Part of an ongoing article series on renewable energy / climate crisis in Southeast Asia.
Introduction
Despite the resilience of the climate deniers group worldwide, Southeast Asia has undeniably suffered from the manifestation of the climate crisis that has affected everyone in the region, animals and plants included.
Latest developments should be a wake-up call to convince us that climate change is real. We are living in the age where nature is raging: extreme weathers, heat waves and the extinction of selected species, among others.
Recently, Typhoon Yagi has swept through the Philippines, Thailand, Myanmar and Laos and left an especially catastrophic damage in Vietnam. The death toll has reached 226 at the time of writing, but images coming out of Vietnam, including blown-away trees and a collapsed steel bridge, paint a harrowing picture of the effects of climate change.
The Singapore Airlines SQ321 London-Singapore flight also showcases the extent of the climate crisis even if your feet are not firm on the ground. Climate change is increasing the incidences of severe aviation turbulence which could turn deadly, as in the case of SQ321 flight.
The climate crisis has also been blamed for other disasters such as the decline of agricultural products and the disruption of food supply in Malaysia. The December 2021 flood was particularly traumatising for those in the peninsula, even hailed as a once-in-a century disaster event. Low rainfall and high temperature also negatively impact the country’s agricultural output, which is deeply problematic considering Malaysia’s reliance on the palm oil industry. Furthermore, fishermen in Johor do not only harvest fewer fish these days, but also have to contend with strong gales and turbulent waves that threaten their lives.
Earlier in this article series, Novia Xu posed the question, “when must we act on the climate crisis?” For Malaysia, the answer is clear: it must be now and it must be immediate. However, Malaysians still struggle with the “how”, considering many are still unsure of what measures they can undertake to mitigate climate change.
Available Options
Presently a new trend in the global fight against climate change has emerged, where trade practices/agreements and climate change goals are combined into a package.
Examples at the international level include the North American Free Trade Agreement (NAFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Agreement on Climate Change, Trade and Sustainability (ACCTS), and the EU Deforestation Regulation.
Meanwhile, at the firm- or national-level, we see the adoption of the SDGs, the environmental, social and governance (ESG) principles, the doughnut economics model, and carbon pricing by selected firms and governments.
The last of this list – carbon pricing strategy – may have the impact of reducing carbon emissions but may also be considered as an additional barrier to trade for developing countries and its MSME players.
Given that the biggest polluters remain to be the industry, energy, agriculture, buildings and land use sectors, in theory, it is logical to incorporate trade practices and climate change goals in a package deal. In practice, however, there are short-term downsides.
This tension may increase in the future, especially when there are signs that carbon pricing would be made mandatory in the near future via the global carbon tax scheme due to its effectiveness in combating climate change.
In the context of Malaysia, carbon pricing may indeed bring about benefits to its economy and sustainability goals, but as a trading and developing nation that is home to many MSMEs and vulnerable households, its drawbacks cannot be ignored.
Malaysia’s economy is mainly made up of the manufacturing industry, mining and the services sector, thus contributing far less carbon emissions than the biggest polluters (China, the United States and Indonesia) from a global perspective.
Nevertheless, as Malaysia is deeply intertwined with the regional and global supply chains, global rules and standards on carbon pricing and sustainability will need to be adopted and adapted at the national-level in the short-term, if we were to continue to be an active participant.
Carbon Pricing: A Refresher
Before exploring the viability of carbon pricing in Malaysia, a brief introduction to the concept is necessary for those who are unfamiliar.
Carbon pricing is a policy measure that aims to include a monetary cost on carbon emissions, so that producers and polluters are made accountable to the emissions produced (internalizing the costs) as opposed to passing the cost off to society (externalizing the cost).
By internalizing the external costs linked to emissions, this will then encourage and push the industries to adopt cleaner technologies and methods in their production process.
Carbon emissions can be priced in two ways; via carbon taxes or the emissions trading system (ETS).
While carbon tax sets a tax rate on greenhouse gas (GHG) emissions, the ETS, also known as the cap-and-trade system, limits the overall level of GHG emissions. Additionally, industries producing low emissions are allowed to sell their “surplus” to bigger polluters.
By establishing a market for emissions to be traded, ETS allows the identification of a market price for GHG emissions, while the established cap or limit ensures that emissions are kept within an established carbon allocation.
Even though the concept was introduced decades ago, it was through the introduction of the Kyoto Protocol in 1997 that international participation in carbon markets started to become normalized, though without the participation of the United States and China.
Eight years after its introduction, the European Union Emissions Trading Scheme (EU ETS) was established and became an important milestone in establishing carbon pricing mechanisms on the international level, whereby emitters are required to apply for tradeable permits for each tonne of CO2 emitted. This set the stage for other countries to adopt this method to control carbon emissions within their borders.
Today, however, carbon pricing has yet to take firm roots in Southeast Asia. As of this year, only Singapore and Indonesia have established carbon pricing policies, with Brunei, Cambodia and Vietnam at different stages of planning and implementation. Compared to these countries, Malaysia is left behind, as we are only at the initial stage of exploring various carbon tax mechanisms.
