Carbon Pricing and the Business Case for Emissions Reductions and Nature Conservation in Malaysia
In the context of climate change mitigation, two market failures stand out: an oversupply of “negative externalities” in the form of greenhouse gas (GHG) emissions and an undersupply of “positive externalities” in the form of the protection and conservation of natural capital. The failure to address these market failures plays an important role in the continued worsening of climate change. From this economic perspective, climate change simply reflects a lack of incentives to reduce emissions and protect natural capital. Carbon pricing can address this lack of incentives by associating a direct cost with GHGs, whether emitted or sequestered. This can transform energy markets by encouraging investment in low-carbon energy rather than fossil fuels and can strengthen incentives to conserve and rehabilitate natural capital, such as forests, by associating a monetary value to carbon sequestration.
However, carbon pricing does not completely resolve market failures. The design of carbon pricing instruments (CPIs) is an important aspect of their effectiveness. The 68 CPIs implemented nationally or subnationally worldwide differ significantly in design, featuring a wide range of carbon prices and sectoral coverages. Only a fraction of these price carbon either at levels commensurate with scientific evidence of the cost of carbon or consistent with meeting the Paris Agreement targets. Malaysia’s intention to formulate a national policy on carbon pricing and implement CPIs was established in the Twelfth Malaysia Plan. The Ministry of Natural Resources, Environment, and Climate Change announced its intention to launch a domestic emissions trading scheme, while the Ministry of Finance is studying the feasibility of a carbon tax. Meanwhile, Bursa Malaysia, the capital market regulator, launched the voluntary carbon market in December 2022.