Benefits and impact of carbon tax in Malaysia

MALAYSIA aims to reduce its intensity of greenhouse gas emissions by 45% by 2030 against its 2005 levels. So far, 37.1% of that target has been achieved.

Under Budget 2026, the government had planned to introduce a national carbon tax on the energy, iron and steel sectors as parts of efforts to reach its GHG reduction target. However, in April this year, that plan was put on hold with the government citing the Middle East conflict and the risks of adding extra financial burdens to businesses and households.

But the direction has not changed. Alongside the pause, the government launched the National Carbon Market Policy, approved by the Cabinet on April 1, to build a framework for verifying and trading carbon credits.

A National Climate Change Bill is still in the pipeline, and officials expect emissions to peak between 2029 and 2034. The question is no longer whether Malaysia will price carbon; the question is who will pay, and who will benefit.

Carbon pricing puts a cost on every tonne of greenhouse gas released. When emissions are free, firms have little reason to cut them. When they carry a price, the incentive shifts towards efficiency and cleaner technology.

A carbon tax sets a fixed price per tonne. An emissions trading system caps total emissions and lets companies trade permits under that cap. The plumbing already exists. Bursa Malaysia’s Carbon Exchange held the country’s first carbon credit auction in 2024, selling more than 20,000 tonnes from the Kuamut Rainforest Conservation Project in Sabah.

For Malaysia, this is less about the climate than about staying in business. The European Union’s Carbon Border Adjustment Mechanism now charges a carbon cost on imported steel, cement, aluminium, fertiliser, electricity and hydrogen. If Malaysia does not price carbon at home, our exporters may pay that charge to Brussels instead of to Putrajaya. The money leaves either way. The only question is whether it funds our transition or someone else’s.

Our iron and steel sector is energy-hungry and hard to clean up. Delay the carbon signal too long and we risk locking in high-emission plants that later need costly retrofits or early shutdown. What looks cheaper today is often dearer tomorrow.

For most SMEs, the barrier is not unwillingness but capacity. Many still cannot measure what they emit, let alone manage it. Yet, the low-carbon options are already on their doorstep. Rooftop solar, efficient equipment and local biomass such as palm kernel shell (PKS), a byproduct of the palm oil industry, can cut both emissions and energy bills.

Carbon pricing must therefore not arrive as a punishment. It must come with measurement, training and financing.

Done badly, carbon pricing will raise the cost of fuel, electricity and transport, and households will feel it first. Lower-income families and small firms would be squeezed before large corporations.

Done well, it will fund national renewal. The revenue must be ring-fenced for renewable energy, a modern grid, household support, SME transition grants and green financing.

Treated properly, carbon pricing is a transition fund. The price must also be real, not symbolic, and it must rise on a path that is predictable and transparent. Malaysians will reject carbon pricing if it looks like another cost-of-living squeeze. They may back it if they can see where the money goes and how it makes the country more competitive.

When carbon finally gets a price here, will we treat it as a burden or as the investment that secures our future?

DR AZFARIZAL MUKHTAR

Principal researcher

Institute of Sustainable Energy

Universiti Tenaga Nasional (Uniten)