Issues with Carbon Pricing
Even though carbon pricing has been adopted widely elsewhere, with more than 40% of the GHG emissions regulated by carbon price in 2021, its effectiveness in reducing emissions remains in question. In theory, as carbon prices increase, this should lead to reduced overall emissions in the long term.
Apart from this conundrum, two other issues have also been debated. First, the impact of high carbon prices on business competitiveness. Second, the potential of carbon leakage.
On the first point, high carbon pricing may impact business competitiveness as costs are internalized, which translates into higher cost per unit of product or service.
Bigger emitters may have the resources to internalize the cost of emissions, but smaller, local players – such as MSMEs in this part of the world – may not be able to internalize the costs of emissions while remaining competitive at the same time.
This significant impact on MSMEs will not only affect their pricing strategies but also survival in the long-run. This is why appropriate policies and carbon pricing measures need to be adapted to the context of MSMEs so that they can positively impact their competitive strategies.
In a larger context, high carbon pricing will negatively impact developing countries in the short- to medium-term based on the energy mix that is used in their industries. The more dependent a country’s economic activities are on fossil fuels, the higher its output per unit would be if carbon pricing were to be implemented across the sectors.
Additionally, there are concerns surrounding the unintended impact of carbon policies like carbon leakages. Studies have shown that carbon leakages have resulted in the relocation of carbon-intensive producers from a region with strict rules on emissions to other regions with less stringent rules. Recently, we have also observed producers who have relocated to different countries in search of new business opportunities abroad, due to strict regulations on emissions back home.
Malaysia’s Implementation of Carbon Tax
From the outset, the implementation of carbon pricing in Malaysia can be challenging. The Malaysian economy is overwhelmingly dominated by MSMEs (accounted for 96.9% of all establishments in 2023) and as per the argument presented above, these MSMEs might be negatively impacted if carbon pricing policies are not adapted based on their limitations.
Presently, Malaysia has not implemented any carbon pricing policies, even though a carbon tax agenda was highlighted in the 12th Malaysian Plan (2021-2025). Recently, the New Industrial Master Plan (NIMP) 2030 has also highlighted the introduction and the implementation of a carbon pricing framework as a way to decarbonize its industries, even as it pushes for Net Zero Emissions (NZE).
This is an ambitious target, especially when Malaysia’s energy mix still relies heavily on natural gas. In 2021, natural gas accounts for almost 45% of total energy supplied, followed by oil, coal and hydro.
Even though various documents have been presented to the government (plus a study being undertaken by the World Bank on the subject), a climate change law has not been tabled in the Parliament. This law is important to create a binding and basic carbon pricing framework like the national carbon register and compliance rules.
Strategies on the implementation of carbon pricing in Malaysia have been published, starting from the steel sector, where buy-in from local producers is already obtained. A five-year plan of implementation seems feasible––where in 2025 a temporary tax on coking coal should be introduced while the regulatory frameworks on carbon pricing and a Malaysian Carbon Border Adjustment Mechanism (CBAM) are established.
The same publication projects that carbon pricing will only be introduced in 2027 after measurement emissions requirements are implemented the year before. The rate of carbon tax may be increased over time by 2030, but as suggested, a national carbon pricing system needs to be developed so that it can be implemented across all sectors.
It is important that carbon tax is implemented in a progressive manner because a regressive carbon tax will disproportionately impact the poor. It was found that even if it is not regressive, carbon tax can reduce household welfare if it is not compensated by other measures to support the vulnerable households.
As carbon pricing has its limitations, especially in the context of developing countries, other policies can be considered for the short term.
The introduction of various policies such as an excise tax on energy, incentives for renewable energy usage and removing a blanket subsidy on fossil fuels may be more effective in the short term. This is to encourage producers and consumers to transition to renewable energy and adopt technologies that produce less emissions across sectors. Targeted compensation schemes for vulnerable households need to be introduced to offset its negative impacts.
Apart from taxation, implementation of strict regulations on environmental protection and waste management – whereby MSMEs and bigger firms can be held accountable – is key in signalling to the market that polluters will be penalized.
These alternatives are building blocks to an end goal of a successful transition towards carbon pricing that limits the negative impacts towards the Malaysian economy and households in the short to medium term.
Conclusion
We need to remind ourselves that carbon pricing is merely a small piece of a larger puzzle in mitigating climate change and creating a sustainable future. While carbon pricing is an attractive option, our eyes must be set on these bigger goals instead of simply treating this concept as a new way for monetization. In the race to implement carbon pricing, it is important for countries like Malaysia and its peers in the region to ensure that the fundamental policies are abided by. These include regulating business practices in environmental protection, enhancing waste management, introducing fuel tax and subsidy. It is also important to ensure that big and small players alike implement these policies in the interest of capping emissions and reversing climate change.
