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PETALING JAYA: Experts are mixed on Malaysia’s proposed implementation of a carbon tax policy, with some believing that it is a timely initiative, while others deem that the country is not ready to consider such a move.
Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong said a carbon tax policy is not timely as the country still has more important reforms to deal with for now.
“We still need to address the RON95 fuel subsidy reforms and the revision of electricity tariffs. Implementing too many reforms simultaneously can make it difficult for companies and individuals to digest. Hence, I do not think it is a good time to implement the carbon tax,” he told StarBiz.
Wong also noted that the government needs to reform the electricity market and liberalise access to clean energy sources before it can roll out carbon-related initiatives.
“Before the government can have a carbon pricing market that works, allowing prices to signal the demand (the need to release carbon dioxide or CO2 emissions) and supply (those who have carbon credits) dynamics, demand in the electricity sector for example, needs to function without artificial distortions.”
He noted that in Malaysia, electricity accounts for more than 30% of CO2 emissions, which is heavily subsidised by the government.
Wong said this then creates artificially low electricity tariffs, leading to higher demand for it.
“Hence, electricity tariffs need to be readjusted based on actual demand, so that it properly reflects production costs. This will also incentivise the adoption of cleaner energy sources. Once these reforms are in place, the focus can shift to carbon-related initiatives,” Wong said.
Further, it is also crucial to ensure that there is an adequate supply of clean or alternative energy sources, he said.
“Right now, the infrastructure for electric vehicles (EVs) for example is still underdeveloped and is still insufficient to meet demand should consumers shift to EVs as a result of subsidy rationalisation of RON95. Consumers may face rising living costs as a result.”
For starters, Wong is proposing that the tax be imposed on companies engaged in trade with the European Union (EU) and not nationwide.
“It should be planned and strategised now, so that the adjustment can be carried out by 2025,” he said.
Earlier this week, Deputy Investment, Trade and Industry Minister Liew Chin Tong said Malaysia will have to start implementing carbon pricing to facilitate carbon trading and look into carbon taxing as the EU prepares to commence its Carbon Border Adjustment Mechanism (CBAM) in 2026.
Designed to level the playing field between EU-produced goods and imports from non-EU producers, the CBAM will price the carbon emitted during the production of carbon-intensive goods entering the EU.
The transitional phase of the CBAM spanned from Oct 1, 2023 to Dec 31, 2025.
EU importers of goods covered by the CBAM from non-EU countries must report the emissions embedded in their imports without facing financial penalties.
From 2026 onwards, these importers will be required to purchase and surrender CBAM certificates, thereby imposing a carbon price aligned with EU emissions trading system (ETS) allowance prices.
Importers can deduct previously paid carbon prices if they provide proof of payment during the production of the imported goods.
The CBAM is expected to affect up to 75% of Malaysia’s exports to the EU, albeit collectively accounting for 8% of the country’s total exports in 2021 to 2023.
Initially affecting the import of goods within the cement, electricity, fertilisers, aluminium, iron, steel and hydrogen sectors, as well as some upstream and downstream products (mainly iron, steel and aluminium), this scope is expected to be expanded to all sectors subject to ETS trading by 2030.
In a recent report, UOB Research pointed out that if EU importers pass through additional CBAM costs, Malaysia’s producers could face a higher price for their raw materials.
Moreover, EU importers may favour lower emitting suppliers to reduce CBAM-related costs.
In the South-East Asian region, only Singapore is implementing carbon taxes, at a rate of S$25 per tonne of carbon dioxide equivalent.
Interestingly, carbon-intensive economies like China, the United States and Russia do not have explicit nationwide carbon taxes yet.
Centre for Market Education chief executive officer Dr Carmelo Ferlito said a sound analysis of trade-offs should be implemented before proposing the carbon tax.
“While the tax can help us achieve a certain amount of carbon dioxide emissions reduction, at the same time, by making production and products more expensive, it has the hidden cost of making everybody poorer: there is a policy cost.
“It is important, thus, that the policy cost is proportionate to the gained benefit in terms of carbon emissions. The final aim should be the best result achievable with the minimum possible cost, including in it the policy cost too,” he said.
Perhaps, Malaysia can take stock of what countries like Canada underwent in its implementation of carbon taxes since 2019.
Initially set at C$20 per tonne in 2019, Canada’s carbon tax rate has undergone several hikes. Most recently, on April 1, 2024, the rate was raised to C$80 per tonne, marking a C$15 increase from its previous rate of C$65 per tonne. This tax is set to rise by an additional C$15 annually until it reaches C$170 per tonne by 2030.
So far, the carbon tax has been met with increasing dissent in Canada, criticised for being an unfair financial burden on Canadians amidst the rising cost of living.
Offering a differing viewpoint, Sunway University professor of economics Dr Yeah Kim Leng said it is timely for the Deputy Minister to alert the public, especially those in the affected industries, to be ready for the onset of carbon tax.
“Given that the EU’s planned CBAM will start in 2026, there is sufficient leeway for Malaysian export industries to take stock of the carbon adjustment tax impact and determine the type of intervention needed to maintain their existing export markets or find alternative markets that do not impose such taxes,” he said.
He opines that more countries are likely to join the bandwagon as they commit to carbon emissions reduction although the pushback from developing countries, including Malaysia, will exacerbate global trade tensions, given its unfair impact on developing economies with lower historical emissions.
“Industry leaders in Malaysia need to be aware that global value chain greening is gathering steam, driven by institutional, market and technological factors.
“Institutional drivers such as societal pressures and political decisions are being made to reduce carbon emissions and meet national net-zero emissions targets.
As of 2022, 46 countries have begun pricing emissions through carbon taxes or emission trading schemes, with Denmark having the highest enterprise carbon tax scheme that is expected to be US$160 per tonne of carbon dioxide emitted by 2030, according to Global Value Chain Report 2023.
Liew, in his statement, also mentioned that the collections from carbon tax should be channelled into green investment, including the investment into green steel.
Yeah regards this as a beneficial policy, given that an enormous amount of capital is needed to achieve Malaysia’s green economy aspirations.
“The channelling of carbon tax revenue into green investments is therefore a beneficial policy to accelerate the transformation, as well as to mitigate export risks given the country’s large exposure to the global value chain,” he said.
