This article first appeared in The Edge Malaysia Weekly on March 16, 2026 - March 22, 2026
As countries rush to cut carbon emissions, whether by electrifying vehicles or using recycled materials, the path to a greener economy could be costly — at least in the short term.
Isabel Schnabel, a member of the executive board of the European Central Bank, said in a 2022 speech, titled “A new age of energy inflation: climateflation, fossilflation and greenflation”, that the rise of green technology is driving demand growth for minerals, but short-term supply limits will result in rising prices.
Critical metals like copper, lithium and cobalt are needed to manufacture low-carbon technologies to produce renewable energy and electric vehicles (EVs).
“There is a price to be paid for going green at a pace that reflects the dual objective of safeguarding both our planet and our right to self-determination. But that price, including the fiscal support required to protect the most vulnerable members of society, is worth paying,” she said.
“Climateflation” refers to the cost of managing the impact of climate change such as droughts, which cause food prices to go up. “Fossilflation” reflects the legacy cost of depending on fossil energy sources, which includes the impact of oil import embargos due to the Russian invasion of Ukraine.
“Greenflation refers to the short-term price increase or inflationary impact associated with the transition to a net zero economy. For example, an increase in the prices of critical minerals [to develop low-carbon technologies] that are necessary for the green transition may be difficult to obtain due to shortage of supply,” says Bhavya Gupta, a postdoctoral researcher at Net Zero Governance Systems at the University of Oxford.
She observes that when overall inflation is already elevated, price swings linked to the green transition can become more pronounced. Structural constraints such as weak power grids and fuel subsidies also hinder the scaling of renewable alternatives, further intensifying short-term cost pressures.
This point was further elaborated on by BNP Paribas in a 2023 report, titled “Greenflation: how inflationary is the energy transition?” The energy transition is likely to be inflationary in the short term as production methods shift and demand for critical raw materials accelerates, highlights the French asset management firm.
However, over the medium to long term, the transition could become disinflationary if renewable energy technologies become more efficient and the capacity expands, says BNP Paribas.
These developments illustrate a paradox in the fight against climate change: The faster and more urgent the shift to a greener economy becomes, the more expensive it may get in the short run, and the cost is passed on to consumers if the transition is not managed well.
Will a carbon tax make things more expensive?
Another factor that could contribute to “greenflation” is the introduction of a carbon tax, which is levied on carbon emissions from the production of goods and services. It is meant to incentivise manufacturers to opt for greener methods of production and pricing in the cost of unaddressed pollution and global warming.
Prime Minister Datuk Seri Anwar Ibrahim announced during the tabling of Budget 2026 in October last year that a carbon tax would be imposed on the iron, steel and energy sectors starting in 2026, underlining the country’s commitment to reducing emissions by putting a price on carbon. The move has prompted pushback from industry associations as such a move raises the question of its potential impact on businesses and consumers.
Tan Sri Soh Thian Lai, former president of the Federation of Malaysian Manufacturing, said during a speech in June 2025 that manufacturers would need a sufficient transition period before a carbon tax is imposed, and if it is introduced too early compared with neighbouring countries, it could put local businesses at a disadvantage.
However, some studies say a carbon tax will not necessarily cause inflation in the mid to long term. What makes the difference? Well-designed policies, public investment in green innovation and support for vulnerable groups.
A January 2025 column by the Centre for Economic Policy Research (CEPR), a pan-European non-profit organisation, analysed the impact of climate change policy measures on inflation for 177 advanced, emerging market and developed economies from 1989 to 2022.
The researchers found a transitory increase in inflation after a carbon tax was introduced. An increase in carbon price of US$100/tCO2 on average in its sample implies a price increase of about 8% in the medium term, but it falls after four years (see graph).
However, the inflationary effect is three times larger in low- and middle-income countries, and especially so in countries that already have high inflation.
Therefore, well-designed climate change policies are needed to mitigate these potential impacts on consumers. The CEPR authors point out that it is best implemented when economic conditions are more favourable, and that green innovation is key to reducing the cost of the transition. In fact, the study found that in sectors or regions with high innovation capacity, the inflationary effect of a carbon tax is 0.4% less.
“These inflationary effects can be mitigated through a gradually implemented carbon pricing scheme that targets major emitters, alongside complementary measures to cushion cost increases for consumers and economically vulnerable groups,” says Bhavya.
