In Short : Implementing a carbon tax can be a complex and politically challenging process. Therefore, careful planning, stakeholder involvement, and ongoing evaluation are critical to ensure its success.
In Detail : PETALING JAYA : Malaysia should consider various factors before implementing a carbon tax regime, which is gaining popularity globally, according to experts.
Although there is resistance among some quarters on such a tax, most experts said some considerations need to be taken heed of to ensure it benefits businesses on the whole.
Basically, a carbon tax is a tax levied on the carbon emissions required to produce goods and services. Malaysia is currently considering a carbon tax to reduce greenhouse gas emissions.
Speaking with StarBiz, Deloitte Malaysia country tax leader Sim Kwang Gek said that currently, the country does not have a carbon tax and may consider similar measures to drive climate change objectives.
She said the implementation of carbon tax must take into consideration the overall cost burden to businesses, especially small and medium enterprises, its legal framework as well as availability and reliability of data.
At present, Malaysia offers tax incentives to encourage the adoption of green practices and green investments by businesses.
In Budget 2024, the existing green tax incentives were proposed to be extended and expanded to include additional activities. These measures are welcomed and in line with the government’s aspiration towards net zero by 2050.
“While we should incentivise efforts in going green, environmental taxes can be introduced to encourage businesses to make sustainable choices and prevent deterioration of our environment.
“As part of the global efforts in addressing climate change, Malaysia is committed to achieve its targets under the United Nation’s Sustainable Development Goals and its pledge to be a net-zero greenhouse gas (GHG) emission nation by as early as 2050.
“Introducing carbon tax alongside other measures such as the implementation of voluntary carbon market by Bursa Malaysia would assist the nation to achieve its goals,” Sim noted.
In South-East Asia, Singapore was the first country to introduce carbon tax in 2019, which is currently set at S$5 per tonne of GHG emissions. Since then, Singapore has set out a roadmap on its carbon tax rate hike to meet its carbon neutral pledge.
Singapore’s carbon tax would be increased by five times from S$5 to S$25 per tonne of GHG emissions in 2024, followed by S$45 in 2026, before reaching S$50 to S$80 per tonne by 2030.
Sim said carbon tax can also be a tax revenue-generating tool for the government, adding that carbon tax rates vary significantly around the world.
For Malaysia, she said the carbon tax may be set at a low rate initially, with planned increases over a period of time.
This gradual planned increase should be made known to businesses to facilitate planning for green investments, she said.
It was reported that as at March 2023, Uruguay had the highest carbon tax rate at US$156 per tonne of carbon dioxide (CO2) equivalent, while Poland had a tax rate of less than US$1 per tonne of CO2 equivalent.
In terms of revenue collection, it was reported that carbon taxes in Canada brought in a revenue of US$5.5bil in 2022, while carbon taxes in Sweden generated the second highest revenue worldwide at US$2.1bil.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said carbon tax is one of the mechanisms to encourage businesses and consumers to shift towards an environmentally friendly solution.
He said the tax would be a means to punish the carbon emitter, which then would redirect more resources to build a greener economy.
While the intention is noble, he said there could be side effects to the economy. In the interim, he said it may result in higher cost of doing business.
Therefore, he noted that revenue generated from the carbon tax has to be used for capacity building of the green economy, such as electric vehicles (EVs) and renewable industries.
At the same time, he said fossil fuel subsidies would need to be reduced in order to cut carbon emission.
Afzanizam said that in a nutshell, the journey towards environmental sustainability would need to be carefully calibrated.
He said there could be side effects such as higher cost of living and higher cost to businesses as the transition may take a while.
“If we can make some parallel, in the 1990’s, globalisation and trade liberalisation were the main mantras for a vibrant economy.
“However, it comes with adverse effects such as an overheating economy as investment activities were rapidly growing, which resulted in macroeconomic imbalances such as current account and fiscal deficits as well as volatility in the exchange rate.
“The point is, the transition towards a greener economy and environmental sustainability has to be executed using our own ‘mould’.
“There must be ample time and widespread capacity building as well as efficient use of resources to ensure that it will be a seamless journey,” he added.
UCSI University Malaysia assistant professor in finance Liew Chee Yoong, who is also a research fellow at the Centre for Market Education, said introducing carbon tax, as part of a transition to a low carbon economy, is beneficial and is consistent with global efforts to combat climate change.
He said a carbon tax can incentivise firms to reduce their carbon footprint, encouraging investments in cleaner technologies and sustainable practices.
However, Liew said the government needs to convince businesses to accept this tax, as not all firms are able to afford to invest in clean technologies as it requires high investment.
“On the other hand, polluting firms have to pay this carbon tax, which will increase their cost structure.
“Either way, both polluting firms without clean technologies and non-polluting firms with clean technologies will encounter higher cost structure in the short term with the implementation of this tax.
“In the long run, all firms and individuals will benefit if there are less carbon emissions as a result of the implementation of the carbon tax, as there will be less natural catastrophes such as hurricanes, tornadoes and floods which can disrupt business operations and human activities,” he added.
As such, he said firms and individuals need to see the long-term returns as a result of the implementation of carbon tax.
Sim said one of the challenges in introducing carbon tax is the existence of fuel subsidies.
She said the proposed rationalisation of diesel subsidies as announced in Budget 2024 is a step in the right direction.
Sim said it is critical that the government aligns its policies on the gradual removal of fuel subsidies with the introduction of carbon tax, so that the objectives of the two policies do not contradict one another.
The savings achieved from the removal of subsidies and carbon tax can be channelled to small businesses and low-income groups to alleviate the financial costs burden faced by these groups, Sim said.
Taking an opposite view, Malaysia University of Science and Technology economics professor Geoffrey Williams said carbon tax would not benefit the country significantly, as it would impose a huge burden on ordinary people with low income.
He said carbon taxes are not the best way to reduce carbon emissions.
Instead, Williams said the government should simply cut subsidies, not just on petrol and electricity but also on tolls and cars.
Malaysia will not achieve net zero by following policies of other countries, he said, noting that carbon taxes, EVs, green growth or any of these agendas are mostly irrelevant in the Malaysian context.
“The strategy for Malaysia is to over-produce electricity from renewable and clean energy sources and then to sell it to countries like Singapore, which want clean energy at low costs.
“Malaysia achieves net zero by reducing the emissions of buyers, not from reducing its own carbon footprint. It will compete with Vietnam and other countries on this,” he noted.
Williams said the country can also contribute by providing rare earth resources used in green growth products.
In other words, Malaysia benefits from the demand for green growth in other countries as a supplier of green growth solutions, he said.
“The green growth agenda would not significantly reduce carbon emissions in Malaysia directly,” Williams said.