Using Carbon Pricing to Support Sustainable Development in Malaysia

By Darshan Joshi   |   Posted on

Executive Summary
The pricing of carbon is widely considered to be a fundamental component of effective climate action, and represents an efficient economic solution to the two market failures which continue to exacerbate the problem of climate change. Such price-based regulation serves to mitigate emissions by incentivising the adoption of low-carbon means of production, encouraging economic actors to invest in and employ emissions abatement technologies, and curbing aggregate demand for emissions-intensive goods and services. Given the growing need for Malaysia to significantly decarbonise its economy, enforcing a price on carbon by taxing emissions arising from the electricity, transport, and oil and gas sectors would place downward pressure on over 70% of national emissions, and spur the growth of competing domestic clean energy and low-carbon industries. Commencing at a rate of RM35/tCO2e in 2020 and peaking at RM150/tCO2e in 2028, this tax would raise RM21.8-24.6bil in average annual revenues until 2030, adding approximately 18% to federal direct tax collections over this period. Carbon taxation can play an important role in determining whether Malaysia is able to exceed even its most ambitious climate scenario, which will still see emissions increase by 46% within these three sectors between 2020 and 2030. With the pricing of carbon, for instance, it is projected that parity in the levelised costs of generating electricity through coal and large-scale solar can be achieved by 2020/21, and the gap between the levelised costs of ultra-supercritical coal plants against those of combined-cycle natural gas will be reduced from approximately 50.8% at present to just 14.2% by 2028, assuming no changes to fuel input prices. Across sectors and economic activities, carbon pricing will strengthen the economic competitiveness of low-carbon technologies.

While consumers will be affected by rising prices as a result of carbon taxation, this paper shows that the absolute magnitude of these negative effects are relatively muted. It is estimated that fully compensating the nation’s bottom 40% (B40) for the increases in their electricity and transport costs through carbon “rebates” would only consume 29.2-44.5% of total revenue collections over the first four years of the policy – a percentage which shrinks as the price of carbon is gradually raised over time. It is recommended that a significant proportion of residual revenues be utilised to propel further climate change mitigation and adaptation efforts, for which MESTECC cites a present funding gap of over RM20bil, and in the long-run it can play a role mitigating inequality by financing and forming a crucial component of progressive tax system reform, while residual proceeds can be used to stabilise the nation’s fiscal outlook. Carbon pricing has the potential to put Malaysia on the path towards long-term sustainability with few consequential costs in the near future and monumental benefits in the long-run.