntary Emissions Trading Scheme (JVETS) in 2005 as a pilot project which concluded in 2009. The JVETS helped pave the way for the current introduction of J-credits (carbon offset credits) and other trading mechanisms such as the Tokyo cap and trade programme. The trading of J-credits was introduced on the Tokyo Stock Exchange in 2023 at an average trading price of JP¥ 5,400 (US$36.38). 

• Australia has made recent reforms to its ETS, known as the Safeguard Mechanisms which is regulated by the Clean Energy Regulator. The reforms aim to increase the competitiveness of its existing carbon market by introducing legislated emission reduction targets. The nation plans to introduce a dedicated carbon credit exchange to improve pricing transparency and increase ease of trading.

• Singapore’s National Environment Agency (NEA) implemented the Carbon Pricing Act (CPA), the first carbon pricing scheme in Southeast Asia. It encompasses 80% of Singapore’s total GHG emissions in sectors such as manufacturing, power, waste and water. The current carbon tax rate in Singapore is S$25 (US$18.48) per tonnes of CO2 equivalent (tCO2e), applying to facilities that emit at least 25,000 tCO2e of GHGs annually.

• In early 2023, Indonesia launched its ETS which now only covers coal-fired power plants (CFPP). The system mandates intensity-based emissions coverage for CFPP facilities with a production capacity of 100 megawatts (MW). The design of the ETS is a mandatory intensity-based emissions coverage at 100 MW CFPP. The price of carbon credits at launch stood at IDR 69,600 (US$4.45) and will be market driven.

As Malaysia aims to expand its energy-intensive activities such as semiconductor and electronic manufacturing, AI development and become a data centre hub in Southeast Asia, the impact of carbon pricing will likely impact operational cost as energy producers pass on costs to industries and businesses that rely heavily on energy.

Implementation of carbon pricing in Malaysia needs to take into account policies and regulatory considerations, such as the social costs, economic impact, impact on Malaysia’s competitiveness in the region and the readiness of the businesses. For example, Australia’s earlier attempt to introduce a carbon tax in 2012 received mixed feedback from members of the public on concerns of increased cost of living, leading to its repeal in 2014. Learning from such experiences, Malaysia can develop strategies to address public concerns and balance stakeholder needs to ensure successful implementation.

Following on from the launch of the Voluntary Carbon Market during Budget 2022, and the subsequent launch of the Bursa Carbon Exchange, it would be plausible to look forward to the introduction of carbon tax soon. Aligned with aspirations to address the reduction of national GHG emissions in support of Malaysia's net zero ambition by 2050, the introduction of a carbon tax needs to be guided by a clear timeline and implementation roadmap. This will enable the formulation of carbon pricing framework and policy making, as well as to incentivise industries to adopt measures to reduce emissions either by using carbon abatement technologies and/ or more energy efficient measures. 

Regardless, introducing any mechanism for carbon pricing needs to be done in a balanced manner, taking into account the interests and implications on both public and private sector stakeholders. Such measures should be complemented by other outcome-based tax incentives and broader subsidies to support the energy transition, encourage adoption of green technologies and stimulate further innovation among businesses.

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