Malaysia’s 2026 Carbon Tax: Lessons from Global Models and What to Expect

alecasolutions
Jul 28
4 min read

Updated: Jul 29

Malaysia is set to introduce its first national carbon tax regime by 2026, starting with iron, steel, and energy industries, which are among the country’s highest carbon emitters. The move aims to accelerate decarbonisation, align with Malaysia’s 2050 net zero target, and transition toward a circular, low-carbon economy. However, as global experiences show, the effectiveness of a carbon tax depends heavily on design, transparency, and public acceptance.

Global lessons: The case of Canada

Canada’s carbon tax model, termed “carbon pricing”, offers key insights. Its primary goal is not only to cut emissions but also to protect and boost the competitiveness of domestic industries in a global market increasingly favouring low-carbon products.

The principle is straightforward: the higher the emissions, the greater the cost. This pricing mechanism is intended to make emitting carbon more costly, while encouraging the adoption of clean energy and electric vehicles by making them more accessible and affordable.

However, public perception remains mixed. A Nanos Research survey for CTV News found that two-thirds of Canadians believe it is a poor time to increase the carbon tax, and many view the tax on fuel as ineffective in curbing emissions. This highlights a crucial lesson for Malaysia: public buy-in is essential, especially when fuel prices affect the cost of living. Canada has seen rapid inflation in recent years, in large part due to the carbon tax and its effect on consumer purchasing power.

Another key issue Canada faces is that they are “carbon taxing” the fossil fuel industry which exports the majority of its products and taxing Canadian consumers who purchase fossil fuels, all while providing an ecosystem that traditionally subsidises fossil fuel use through tax incentives to provide this form of energy. Renewable energy costs have dropped globally, but fossil fuel subsidies have historically kept petrol and diesel readily available for reasonable prices for all Canadians. Without subsidies, price gaps between renewable and non-renewable energy would narrow dramatically, but an entire export industry could collapse. This is a factor Malaysia must evaluate carefully.

Malaysia’s approach: Balancing decarbonisation and affordability

Malaysia’s carbon tax will be introduced alongside fossil fuel subsidy rationalisation, which is crucial for its success. In 2023, subsidies consumed over RM52 billion, more than 70% of total government subsidies, covering diesel, RON95 petrol, LPG, and palm oil.

Steps already taken include:

Partial diesel subsidy removal in 2024, with exemptions for logistics fleets, low-income households, and Sabah and Sarawak.
Planned RON95 petrol subsidy cuts starting in 2025, though timelines are adjusted to reduce inflationary pressures.

The government has yet to announce how the carbon tax will be calculated, but transparency will be critical. Businesses and consumers need clarity on the real cost of fuel and electricity without subsidies, enabling them to make informed decisions and invest in cleaner alternatives.

Impact on industries and consumers

The initial tax on steel, iron, and energy industries is expected to raise production costs, pushing companies toward energy efficiency, renewable energy adoption, and possibly carbon capture solutions. Over time, the tax may expand to other sectors, including logistics and manufacturing, which will indirectly affect food prices and daily necessities.

Perishable goods, in particular, rely on logistics that involve heavy vehicles, storage, and refrigeration, all of which emit significant carbon dioxide. Without proper planning, these costs will definitely cascade down to consumers.

Ensuring a smooth transition

For Malaysia’s carbon tax to work effectively, strategic incentives are essential. Lessons from other countries show that public resistance can derail renewable energy policies if the cost burden is not offset. Incentives such as tax rebates, green financing, and direct assistance to vulnerable groups can help businesses and households adapt.

Ultimately, Malaysia’s carbon tax is more than a revenue measure; it is a step toward modernising its economy to compete in a low-carbon global market. Malaysia’s success will depend on transparent carbon pricing, well-coordinated policies, and clear benefits for both industries and consumers. Any new tax of this type will need to be weighed against its effects on inflation, which is something other countries have failed to recognise. Hopefully Malaysia can learn from the mistakes of others.

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