PETALING JAYA: Economists caution that Malaysia's plan to roll out a carbon tax in 2026, with initial focus on the steel, cement and energy sectors, may face challenges, particularly in balancing environmental goals with industrial competitiveness.

Prof Geoffrey Williams, economist and founder of Williams Business Consultancy Sdn Bhd, said the policy could result in higher costs for businesses without significantly reducing emissions or raising meaningful revenue.

"There are two main aims of a carbon tax, first to make production of carbon emissions expensive to encourage cleaner business models, or second to raise revenue. A carbon tax in Malaysia will not raise much revenue and old production models will be difficult to change quickly," he told SunBiz.

He warned that higher costs are likely to be passed down through the supply chain, leading to price increases for consumers and eroding Malaysia's international competitiveness.

Williams was commenting on Budget 2026 tabled on Friday by Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim, which included plans to roll out a carbon tax in 2026.

The economist said that to protect Malaysia's competitiveness, the rate should be low and cautioned that it might not push down emissions. He added that revenue raised could be redirected into clean energy incentives, but these are already in place so it is not obvious that this would move the needle.

Anwar said the introduction of the tax is aimed at strengthening Malaysia's commitment to sustainable development and climate action. The government will align the mechanism with the National Carbon Market Policy and the upcoming Climate Change Bill to ensure effective implementation.

"The carbon tax mechanism will be synchronised with our national carbon market framework and the legislation to be tabled, to guarantee efficient enforcement," Anwar said, adding that this would support the country's transition towards low-carbon growth.

Williams also questioned the timing of the measure, arguing that the National Energy Transition Roadmap already provides a comprehensive framework for balancing growth with environmental sustainability.

"There is no obvious economic justification for a carbon tax at the moment and there is an obvious contradiction in taxing carbon from industrial production while subsidising carbon produced at power plants and from subsidised petrol and diesel," he said.

Offering a different perspective, Taylor's University research cluster lead for innovative management practices Prof Dr Poon Wai Ching said the introduction of the carbon tax is strategically aligned with Malaysia's climate commitments and regional market developments.

"Given the rapid development of carbon markets across the region, particularly with the UNFCCC's operationalisation of Article 6.4 establishing a common global carbon registry in the early part of this year, it is imperative for Malaysia to proactively define its own carbon market strategy. The introduction of a national carbon tax would enable the government to maintain sovereign control over domestic carbon pricing, rather than allowing it to be dictated by external demand dynamics inherent in cap-and-trade systems," she said.

Poon acknowledged that the implementation of the tax would add additional costs and might induce inflation in certain sectors, but said the long-term benefits outweigh the short-term pressures.

"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. This is particularly relevant under the EU's CBAM (European Union Carbon Border Adjustment Mechanism), where Malaysian exporters could qualify for deductions based on verified domestic carbon pricing and mitigation efforts," she said.

She added that a well-designed carbon tax should be viewed not as a burden, but as a strategic instrument to modernise Malaysia's industrial base, attract climate-aligned investments, and fulfil national climate commitments.

"A successful carbon tax in Malaysia requires a strategic and gradual approach to balance environmental goals with business competitiveness. This involves a phased implementation with predictable price signals to allow industries time for transformation and investment in cleaner technologies. Key to its success is revenue recycling, where funds are returned to the economy via green technology grants and targeted incentives for energy-intensive sectors," Poon said.

The Federation of Malaysian Consumers Associations views carbon tax as a long-term positive for households and the environment.

Its CEO, Saravanan Thambirajah, said the tax, although targeted initially at heavy industries, would encourage cleaner production and bring wider benefits to consumers.

"The government's plan to introduce a carbon tax in 2026 is another important step. While initially focused on heavy industries, it will encourage a shift towards cleaner production and reduce long-term environmental costs. For consumers, this translates into cleaner air, healthier communities, and a more sustainable economy."

Saravanan noted that complementary measures such as the Solar Accelerated Transition Action Programme - a rooftop solar initiative - rebates for energy-efficient appliances and expanded tax relief for food waste recycling machines would directly help households cut bills and adopt sustainable practices.

Malaysia's carbon tax - Short-term pressures, long-term positives?