Jigar Shah, head of sustainability research at Maybank Investment Banking Group, concurs. He says a carbon tax usually leads to low carbon transition and results in cost savings for companies.
“If we take the example of the EU, the UK, Canada and elsewhere, it is not driving up inflation because there is commensurate savings from the adoption of low carbon technologies,” says Jigar.
In Malaysia, not much is known about the proposed carbon tax yet. To this, Kevin Lee, head of sustainability at CGS International, says the country should start its carbon tax at a reasonable rate to cut emissions without overburdening businesses or consumers.
“It is still unclear what the carbon tax rate and trajectory in future years will be. There have been indications that the government will start at a low carbon tax of around RM15 per tCO2e,” he adds.
If the tax rate is too high, it could drive businesses out of the country, or the costs could be passed on to industrial, commercial and residential end-consumers.
However, these are short-term impacts, says Lee. Investing early in emissions-reduction strategies rather than viewing the carbon tax purely as a cost will help in dealing with the long-term inflationary effects.
“For instance, Malaysia can exercise prudence in its fiscal policymaking by channelling carbon tax revenues towards capital expenditure on building the renewable energy infrastructure. This would help the country fulfil its carbon reduction commitments under the Paris Agreement, minimise its reliance on fossil fuel reliance and hopefully relieve energy cost pressures in the future,” he points out.
Lee says the government should introduce incentives to encourage green innovation start-ups, while simultaneously implementing business-friendly policies to support more established green technologies. Such complementary measures are critical to ensuring the cost of adopting green technologies becomes disinflationary over time.
“A carbon tax can speed up the adoption of mature clean technologies in the short term. But due to lack of scale and competitors for emerging green technologies, there may be some difficulties in lowering the prices,” he adds.
Gradual implementation, support vulnerable groups and invest in innovation
Although the details of the carbon tax in Malaysia remain unclear, regional experience offers lessons. Singapore implemented a carbon tax — the first carbon pricing scheme in Southeast Asia — in 2019.
The carbon tax was set at S$5/tCO2e for the first five years (from 2019 to 2023) to provide a transitional period for emitters to adjust. The tax was increased to S$25/tCO2e in 2024, and then to S$45/tCO2e in 2026.
According to the Singapore government, the price increases have been relatively modest for households, in the range of a few dollars per month.
The increase in carbon tax to S$45/tCO2e is estimated to translate into an increase of about S$3 per month in household utility bills for the average four-room HDB flat. This impact is partly cushioned by rebates and support, according to the government.
To help households defray their utility expenses, the Singapore government provides up to S$380 a year in U-Save rebates under the permanent GST voucher scheme.
Jigar says that in Malaysia, the carbon tax needs to be imposed gradually or in a phased approach in the hard to abate sectors and combined with friendly government policies or incentives. This is to help companies slowly decarbonise and innovate towards low-carbon transition.
“The transition also depends on the availability of finance, then the carbon tax will not become a burden on consumers. A carbon tax is usually recycled through revenue and subsidies or incentives, and are not heavy on consumers,” he adds.
European countries, many of which had carbon pricing schemes in place earlier on, also offer an interesting case study.
Another BNP Paribas article on this topic in 2023 outlines how the price per tonne of CO2 in many European countries is 10 times higher than when the Paris Agreement was signed in 2015. Citing a study by the Banque de France in 2023, it shows that the earlier and more gradual the implementation of a carbon tax, the less inflationary it is.
In the short term, there will be a rise in energy and critical metal prices, but this could be curbed in the mid to long term with the right measures: a gradual implementation, redistribution of tax proceeds to households and public investments, and certainty over transition policies.
Not passing on to consumers yet
ESG asked some industry players their thoughts on the cost of going green. If the proposed carbon tax is implemented, it will impact the iron and steel industries, as well as businesses that consume huge amounts of energy.
The energy sector is Malaysia’s biggest source of carbon emissions, driven primarily by electricity generation, followed by the transport sector.
To decarbonise, more renewable energy is being integrated in Malaysia, supported by schemes such as the Corporate Renewable Energy Supply Scheme and Solar ATAP. Meanwhile, in the transport sector, there are players optimising routes and investing in electric vehicles (EVs), among others.
