On Oct 18, 2024, Prime Minister Datuk Seri Anwar Ibrahim announced a record-breaking RM421bil budget.
The announcement of Budget 2025 saw significant allocations towards narrowing the fiscal deficit of 3%, debt level below 60% of gross domestic product (GDP), cutting subsidies and bolstering the economy’s competitiveness and growth, with a predicted GDP increase of 4.5% to 5.5%.
Malaysia’s commitment to reducing carbon intensity by 45% of the country’s GDP by 2030 in comparison to 2005 levels aims to be achieved through identifying focus areas of water, coastal zones, agriculture, infrastructure, health, forestry, and biodiversity. Malaysia’s long-term nationally determined contributions target is net-zero by 2050. Under Budget 2025, the Ecological Fiscal Transfer fund has been increased to RM250mil from RM200mil to support the state governments’ efforts in protecting forests and wildlife.
To combat climate change, Budget 2025 also allocated RM3.85bil for flood mitigation and disaster preparedness projects under the National Disaster Management Agency.
Deloitte Malaysia country tax leader Sim Kwang GekIn efforts to achieve the national agenda of net-zero emissions, an additional RM300mil has been allocated to the National Energy Transition Roadmap initiatives in collaboration with TNB and PETRONAS.
The Net Energy Metering programme’s extension to June 30 next year for the installation of photovoltaic solar panels showcases a commitment to installing them in Putrajaya’s public walkways and parking lots.
This is alongside developing new skills training initiatives on energy transition as spearheaded by government-linked companies such as TNB. A further RM1bil is allocated for the green technology financing scheme to drive the installation of photovoltaic solar panels.
To encourage adoption of energy efficiency initiatives in the public sector, all government agencies are required to sign energy performance contracts to reduce electricity bills by 10%. Private sector participation in energy is spearheaded by UEM Lestra and TNB, who are committed to invest RM16bil to improve transmission and distribution networks as well as to decarbonise industrial areas.
These efforts highlight Malaysia’s commitment to renewable energy and supports the nation’s aspiration to become a leader in the green energy sector in the region.
The introduction of carbon tax on iron and steel, and energy industries by 2026 is aligned to EU’s Carbon Border Adjustment Mechanism, with the objective to reduce risk of carbon leakage by equalising the price of carbon between domestic products and imports in selected sectors into the EU. The proceeds of the proposed carbon tax in Malaysia aims to fund green research and technology programmes.
The existing Green Technology Financing Scheme programme will be extended to 2026 with RM1bil in funding. Additionally, investment tax allowances or income tax exemptions for carbon capture and storage (CCUS) activities will be offered under the New Investment Incentive Framework to boost the adoption of CCUS by industry players.
The implementation mechanism of the Malaysian carbon tax is currently unclear, but the system has to be equitable and fair for all related industry players. A similar carbon taxation system was introduced in EU in 2005.
The EU’s Emissions Trading System (ETS), is the world’s first and largest carbon market, is based on a “cap-and-trade” principle that requires polluters to pay for their Green House Gas (GHG) emissions. It has the objective to reduce overall EU emissions while generating revenues to finance the green transition in EU.
How does the ETS work?
The ETS sets an annual limit on the total amount of GHG that can be emitted by specific polluters in an area and allows companies to trade emissions rights within that area.
The EU ETS operates in 30 countries: the 26 EU member states plus the United Kingdom, Iceland, Liechtenstein, and Norway. Under the system, EU member state governments agree on national emission caps which must be approved by the EU Commission.
Deloitte Malaysia sustainability and emerging assurance director Karina Mohamad NorThese countries then allocate allowances to their industrial operators and track and validate the actual emissions per the relevant assigned amount. They require the allowances to be retired after the end of each year.
The total number of permits issued (either auctioned or allocated) determines the supply of the allowances. The actual price is determined by the market.
Too many allowances compared to demand will result in a low carbon price, reducing the emission abatement efforts and vice versa, while too few allowances will result in a high carbon price.
Currently, the system covers (i) carbon dioxide emissions from power and heat generation, energy-intensive industry sectors such as oil refineries, steel, iron, aluminium, metal cement, lime, glass, ceramics and chemicals and commercial aviation; (ii) nitrous oxide from the production of nitric, adipic and glyoxal; and (iii) perfluorocarbons from aluminium production.
The system has been criticised for several failings, including over-allocation of permits, massive windfall profits for energy generator companies, price volatility, and in general for failing to meet its goals.
The EC is improving the EU ETS as an investment driver and to reinforce market stability, while maintaining a decrease in EU carbon emission in total.
The key question lies in the ability to provide proper incentives to industries to reduce their emissions and to create an effective environment where all current players are cooperating.
Reducing caps and tightening allocations may not be the most effective tools to use as it may lead to the retreat of smaller industry players from the market; while larger and more powerful industry players who are the main polluters will remain on the scene and will dominate the market.
Existing policies introduced by the Government’s Pre-Budget 2025 announcement such as the National Semiconductor Strategy, KL20 Action Plan, GEAR-uP Programme, and Public-Private Partnership Master Plan 2030 provides the foundational impetus for Budget 2025 to boost private investment by allocating RM78bil through Pelan Induk Kerjasama Awam-Swasta, which is expected to generate 900,000 new jobs through projects.
Private sector participation plays an important role to drive the growth of the economy.
Malaysia has recorded an 18% year-on-year increase in approved investments, reaching RM160bil in the first half of 2024 with initiatives like the Johor-Singapore Special Economic Zone are positioned to further enhance private sector investment prospects.
Furthermore, development expenditure focus on projects of public interest, such as Kerian Integrated Green Industrial Park (KIGIP), Kuala Lumpur-Singapore High Speed Rail (HSR), Kulim Hi-Tech Park expansion and the Pulau Pinang light rail transit (LRT).
This also includes an allocation of RM1bil for Ikhtiar SejaTi Madani, to stimulate the rural economy, aided by plantation groups in local communities, highlighting continued efforts to support the Government’s commitment for a more equitable society and greater economic growth to be enjoyed equally by all Malaysians.
