KUALA LUMPUR (Aug 20): The Institute for Democracy and Economic Affairs (Ideas) has released a new policy paper suggesting that a carbon price of RM200 per tonne of carbon dioxide (CO2) is the critical threshold to make low-carbon steel production commercially viable in Malaysia.

The think tank's report, which also suggested an immediate but phased introduction of carbon pricing to reach this benchmark by 2030, comes as the country prepares to implement a carbon tax on high-emission sectors, including iron, steel, and energy, starting next year, as announced in Budget 2025. The tax aims to reduce carbon emissions from heavy industries and help the country meet its climate goals.

According to Ideas' analysis, a carbon price at this level would increase costs for domestic steel producers using traditional blast furnaces by about 11%. Downstream sectors such as construction, could see a cost increase of 3.5% to 4.6%, while those using higher value-added steel would experience a more modest increase of about 1%.

Ideas said the RM200 per tonne of carbon dioxide can be achieved within four to five years under a phased approach, and could raise RM3 billion in revenue annually for the government.

The proposed carbon pricing strategy is a proactive measure designed to help Malaysia meet its national climate commitments and protect its export industry from international regulations like the European Union's (EU) Carbon Border Adjustment Mechanism (CBAM).

Under the CBAM, a carbon tariff will be imposed on carbon-intensive products entering the EU, which means Malaysian exports of iron and steel will be taxed, unless a similar tax is collected domestically.

The steel sector’s growing emissions intensity over the years and its exposure to CBAM measures is a concern Ideas underlined in its paper.

According to the think tank, the sector's production back in 2014 exclusively used low-emissions electric furnace technology. However, emissions-intensive blast furnace methods now account for 70% of production, causing the average emissions intensity of Malaysian steel to more than quadruple. This trend undermines Malaysia's net zero target and exposes the industry to significant trade risks such as the CBAM tariff, it noted.

To guide the sector onto a low-emissions and high-value path, a sufficiently high carbon price is required, according to Ideas senior fellow Renato Lima de Oliveira, who is also the paper’s co-author and associate professor at the Asia School of Business (ASB).

“It could open the door for new technologies, reduce exposure to emerging trade restrictions, and secure access to markets that are moving quickly to decarbonise. It could also generate up to RM3 billion in government revenue annually, which could be reinvested to support adjustments by steel producers and consumers,” he said.

Echoing this sentiment, fellow co-author Pieter E Stek stressed that the next few years are pivotal for the government to "place Malaysia's steel sector in a position to compete in a low-carbon global market or risk falling behind as other countries move ahead".