From P Ganesha
As the global economy shifts towards cleaner, low-carbon development, carbon pricing is increasingly becoming a key tool for reducing emissions while preserving economic competitiveness.
Carbon pricing places a cost on greenhouse gas emissions, pushing industries to invest in cleaner technologies and reduce environmental harm.
For Malaysia, the way carbon is priced will shape not only its climate ambitions, but also its ability to remain competitive in markets that increasingly favour low-carbon products.
Delays risk long-term competitiveness
Malaysia still does not have a fully operational national carbon pricing system. There is no economy-wide carbon tax or emissions trading system (ETS). Instead, the country operates a voluntary carbon market through the Bursa Carbon Exchange (BCX), where companies may choose to trade carbon credits.
The government had planned to introduce a carbon tax by 2026 for the iron, steel and energy sectors. However, during the launch of the National Carbon Market Policy, natural resources and environmental sustainability minister Arthur Kurup Joseph said the proposal had been delayed due to energy security concerns linked to geopolitical tensions in the Middle East.
While this delay may reduce short-term pressure on industries, it could weaken Malaysia’s long-term competitiveness.
A lack of clear carbon pricing creates uncertainty for businesses and investors that are considering renewable energy and low-carbon technologies. Without predictable pricing signals, companies struggle to estimate future costs or justify long-term investments.
Malaysia also risks losing ground internationally. The European Union’s Carbon Border Adjustment Mechanism (CBAM) imposes carbon costs on imported goods based on emissions generated during production.
Malaysian exporters producing steel, cement and aluminium could, therefore, face additional costs when exporting to Europe if Malaysia does not have its own carbon pricing system.
At the same time, the current voluntary carbon market provides only weak incentives for emissions reduction because participation is optional and there are no binding caps or penalties. This raises the risk of delaying meaningful climate action while locking the country into carbon-intensive infrastructure.
Social fairness is another important consideration. Carbon pricing can increase fuel, electricity and transport costs, disproportionately affecting lower-income households. Studies consistently show that public acceptance improves when governments recycle carbon revenue through rebates, subsidies or targeted assistance.
A stronger framework needed
Malaysia should introduce a comprehensive national carbon tax with a clear and gradual price pathway. The tax should eventually cover more sectors beyond iron, steel and energy. Revenue generated could support renewable energy, vulnerable industries and household assistance programmes.
Malaysia should also consider developing a sectoral emissions trading system, which sets limits on emissions while allowing companies to trade carbon allowances. South Korea’s Emissions Trading Scheme (KETS) is often cited as a successful example covering hundreds of major emitters.
Global experience shows that carbon pricing can reduce emissions without severely harming economic growth.
British Columbia’s carbon tax reduced fuel consumption while maintaining economic growth. Similarly, the European Union Emissions Trading System (EU ETS) and China’s national carbon market have encouraged cleaner technologies by making pollution costs more visible.
Singapore provides one of the clearest regional examples. Its carbon tax started at S$5 per tonne of CO₂, increased to S$25 in 2024, will rise to S$45 in 2026 and is expected to reach between S$50 and S$80 by 2030. This gradual and transparent structure allows businesses to plan investments confidently, while revenues are recycled into decarbonisation and energy-efficiency programmes.
Pricing carbon effectively
An important concept in carbon pricing is the social cost of carbon (SCC), which estimates the economic and environmental damage caused by emissions.
Recent estimates place Malaysia’s SCC at around RM92 per tonne of CO₂ in 2025, rising as high as RM850 by 2050 under a business-as-usual scenario.
One study by IDEAS suggests a carbon price of RM200 per tonne could make low-carbon steel commercially viable by 2030.
Another study by the Asia School of Business argues that effective carbon pricing should ensure polluters bear the true cost of emissions, finance transition pathways, and protect households and businesses instead of merely passing costs on to consumers.
Based on these findings, Malaysia should consider introducing carbon pricing at approximately RM100 per tonne of CO₂ and gradually increasing it over time.
A much lower price, such as the much-discussed RM15 per tonne, may not be strong enough to influence business decisions or encourage cleaner alternatives.
The cost of inaction
Malaysia’s current carbon pricing approach remains fragmented and uncertain. To remain competitive and meet climate goals, the country needs a coherent system combining carbon taxes, an emissions trading scheme and social protection measures.
Strong and well-planned carbon pricing can encourage cleaner growth, attract investment and ensure Malaysia remains competitive in an increasingly low-carbon global economy.
The cost of inaction is clear; the opportunity of decisive and well-planned carbon pricing is even clearer.
P Ganesha is the head of engagement at RimbaWatch and an FMT reader.
The views expressed are those of the writer and do not necessarily reflect those of FMT.