Carbon Pricing and the Business Case for Emissions Reductions and Nature Conservation in Malaysia: Research Summary and Policy Recommendations
Two market failures stand out in the context of climate change adaptation. First is the oversupply of negative externalities that arise from otherwise productive economic activity. These negative externalities, in the form of greenhouse gas (GHG) emissions, are driving the global average surface temperature increase. Second is the undersupply of positive externalities in the form of underinvestment in the protection and conservation of natural capital, which amongst their many functions, can also sequester carbon. The failure to address market failures plays an important role in the continued exacerbation of climate change.
By associating a direct cost with GHG emissions, carbon pricing instruments (CPIs) address the negative externality and transform energy markets by enhancing the economic case for investment in low-carbon energy ahead of fossil fuels. CPIs also strengthen incentives to conserve and rehabilitate natural capital, such as forests, by placing a tangible valuation on the economic benefits of carbon sequestration.
Against this backdrop, and given the Malaysian government’s intentions to introduce CPIs, it is important to consider how carbon pricing can drive emissions reductions and encourage conservation. This study focuses on the implications of carbon pricing across Malaysia’s energy and forestry sectors. Action across both sectors is crucial in Malaysia’s pursuit to meet its Nationally Determined Contribution and long-term goals to decarbonize and achieve net-zero emissions by as early as 2050.