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Malaysia plans to roll out a carbon tax in 2026, initially targeting the steel, cement, and energy sectors, as part of its Budget 2026 and long-term climate strategy. Experts warn of short-term industrial challenges, but the move could strengthen Malaysia’s competitiveness and export position over the long term.
The proposed carbon tax is part of Prime Minister Anwar Ibrahim’s efforts to advance sustainable development and align with Malaysia’s National Carbon Market Policy and the Climate Change Bill. While the initiative reflects a decisive step toward net-zero emissions by 2050, experts note that businesses may face higher costs across supply chains in the short term.
Economist Geoffrey Williams of Williams Business Consultancy Sdn Bhd said that the tax may not generate substantial revenue immediately and that old production models are difficult to reform quickly. He suggested keeping the carbon tax rate low and channeling revenue toward clean energy incentives.
Steel and cement among first sectors taxed
The steel industry will be among the first affected, consistent with the Steel Industry Roadmap 2035, which outlines a 10-year plan for decarbonization. The roadmap emphasizes reducing overcapacity, transitioning to low-carbon steel production, and accelerating investment in green steel.
Market demand for low-carbon steel is projected to grow 2.5 times over the next five years, potentially accounting for more than 40% of total steel procurement. Malaysian authorities view the carbon tax as a critical step in modernizing the industrial base and preparing the sector for global competition.
Long-term benefits and competitiveness
Experts argue that while there may be short-term economic pain, a carbon tax can ultimately enhance industrial competitiveness.
- Poon Wai Ching, Taylor’s University research lead, noted that demonstrating lower carbon footprints could help Malaysian exporters qualify for EU Carbon Border Adjustment Mechanism (CBAM) deductions, preserving market access.
- Implementing a national carbon price also allows Malaysia to retain sovereign control over domestic carbon policies, rather than relying on external cap-and-trade frameworks.
Malaysia is also developing carbon market mechanisms under the UNFCCC framework, including bilateral cooperation under Article 6.2 and the Paris Agreement Crediting Mechanism under Article 6.4, with agreements already signed with South Korea and Singapore.
Outlook
Budget 2026, the first under the 13th Malaysia Plan, sets the stage for Malaysia’s low-carbon transition. While businesses may face growing pains initially, authorities and analysts agree that the carbon tax represents a strategic move toward sustainable industrial growth and net-zero targets.
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