Richard Baker is the Sustainability and Climate Change, and Tax director at PwC Malaysia.BUDGET 2026 builds on measures introduced in the previous budget, advancing ESG priorities through a mix of regulatory instruments—most notably a carbon tax—and extended incentives and grants. The package signals a clear policy direction: sustainable practices are being encouraged and, increasingly, required to meet national climate commitments, with participation expected from both individuals and businesses.
Budget 2026 confirms the introduction of a carbon tax in 2026, with an initial focus on the iron, steel and energy industries. There are as yet no full details on the mechanism or pricing, but this announcement is welcome to help align with our nation’s goals and targets. With the introduction of the carbon tax, taxes will be paid locally in Malaysia, and can be
offset for the purposes of the EU’s Carbon Border Adjustment Mechanism (CBAM), which allows a deduction for carbon prices already paid in the country of origin. This ensures that companies pay for their emissions but the revenue generated can be utilised here locally—for example, to fund green initiatives and to support industries in adapting to a low-carbon economy.
The introduction of the carbon tax will also put greater emphasis on the requirement for companies to measure their emissions, particularly Scopes 1 and 2, but eventually towards their indirect emissions as part of their Scope 3 reporting. This requirement for measuring emissions for the carbon tax to be paid on, also advances sustainability practices as the impacted companies will now need to factor the carbon taxes into their decision-making processes.
By putting a price on emissions, the policy embeds carbon considerations into corporate decision‑making, compelling companies to either absorb the additional cost or reduce emissions to mitigate their tax exposure. In the long run, companies will be better prepared for potential changes in trade regulations, especially in regions prioritising ESG compliance.
To further encourage sustainable practices within Malaysia, the new Green Investment Tax Allowance (GITA) will be given to companies that use locally manufactured green technology products certified with our MyHIJAU mark. This initiative is designed to promote local production and manufacturers, strengthening local sourcing while simultaneously helping us reduce our dependence on geopolitically sensitive regions.
A key part of supply chain diversification is our aspiration to enhance research and development and commercialisation and innovation (R&D&C&I) locally to encourage our manufacturers to increase their green technology product offerings and as such, develop local knowledge and talent in these sustainability-linked fields.
The expansion of the existing GITA to include these locally manufactured green technology products is also timely with the Energy Efficiency & Conservation Act (EECA) being implemented for the second year. From January 2026, the Energy Commission can start issuing notices to qualifying energy consumers, requiring compliance with the EECA and its regulations.
Particularly for the large energy consumers and commercial building owners covered by the EECA, there will inevitably be a need to invest in green technology products to reduce their energy consumption. These companies should look to align with the available GITA incentives.
Summary
Budget 2026 has indeed encouraged the advancement of sustainable practices. With the carbon tax comes the need for technical skills—for instance measurement of emissions and decarbonisation roadmaps and levers. It also means that the revenue generated can be collected locally and used to fund initiatives locally.
With the growing demand for Malaysian produced products, there could be opportunities to explore partnerships and collaborations through research and development, strengthening our position in the market and minimising risks from global instability.
In the face of global headwinds such as tariffs and geopolitical tensions, by encouraging local green product manufacturing and innovation, Malaysia can promote our products at an international level, enhancing transparency through compliance with global standards around energy efficiency and green certification.
