External Pressures: The EU’s Carbon Border Adjustment Mechanism (CBAM)

alecasolutions
Aug 14
4 min read

The EU’s Carbon Border Adjustment Mechanism (CBAM) is one of the primary catalysts for the carbon tax debate in Malaysia. CBAM requires importers to pay for the embedded carbon emissions of goods like steel, cement, and fertilisers entering the EU. This policy threatens to penalise Malaysian exporters if they cannot prove or reduce their carbon emissions (Business Today, 2023).

“CBAM is forcing Malaysian businesses, particularly exporters, to become carbon-conscious, not by choice, but by necessity” (Business Today, 2023).

MSMEs integrated into global supply chains will find compliance burdensome. Data collection, emissions accounting and reporting, all demanded under CBAM, are time-intensive and expensive for small firms. Furthermore, non-compliance by MSMEs risks market loss, reputational damage, or even legal implications (Tax at Hand, 2025).

Risks of Double Burden and Carbon Leakage

It is critical to remember that many Western companies, including EU-based ones, have shifted high-carbon operations to Southeast Asia, a phenomenon known as carbon leakage. This has led to Malaysia and other developing nations inheriting the carbon load without equitable compensation (Khazanah Research Institute [KRI], 2024).

If Malaysia implements a carbon tax under pressure from international frameworks like CBAM without adequate industry protections, it risks double-taxing its population: once by absorbing foreign companies’ emissions, and again through domestic carbon pricing. As KRI (2024) notes:

“The public must uphold their rights… as EU policies do not reflect the Malaysian climate or socio-economic reality.”

A Path Forward

Should Malaysia proceed with carbon tax implementation, it must:

Start with large, carbon-intensive firms, not MSMEs.
Use revenues to subsidise green tech adoption for small businesses.
Ensure transparent reporting and oversight mechanisms.
Tailor ESG compliance tools and metrics to MSME realities (ICSB, 2023).

Why is Malaysia Pursuing a Carbon Tax?

The push for carbon taxation in Malaysia is not happening in isolation. It is deeply linked to global climate dynamics, market access pressures, and national sustainability goals (The Edge Malaysia, 2024).

1. International trade pressures

The European Union’s CBAM is reshaping the global trade landscape. Countries that export carbon-intensive goods to the EU, like Malaysia, must now internalise the cost of emissions or risk losing their competitive edge (Business Today, 2023). CBAM is not just a tariff; it’s a message: “Decarbonise or be left behind.” For Malaysia, a carbon tax can be a way to control the narrative, develop national carbon pricing mechanisms, and retain sovereignty over how climate policies affect its economy (Tax at Hand, 2025).

2. Environmental accountability

Malaysia has pledged to become carbon neutral by 2050. A carbon tax acts as a market signal to reduce emissions, shift investments towards renewable energy, and support green innovation (The Edge Malaysia, 2024). From transport to manufacturing, a carbon tax can promote long-term efficiency and align industries with Malaysia’s National Energy Transition Roadmap (NETR). By putting a price on pollution, it acknowledges the cost of environmental degradation that has so far been externalised (SME Corp Malaysia, 2024).

3. Fiscal diversification

Post-COVID-19, the Malaysian government faces shrinking revenue bases. Carbon taxation could provide new fiscal streams which, if used properly, could fund sustainability efforts, retraining programmes, and green public infrastructure (The Edge Malaysia, 2024). However, this only works if the carbon tax is reinvested back into the economy and not simply absorbed into general revenue. If absorbed, it will only lead to inflation and a higher cost of living for all Malaysians, with no long-term benefit (KRI, 2024).

4. Climate justice and global equity

It is worth noting that developed nations are disproportionately responsible for historical emissions. For Malaysia, implementing a carbon tax must not feel like shouldering an unfair burden. It must reflect a just transition, where:

Western companies are held accountable for offshoring emissions.
Green technology transfers and climate finance are increased.
Developing countries are empowered, not penalised, to decarbonise (ICSB, 2023; KRI, 2024).

The carbon tax must not become a tool of external compliance, but a pillar of local resilience.

Conclusion: A Delicate Balance for a Just Transition

Carbon taxation, when done right, can be a catalyst for both climate progress and economic transformation. But in Malaysia’s context, success depends on nuance, not simply copying models from the EU or other global powers. The question isn’t whether to implement a carbon tax, but how to do so without deepening inequality or stifling local enterprise.

For the public, this is a time to ask hard questions: Where will the revenue go? Who bears the heaviest burden? What safety nets and incentives will be in place, especially for MSMEs and low-income communities? For MSMEs, the time to prepare is now, by beginning ESG self-assessments, digitising emissions data, and investing in partnerships that drive low-carbon growth (ICSB, 2023).

Ultimately, a carbon tax must be Malaysian by design, rooted in our economic realities, social fabric, and developmental priorities. It must uplift, not penalise. And it must be part of a wider, fairer strategy to decarbonise the nation while securing the livelihoods of its people.