This article first appeared in Forum, The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

When tabling Budget 2025, the prime minister announced that the country would implement a carbon tax on the iron, steel and energy industries by 2026. It was a much awaited announcement as implementing a carbon tax can cultivate a sustainable physical and business environment amid the ever-evolving environmental, social and governance (ESG) landscape in Malaysia and abroad. Additionally, this move emphasises the government’s commitment to emission reduction goals.

Taxation and ESG are interwoven. Reporting standards, such as the Global Reporting Initiative (GRI), mandate taxation as an obligatory reporting principle.

GRI 201-1 stipulates that organisations must report their direct economic value generated and distributed on an accrual basis. This declaration illustrates the economic profile of an organisation. At a country level, this may indicate the direct monetary value to local economies. Taxes are a weighted component in calculating this economic value. As such, any carbon taxes would be included in this framework.

A potential carbon tax has been discussed before — it was proposed in Budget 2022 under the previous administration. It was removed in the iteration of Budget 2022 by the current government, which was passed by parliament following the 15th general election (GE15).

The Organisation for Economic Co-operation and Development (OECD) has estimated that carbon pricing, combined with targeted transfers to low-income households, will add 0.5% to Malaysia’s gross domestic product (GDP).

A carbon tax is a tax collected on carbon emissions from the production and delivery of goods and services within the economy. It directly sets a price on carbon by setting out a tax rate on greenhouse gas (GHG) emissions.

This tax is largely classified as above-the-line operating costs within the overall cost structure of supply chains. Globally and regionally, these taxes have been levied on industries such as but not limited to plastics, landfills, forestry and timber, transport and logistics.

Overall, carbon taxes have less certainty around pre-defined emission reduction outcomes but have set out carbon pricing.

Taxes are multifaceted. One function is revenue raising for governments, while another is to influence and change consumer and production behaviour. Deploying carbon taxes results in carbon-intensive producers and service providers passing on these costs, ultimately making these goods and services more costly.

Ideally, consumers and producers will be encouraged to switch to low-carbon products or carbon-neutral products, which can contribute to a more sustainable environment in the medium to longer term.

Carbon taxes quantify the price of carbon, which would otherwise be implicit. This process is a strategic, financial planning and operation efficiency tool for firms.

They also raise income for governments, which can use such funds for public spending requirements and or to address or rebalance other fiscal requirements and instruments.

The OECD found that among 72 countries surveyed (including Malaysia), 58% of GHG emissions are unpriced. Only 7% are subject to a carbon price equivalent to the cost of carbon dioxide (CO2) emissions at €60 per tonne of CO2.

Malaysia has several fiscal programmes that support the transition to a net zero economy. Two such examples are the extensions of the Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) to Dec 31, 2025, allowing businesses to accelerate using ESG-focused technology.

Under the indirect and direct tax categories, it has executed personal and corporate income tax, excise duty reliefs, deductions and benefits. From an environmental tax perspective, only an air passenger tax has been realised.

As for carbon taxes within Southeast Asia, only Singapore and Indonesia have such realised taxes. Indonesia is the only country that has applied both carbon tax and pricing. Malaysia is the only country in Southeast Asia that implements both personal and corporate income tax reliefs, deductions and benefits.

Singapore’s carbon tax was applied on Jan 1, 2019. The city state priced carbon at S$5 per tonne of carbon dioxide equivalent (CO2e) from 2019 to 2023. The tax was raised to S$25 per tonne of CO2e from this year onwards. It will be raised to S$45 per tonne of CO2e in 2026 and 2027, with a targeted tax rate of S$50 to S$80 per tonne by 2030.

Malaysia has specific fiscal policies and initiatives to manage a net zero transition. It also shows that from a taxation perspective, more can be done to expedite and facilitate this transition. Charging a carbon tax will advance the government’s commitment to ESG and its objectives. The global investment environment has embraced ESG metrics in due diligence processes. Rolling out a carbon tax denotes a commitment to sustainable development and governance.

The most noticeable impact of implementing a carbon tax will be on the government’s coffers, as such funds can be used to foot the bill for key development infrastructure such as healthcare, education and other public goods. Carbon tax revenue can also be used to support domestically focused research and development for green technologies.

The carbon tax has its detractors, who argue that it is an additional cost to Malaysian businesses, especially small and medium enterprises (SMEs) that make up the backbone of the economy. This additional cost may be passed on to consumers via higher prices, resulting in a higher cost of living. This higher cost of living will impact the most vulnerable in society.

Some quarters will also wonder what basis the pricing will be set on as carbon prices fluctuate. Any price assumptions and revenue collection assumptions under a carbon tax will be under scrutiny.

Nevertheless, assuming prudent management, appeals processes and relief measures, the revenue raised by a carbon tax can be used for transfers to the most vulnerable in society, including individuals and SMEs. Additionally, there are measures such as automated pricing mechanisms and reviews to ensure that carbon prices are equitably set.

Enforcing a carbon tax will support Malaysia’s transition to a net zero economy. Combined with other measures, it has the potential to raise important support for public spending while also leading the economy away from carbon-intensive practices.

S Saravana Kumar is a tax lawyer with law firm Rosli Dahlan Saravana Partnership (RDS)

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