.jpg)
Malaysia to roll out carbon tax in 2026, targeting steel, cement, and energy. (Photo: iStock)
Malaysia unveiled its USD 111 billion budget for 2026 on Oct. 10, which includes plans to introduce a carbon tax next year, initially targeting the steel, cement, and energy sectors. Experts are divided over its impact: Some warn it could undermine industrial competitiveness, while others say it aligns well with the country’s long-term climate goals.
Prime Minister Anwar Ibrahim said the carbon tax aims to strengthen Malaysia’s commitment to sustainable development and climate action. To ensure effective implementation, the carbon tax mechanism will be integrated with the National Carbon Market Policy and the postponed Climate Change Bill.
The proposed tax marks a turning point in Malaysia’s climate policy, but analysts warn that the transition may be challenging for businesses in the near term.
Short-term pain: higher costs across the supply chain
In the short term, the carbon tax could send shock waves through the supply chain, while bringing about only limited changes in emissions and revenue generation.
“A carbon tax in Malaysia will not raise much revenue and old production models will be difficult to change quickly,” Geoffrey Williams, economist and founder of Williams Business Consultancy Sdn Bhd, told SunBiz.
Williams suggested that to protect Malaysia’s competitiveness, the carbon tax rate should remain low, and any revenue collected should be redirected toward clean energy incentives.
However, he noted that similar incentives are already in place, so the introduction of a carbon tax may not have a significant impact. The government currently waives the 1.6% Renewable Energy Fund (KWTBB) charge on electricity tariffs for users sourcing green power through renewable energy programs under the Ministry of Energy Transition and Water Transformation (PETRA), a measure introduced in August.
Steel industry among the first to be taxed
The steel industry will be among the first sectors targeted by the carbon tax, as part of efforts to decarbonize the sector in line with the Steel Industry Roadmap 2035, released in August.
The Steel Industry Roadmap 2035 outlines a 10-year strategy for transitioning to green steel production.
(Chart: Ministry of Investment, Trade and Industry)
The roadmap identifies reducing overcapacity as the first step toward reform, while also driving the transition to low-carbon production and accelerating investment in green steel. Market demand for low-carbon steel is expected to grow 2.5 times over the next five years, accounting for more than 40% of total steel procurement. The government believes that the introduction of a carbon tax will be a vital step toward achieving a green steel transition by 2050.
Long-term gain: competitiveness through decarbonization
While some experts warn that Malaysia’s industrial competitiveness could be negatively affected by the carbon tax in the short term, others argue that it should not be viewed as a burden but as a strategic tool to modernize Malaysia’s industrial base, which could ultimately strengthen the country’s export position.
“For export-oriented industries, especially steel, cement, and energy-intensive manufacturing, the ability to demonstrate lower carbon footprints through verifiable carbon offsets will enhance competitiveness in international markets,” said Poon Wai Ching, Taylor’s University research cluster lead for innovative management practices, in an interview with Sunbiz.
Poon noted that Malaysia’s move to implement a carbon tax is particularly timely amid the launch of the Carbon Border Adjustment Mechanism (CBAM), a European Union regulation that places a carbon price on certain imported goods to prevent carbon leakage and create a level playing field for EU producers. Based on verified domestic carbon pricing and mitigation efforts, Malaysian exporters could potentially qualify for CBAM deductions, helping them remain competitive in EU markets.
Poon added that introducing a national carbon tax would also allow the government to retain sovereign control over domestic carbon pricing, rather than having it dictated by external demand dynamics inherent in cap-and-trade systems.
As part of broader carbon-pricing efforts, Malaysia is developing two carbon market mechanisms under the UN climate framework: a bilateral cooperation scheme under Article 6.2 and the Paris Agreement Crediting Mechanism under Article 6.4, which is managed by the United Nations Framework Convention on Climate Change (UNFCCC).
Malaysia has already signed two MOUs for bilateral cooperation under Article 6.2, one with South Korea last year and another with Singapore in January, strengthening regional collaboration and investment in carbon projects.
A decisive step toward net zero
Budget 2026 is the first under the 13th Malaysia Plan, which sets the country’s development direction for the next five years and advances its low-carbon transition toward net zero by 2050. The carbon tax may bring growing pains in the short term, but its success will ultimately depend on how well Malaysia turns that pressure into progress.
Source: The Sun, The Edge, Reuters
.jpg)
