This article is written by Darshan Joshi, a climate consultant and lead author of the report ‘Carbon Pricing: Incentivizing Emissions Reductions and Conservation in Malaysia’, and Anne Cortez a communications consultant at The Asia Foundation.

  • The problem: In the race against climate change, more and more countries are turning to carbon pricing as an effective policy to support low-carbon transition.
  • Why it matters: By making polluting energy sources more expensive, carbon pricing reinforces the business case for shifting to cleaner and greener technologies and practices.
  • The solution: As carbon pricing gains momentum, Malaysia is assessing the feasibility of designing and implementing its own carbon pricing policy.

In the race against climate change, global attention is turning to carbon pricing as a key policy option to aid the low-carbon transition and deliver on Paris Agreement targets.

By making fossil fuels and polluting energy sources expensive, carbon pricing incentivises the shift to cleaner and greener technologies and practices.

Carbon pricing places the burden of the costs of greenhouse gases on emitters themselves, forcing them to internalise the external costs of their activities. This incentivises economic actors to consider options to adopt low-carbon solutions and cut emissions. By making fossil fuels and polluting energy sources expensive, carbon pricing incentivises the shift to cleaner and greener technologies and practices.

At present, there are over 70 national and subnational carbon pricing instruments implemented globally according to the United Nations Framework Convention on Climate Change. As carbon pricing adoption gains momentum, Malaysia is in the process of assessing the feasibility of designing and implementing its own carbon pricing policy.

Drawing on the Twelfth Malaysia Plan, the Ministry of Finance is considering a carbon tax while the Ministry of Natural Resources, Environment and Climate Change is intending to launch a domestic emissions trading scheme. In December 2022, Bursa Malaysia launched a voluntary carbon market exchange, allowing companies to purchase carbon credits, offset their emissions and meet voluntary climate targets.

A Malaysian case study

Malaysia continues to be a fossil fuel-dependent economy, relying heavily on coal and natural gas for electricity generation, which accounts for 75% of national emissions. Renewable energy sources remain minimal, with solar, biomass and biogas contributing only 4.4% of total capacity and just 1.1% of electricity generated in 2019.

The Malaysia Renewable Energy Roadmap and National Energy Policy have set targets to reduce coal share capacity to 18.6% and increase renewable energy share to 40% by 2040. Carbon pricing can complement other low-carbon policies and instruments, such as for renewables and energy efficiency, and support this commitment to decarbonisation by raising the costs of carbon-intensive electricity. It can also provide additional revenue streams for investment in low-carbon development.

Similarly, the national plan highlights the role of natural resources in climate change mitigation and adaptation. The recently revised Malaysian Forestry Policy recognises the importance of forests as carbon sinks and calls for their increased protection through legislative and economic instruments including the REDD+ financing scheme, payments for ecosystem services (PES) and ecological fiscal transfers (EFT). Carbon pricing complements these mechanisms and helps deter forest exploitation by placing a high price on carbon.

With this in mind, The Asia Foundation has collaborated with the Institute of Strategic and International Studies (ISIS) Malaysia and Climate Governance Malaysia (CGM) to produce a report assessing the impacts and interactions of carbon pricing within Malaysia’s energy and forestry sectors, as well as the nation’s climate policy and stakeholder landscape. Summarised below are five recommendations for the effective design and implementation of carbon pricing instruments to best support Malaysia’s low-carbon transition.

  1. Develop a long-term roadmap to price carbon at a level that reflects the marginal cost of greenhouse gas emissions – i.e. the social cost of carbon;
  2. Set emissions caps based on the cuts Malaysia needs to achieve its most ambitious decarbonisation strategies and targets – e.g. net-zero emissions by 2050;
  3. Gradually expand the scope of carbon pricing instruments to cover all major economic activities;
  4. Limit the extent of carbon-related costs that are passed on to consumers and develop a carbon rebate mechanism to support low-income and vulnerable population groups; and
  5. Utilise carbon pricing as one of a suite of policies to support the expansion of low-carbon electricity generation in Malaysia.

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