ONCE again, Malaysia is at the crossroads of an unpopular tax decision, this time it is on the rollout of a carbon tax.
This matter was brought to the fore when a carbon tax was mentioned by the Deputy Minister of International Trade and Industry Liew Chin Tong last week as a counter-measure against the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) that is scheduled to commence on Jan 1, 2026.
Under CBAM, exports going into the EU will be subjected to a levy based on carbon pricing principles and this will be paid by EU importers. To be noted, only 8% of Malaysia’s total exports in 2021 to 2023 goes into the EU.
Fundamentally speaking, the carbon costs are there. It is just a matter of who will foot the bill. If the country introduces a carbon tax, then the EU importer buying from Malaysia can deduct that amount from their CBAM obligation.
This is why Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong says it is better for the country to start implementing a carbon tax so the revenue will flow to local coffers instead of the EU.
However, the timing is not ideal. It remains a contentious issue among industry experts and economists, with some arguing it should be done in line with CBAM should Malaysia intend to safeguard its market share of exports to the EU.
While Wong reckons a carbon tax is a matter of eventuality, he notes that it is “basically a suicide for any government” like Malaysia to introduce the tax now when it has many other ongoing and planned reforms.
“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 a carbon tax,” Wong says.
The EU’s CBAM is a world-first effort and is only the beginning as other countries like the United Kingdom and Australia are also considering similar border tax regimes. Hence, this is a real issue for local exporters.
The question is whether it is pertinent for the country to roll out the carbon tax by 2026 or can it wait even after that?
ClimatEra Consulting Sdn Bhd director and founder Komathi Mariyappan says to answer this, thorough scoping studies need to be done to assess the economy’s readiness particularly on certain vulnerable sectors like steel that needs to be given a transition period.
“The introduction of a carbon tax should be phased in gradually, starting with selected industries rather than applying it across the board. We need to be cautious not to burden small and medium enterprises (SMEs) as well, as they may struggle financially. Even with environmental, social and governance reporting, many SMEs are not yet prepared,” she says.
CBAM will cover goods from six sectors, namely cement, electricity, fertilisers, aluminium, iron, steel and hydrogen in the first phase.
Subsequently, this scope will be expanded to all sectors subject to EU emissions trading by 2030.
Steel is a key focus in discussions around the country’s implementation of a carbon pricing mechanism, as the industry is a significant contributor to the nation’s overall greenhouse gas emissions.
Recently, the iron and steel sector in Malaysia experienced a downturn due to the Covid-19 pandemic but is now rebounding.
Changes in China’s recycling standards and their shift away from importing iron ore have also impacted this industry, influenced by China’s own net-zero targets.
“In terms of our greenhouse gas emissions, iron and steel are significant contributors to carbon emissions after cement.
“Therefore, a balanced regulatory approach is crucial to both support and regulate these industries as we roll out the carbon tax,” Komathi says.
Businesses also need to face compliance costs which are expected to be very significant, particularly for SMEs.
“Companies may need to hire consultants to navigate the mechanism of the tax, track emissions, and do the necessary reporting. Currently, there are not many local consultants specialising in carbon tax, so companies often need to hire foreign experts and thus incur higher expenses.
“While larger businesses having higher emissions may need to deal with more complexities in complying with the requirements, they are generally able to absorb the costs, unlike the SMEs,” Komathi says.
There is also the concern on the carbon tax becoming an unfair financial burden on the people given its regressive nature.
Canada is an example, where its carbon tax has drawn much flak due to its perceived impact on household expenses and the cost of living, particularly for lower-income households despite the rebates.
Initially set at CS$20 per tonne in 2019, Canada’s carbon tax rate has undergone several hikes. 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.
It is for this reason that economist Geoffrey Williams opines that carbon taxes will not benefit the country that much but will instead impose a huge burden on ordinary people on low incomes.
“The best mitigation strategy is to not impose a carbon tax but switch trade to countries in BRICS which do not impose anti-competition environmental taxes like the EU,” he quips..
On the other hand, the rationale behind the urgency to have the carbon tax by 2026 is not entirely unjustifiable and it seems pretty clear cut from a trade competitiveness and exports’ market share point of view.
As pointed out by Sustainable Fitch Associate Director Melissa Cheok, given that the current average carbon tax in the EU is around €49 per tCO2e, the country’s exports could become less competitive if subjected to this higher tax rate.
“In theory, a carbon tax could also help to incentivise industries to innovate and adopt more sustainable practices and cleaner technology, thereby creating new economic opportunities particularly in renewable energy and energy efficiency sectors,” she says.
