Looking Ahead in Malaysia’s Carbon-Pricing Journey

March 8, 2023

By Darshan Joshi and Anne Cortez

In the race against climate change, global attention is turning to carbon pricing as an effective policy to support the low-carbon transition and meet the targets of the Paris Agreement.

Carbon pricing places the cost burden of greenhouse gas emissions on emitters themselves, forcing them to internalize what were previously externalized costs and creating a potentially powerful incentive to find low-carbon alternatives and cut emissions. By making polluting energy sources more expensive, carbon pricing reinforces the business case for shifting to cleaner and greener technologies and practices.

At present, more than 70 national and subnational carbon pricing instruments have been implemented or are scheduled for implementation globally, according to the World Bank. As carbon pricing gains momentum, Malaysia is assessing the feasibility of designing and implementing its own carbon pricing policy.

Kuala Lumpur, Malaysia

Drawing on the Twelfth Malaysia Plan (12MP), the Ministry of Finance is considering a carbon tax, while the Ministry of Natural Resources, Environment, and Climate Change plans to institute a domestic emissions-trading scheme. In December 2022, Bursa Malaysia launched a voluntary carbon-market exchange, allowing companies to purchase carbon credits, offset their emissions, and meet internal climate targets.

Malaysia’s economy remains dependent on fossil fuels, particularly coal and natural gas, for electricity generation, which account for 75 percent of national emissions. Renewable energy use is still minimal, with solar, biomass, and biogas contributing only 4.4 percent of total electrical capacity and just 1.1 percent of electricity generated in 2019, the latest year for which official statistics are available.

The Malaysia Renewable Energy Roadmap and the National Energy Policy have set targets to reduce coal’s share of generating capacity to 18.6 percent and increase renewable energy’s share to 40 percent by 2040. Carbon pricing can complement other low-carbon policies and mechanisms—such as renewables and energy efficiency incentives—and support the commitment to decarbonization by raising the costs of carbon-intensive electricity. It can also provide additional revenue streams for investment in low-carbon development.

The 12MP also highlights the importance of natural resources in mitigating and adapting to climate change. The recently revised Malaysian Forestry Policy recognizes the importance of forests as carbon sinks and calls for increasing their protection through legislative and economic instruments including the REDD+ financing scheme, payments for ecosystem services, and ecological fiscal transfers. Carbon pricing complements these mechanisms and helps deter forest exploitation by placing a concrete valuation on the economic benefits of sequestering carbon.

With this in mind, The Asia Foundation has collaborated with the Institute of Strategic and International Studies Malaysia and Climate Governance Malaysia to produce a report assessing the impact of carbon pricing within Malaysia’s energy and forestry sectors and the nation’s climate policy and stakeholder landscape. It delivers recommendations for the design and implementation of effective carbon pricing instruments to support Malaysia’s low-carbon transition.

With a combined focus on domestic emissions-trading schemes and carbon taxes, the Malaysian government is likely to take a hybrid approach to carbon pricing. This would involve stakeholders across the public, private, and civil society sectors and multiple industries affected by the national commitment to decarbonize.

Our analysis of the stakeholder and policy environment for emissions reductions and conservation of natural capital has led to the following recommendations for national carbon pricing:

1. Develop a long-term roadmap to price carbon at a level that reflects the marginal cost of greenhouse gas emissions—i.e., the social cost of carbon.
2. Set emissions caps based on the cuts Malaysia needs to achieve its most ambitious decarbonization strategies and targets—e.g., net-zero emissions by 2050.
3. Gradually expand the scope of carbon pricing instruments to cover all major economic activities.
4. Limit the extent of carbon-related costs that are passed on to consumers, and develop a carbon rebate mechanism to support low-income and vulnerable population groups.
5. Utilize carbon pricing as one in a suite of policies to support the expansion of low-carbon electricity generation in Malaysia.

In the forestry and energy sectors, we recommend several policies to expand low-carbon electricity generation in Malaysia. These include developing a long-term strategy to replace natural gas with low-carbon alternatives and enhancing existing low-carbon incentives. It is also important to enable access to open data, to allow researchers to monitor and assess the effectiveness of carbon pricing policy and implementation, and to ensure the integrity of nature-based carbon solutions.

The Asia Foundation continues to work with academia, policymakers, and private-sector partners to support Malaysia on its way to decarbonization and sustainable development. To learn more, read our report, Carbon Pricing and the Business Case for Emissions Reductions and Nature Conservation in Malaysia: Research Summary and Policy Recommendations.

Darshan Joshi is a climate consultant for The Asia Foundation and The World Bank’s hub in Malaysia. He is the lead author of the report Carbon Pricing and the Business Case for Emissions Reductions and Nature Conservation in Malaysia. He can be reached at [email protected]. Anne Cortez is a communications consultant for The Asia Foundation in Malaysia. She can be reached at [email protected]. The views and opinions presented here are those of the authors, not those of The Asia Foundation.

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