CARBON TAX AND YOU: WHAT IT MEANS FOR MALAYSIA’S PEOPLE AND MSMEs

alecasolutions
Aug 5
4 min read

As Malaysia navigates the increasingly complex terrain of climate policy, the potential implementation of a carbon tax has emerged as a key focus. While the intention to reduce carbon emissions and meet international climate goals are clear, the implications for Malaysian people and especially micro, small, and medium enterprises (MSMEs) are both far-reaching and deeply personal.

What is a Carbon Tax?

A carbon tax places a price on the carbon content of fossil fuels and carbon-intensive activities. This additional cost burden creates a financial incentive for individuals and businesses to reduce their carbon footprint by adopting cleaner alternatives.

But in Malaysia’s case, this conversation cannot be detached from the socio-economic realities of the people and the vulnerabilities of MSMEs, who make up over 97% of Malaysian businesses and are central to the nation's economic growth (SME Corp, 2024).

The Impact on MSMEs

Without sufficient transition support, a carbon tax will be broadly inflationary, as the cost of energy, logistics, and manufacturing rises. These are the very sectors in which MSMEs are heavily embedded. Unlike large corporations that can afford sustainable alternatives or pay penalties without significant restructuring, MSMEs face tighter margins, limited resources, and often lack in-house ESG expertise (ICSB, 2023).

Even though ESG adoption is growing in Malaysia, evidenced by SME Corp’s launch of an ESG Quick Guide to help MSMEs begin integrating sustainability (SME Corp, 2024), the process is still nascent. An abrupt or poorly supported carbon tax may endanger many MSMEs, pushing them to absorb higher costs, reduce workforce, or exit the market entirely. In order to truly benefit MSMEs, ESG policies must be made to fit their diverse and unique circumstances.

Cost Transfer and Socioeconomic Risks

In a country where subsidies cushion fuel and energy costs, a carbon tax without transparent reinvestment mechanisms may simply translate into a higher cost of living for ordinary Malaysians. If companies pass on costs to consumers, the B40 and M40 income groups will bear the brunt through even more expensive prices for everyday goods and services.

Additionally, if Malaysia’s government does not fully recycle carbon tax revenues into the economy, such as via subsidies for cleaner technologies, public transport, or MSME green innovation, the policy risks worsening income inequality. Carbon taxation must be accompanied by robust social safety nets and green transition funds, or it risks becoming a regressive measure.

Malaysia is slated to introduce a carbon tax by 2026, beginning with high‑emission sectors such as iron, steel, and energy. The carbon tax revenue could reach nearly RM 1 billion/year or ~US 213 million (The Edge Malaysia; Carbon Pulse). But what does this mean for everyday Malaysians and micro, small, and medium enterprises (MSMEs), who are the consumers of iron, steel, and energy? Aren’t they the ones who ultimately pay the extra RM 1 billion/year?

Challenges with Carbon Tax Implementation

1. Immediate Financial Impacts on Businesses

Energy-intensive MSMEs (manufacturing, transport, food processing) could face higher operating costs, thinner margins, and potential price hikes for customers.
Large firms may absorb costs or switch technologies, but MSMEs often lack capital to invest in alternatives or cover compliance costs.

A reliable ESG framework tailored for MSMEs is extremely essential as generic, EU-centric ESG policies do not and will not match their capacity or scale (CCI France Malaisie).

2. Inflationary Pressure and Household Burden

A new carbon tax, especially if fuel subsidies are curtailed, may push up electricity, transport, and consumer goods costs.
Lower-income households, particularly B40/M40 groups, may bear the brunt unless revenue recycling through additional targeted subsidies and public transport is prioritised.

In similar emerging economies (e.g. Indonesia), low-income households lose proportionally more under carbon tax scenarios without mitigating measures (S&P Global Institut Masa).

3. Public Acceptance Without Trust is Challenging

Studies show Malaysians are more likely to accept carbon tax if the government is seen as accountable and transparent in spending the proceeds.

Trust in government competence or integrity alone doesn’t guarantee acceptance. Accountability matters most.
Demographic factors like education, location, and race influence willingness to pay.

4. Environmental and Economic Trade-offs

Estimated social cost of carbon (SCC) in Malaysia is USD 64/tCO₂e under current trends, which can be significantly reduced (to USD 23/tCO₂e) if carbon sink measures like forest conservation are scaled up.

Putting a price on carbon helps account for environmental damage and supports Malaysia’s goals to cut greenhouse gas (GHG) intensity by 45% by 2030 and reach net-zero emissions by 2050.
However, poor policy design (e.g. conflicting subsidies, poorly aligned incentives) can produce unintended consequences, as seen in Malaysia’s cooking-oil recycling incentives.

5. A Phased, MSME-Sensitive Roll-Out Is Key

Implement carbon tax gradually, as in Singapore: starting low and scaling over time to allow adaptation and public understanding.
Provide transition assistance, such as:
- Subsidies or loans for green tech adoption,
- Free or simplified ESG tools tailored for small businesses,
- Clear guidance and emissions reporting frameworks.

Conclusion: Promise and Peril

In conclusion, the introduction of a carbon tax in Malaysia holds both promise and peril. While carbon tax may be a vital tool in helping to make the hidden environmental damage of carbon emissions visible and financially accountable in addition to steering the country towards a greener future, its success hinges on how thoughtfully it is implemented. Without a clear, equitable, and phased approach, one that protects low-income households and empowers MSMEs to transition, the policy risks widening socio-economic gaps and stifling the very sectors it aims to reform.

For carbon taxation to be effective and just, it has to be more than a revenue tool; it must be part of a broader, comprehensive and inclusive transition strategy that is anchored in transparency, social safeguards, and capacity-building for small businesses. Only then can Malaysia align climate ambition with economic resilience.

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