By establishing a carbon tax ahead of CBAM’s official implementation, this would also provide authorities with the necessary time to address operational needs and rectify any inefficiencies in the system.
“This preparation period is crucial for ensuring that the carbon tax framework is effective and can be smoothly integrated with existing regulatory structures.
“It also grants businesses the lead time needed to better calculate their current emissions and to implement measures aimed at reducing their carbon footprint where necessary,” Cheok says.
In order to determine what would be the best course of action in implementing the carbon tax and at what rates, the country needs to firstly be clear about its objective in implementing the carbon tax.
“The primary reason would not be revenue collection but to drive behavioural change towards decarbonisation.
“Hence, the tax should be designed with that in mind. The pricing and framework should align with this primary objective, and funds need to be channelled to the right places. This is fundamental for an effective carbon tax,” Ernst & Young Tax Consultants Sdn Bhd sustainability tax leader Sharon Yong says.
In fact, carbon tax is not expected to raise much revenue, unless it is levied on petrol, diesel, oil and gas or on electricity generation from those sources.
“Clearly this is a heavy burden on consumers and businesses and it is absurd to tax products that are subsidised,” Williams says.
Wong states that even for the forerunner like the EU in environmental tax which collects the revenue via the emissions trading system (ETS) and transportation tax, the share of the environmental tax in total tax revenue is about 5% to 6%
“It is expected to be declining because a green transition induced by the tax is going to erode the tax base,” he says.
Perhaps, Malaysia can take a leaf from Singapore’s approach which provides a clear roadmap to businesses on how and when carbon tax will be implemented over a three to five-year period.
This then gives businesses time to plan for the transition into making greener choices for their business practices, Deloitte Malaysia country tax leader Sim Kwang Gek notes.
Sim says a planned approach starting with a low carbon tax rate and providing a clear implementation timeline can be considered to allow businesses to adjust to this tax regime.
“This should be coupled with a robust legal framework and strict enforcement activities to ensure full compliance.
“Businesses that do not have the financial means to invest in green technologies should be given sufficient financial assistance or grants for such purposes,” she says.
As the first and only country in South-East Asia to date to have a carbon tax, Singapore started with a rate of S$5 per tonne of carbon dioxide equivalent (tCO2e).
It is currently at S$25 per tCO2e. The figure will be increased on a staggered basis until it reaches between S$50 and S$80 per tCO2e by 2030.
The rollout of a carbon tax in Singapore targets emissions above a specific threshold, where businesses that emit more than 25,000 tCO2e annually will be liable to the tax.
“Singapore’s proposed rate hikes are aligned with global carbon pricing standards, ensuring that companies factor in the true costs of carbon emissions,” Yong says.
However, more importantly is how businesses get their carbon emissions lowered on the production of goods, rather than the tax itself.
“EU importers will likely favour lower emitting suppliers to reduce import costs, so companies need to look at ways to reduce their carbon footprint at the end of the day,” Yong says.
At the moment, other than green tax incentives and green investments, Bursa Malaysia has launched the Bursa Carbon Exchange (BCX) in 2022, a platform where corporations can buy carbon credits to offset emissions and meet climate goals.
However, it is still early days and liquidity is still low.
Chief executive officer Datuk Muhamad Umar Swift says the organic growth of the voluntary carbon market will take time to mature.
“The key to accelerate the development of domestic carbon projects is to adopt some form of compliance carbon markets,” he explains.
Bursa Malaysia unveiled that based on its ongoing engagements with the industry over the past two years, many corporates indicate they only tend to be willing to invest or buy carbon credits when they are compelled by clients to produce carbon-neutral products, by key stakeholders to reduce their carbon footprint or by regulations like those sectors exposed to the EU’s CBAM or domestic carbon pricing instruments.
Nevertheless, the exchange says it is rolling out incentives like US dollar trading of carbon credits, expansion of independent carbon standards to onboard Gold Standard at the end of this year on top of the existing Verified Carbon Standards by Verra, and continued discount and fee waiver to drive liquidity.
If the government does decide to introduce the carbon tax, it should be done in a manageable manner by setting the rate at a low level with a transitional period to adjust, and levied on facilities that exceed a certain threshold of GHG emissions, UOB senior economist Julia Goh says.
“It should be done in a way that does not cast downside risk to key sectors of the economy that generate growth, jobs and revenue for the country, while minimising the risk of carbon leakage.”
Already a subscriber? Log in
Get 20% OFF The Star Digital Access
Cancel anytime. Ad-free. Unlimited access with perks.