For instance, German logistics giant DHL Group has invested almost €7 billion (RM32 billion) in sustainable aviation fuel and last-mile electrification, including in Malaysia.
DHL Express Malaysia and Brunei’s managing director Julian Neo says the company has electrified almost 30% of its fleet. According to DHL’s website, battery-powered trucks are up to three times more expensive than diesel vehicles.
While the initial cost to purchase EVs was higher, in the long term, the total cost of ownership and maintenance will not be more expensive than that for diesel trucks. On the contrary, one saves in terms of total fuel cost, says Neo.
In 2023, the company expanded its fleet to 54 electric vans from 10, leading to a 74% reduction in total fuel cost and a 63.5% increase in carbon efficiency compared with vans that run on internal combustion engines.
“We introduced EVs into our fleet, which not only helped reduce carbon emissions but also lowered our diesel expenditure. Our cumulative electricity spend is about half of what we would have spent had we continued using diesel,” he says.
In the long run, carbon tax, higher diesel prices and lower maintenance costs for EVs are likely to make e-mobility more attractive, says Neo.
“Germany introduced a carbon tax on fuel in 2021 at €25 per tonne. That rose to €55 in 2025, effectively doubling in four years, which raises fossil fuel costs over time,” he adds.
For companies still reliant on diesel, this becomes increasingly expensive. But for companies that electrify early, rising carbon prices improve the economics of switching, as fossil fuel alternatives become progressively less competitive, says Neo.
For now, the company does not foresee passing on the added costs to customers.
“The current run rate of increasing costs as we switch to sustainable products is manageable. We do not see the need to pass on the additional costs, either in the air or on the ground,” he says.
Meanwhile, Datuk Seri Tai Hean Leng, executive vice chairman of Malaysia Steel Works (KL) Bhd (KL:MASTEEL), says the production of “green” steel still requires significant capital compared to conventional steel.
According to a study by Transition Asia titled “Malaysian iron and steel sector overview: The challenge of decarbonisation” in 2025, the levelised cost of steel produced from a 100% scrap-based electric arc furnace (scrap-EAF) stands at US$623 per tonne. EAF steel is generally considered to be greener because its production produces lower carbon emissions than the conventional blast furnace-basic oxygen furnace (BF-BOF) route.
Instead of using iron ore and coal, the EAF process melts recycled scrap steel using electricity, allowing producers to avoid much of the carbon-intensive smelting process associated with traditional steelmaking.
Meanwhile, the levelised cost of steel from a BF-BOF plant is US$515 per tonne and is almost US$100 cheaper than scrap-EAF production.
Then there is green steel produced by using direct reduced iron with green hydrogen or equipping blast furnaces with carbon capture and storage technology. According to BloombergNEF, green steel currently costs about 40% more than the conventional production process with unabated carbon emissions.
The report suggests that these costs could decline by 2050, potentially making green steel 5% cheaper than fossil-based routes as technologies mature and scale improves.
According to Masteel, it has invested RM350 million to reduce greenhouse gas emissions from its processes.
“We are using electric ladle refining furnaces and billet direct charging technology that eliminate the use of fossil fuels for billet reheating. There are also upgrades to high-speed, high-capacity rolling mills, as well as the adoption of continuous emissions monitoring systems,” says Tai.
He observes that by investing in energy-efficient manufacturing processes that lower production costs, savings from reduced energy usage help offset the capital expenditure required for green upgrades.
In its 2024 sustainability report, Masteel said investments in low-emission technologies such as induction furnaces (IF) helped achieve cost savings of about 10.6% per tonne in billet production, alongside a 42.87% reduction in carbon dioxide per tonne.
The IF technology, however, came under scrutiny last year after Thailand called for the removal of certification for steel produced using outdated IF systems, citing ongoing challenges in quality control and environmental performance.
To address these concerns, Masteel says it has allocated an estimated RM64 million to deploy the most efficient IF technology for its Hi-Speed Bar Project, aiming to enhance production efficiency, reduce emissions and mitigate risks associated with outdated systems.
Over time, prices may stabilise for green steel compared to conventional steel. “The government plays a role in co-funding or incentivising green technology adoption, as well as providing transparent timelines and phased implementation of a carbon pricing mechanism to reduce uncertainty and support industrial transition without passing on excessive costs to consumers,” says Tai.
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