Ending fossil fuel subsidies and introducing carbon pricing, accompanied by targeted transfers to low income groups, could add 4 per cent to Malaysia’s gross domestic product, according to a new report by the Organisation for Economic Cooperation and Development (OECD), a group of mostly rich countries.
To continue reading, subscribe to Eco‑Business.
There's something for everyone. We offer a range of subscription plans.
- Access our stories and receive our Insights Weekly newsletter with the free EB Member plan.
- Unlock unlimited access to our content and archive with EB Circle.
- Publish your content with EB Premium.
In the report on Tuesday, the intergovernmental organisation recommended phasing out fossil fuel subsidies as an “important first step” to mitigate its carbon emissions, followed by a mandatory carbon pricing policy.
“Large energy subsidies remain perhaps the most salient obstacle to pricing greenhouse gas emissions in line with achieving mitigation targets,” the report said, pointing out that such subsidies act as a “negative tax on emissions” and directly oppose other decarbonisation efforts such as promoting electric vehicles.
Fossil fuel subsidies in Malaysia are predominantly focused on supporting fuel consumption in the transport sector, as well as liquefied petroleum gas cylinders used for cooking, the OECD said. Malaysia has already begun reducing road fuel subsidies, starting with diesel. In June this year, the government announced that it would only provide targeted diesel subsidies for the logistics sector, a move that it estimated would save 4 billion Malaysian ringgit (US$920 million) annually.
However, the government’s current plan to target support for low-income households using data collected on a central administrative database called Pangkalan Data Utama (PADU) would not be the most effective solution, said the OECD.
“A better approach would be to phase out subsidies altogether and make any targeted transfers independent of energy consumption,” said the report, recommending planned transfers that are integrated into broader efforts to strengthen the social safety net.
Based on the OECD’s recommendations, reducing energy subsidies could add 3.5 per cent of Malaysia’s gross domestic product (GDP) over the next 3 to 5 years. Introducing carbon pricing while compensating low-income households with targeted transfers would add an additional 0.5 per cent of GDP.
There have been increasing calls for the Malaysian government to implement carbon pricing, coming from investors looking to fund carbon projects, researchers studying heavy emitting industries like steelmaking, and even the top echelons of civil service, with the secretary general of the Ministry of Natural Resources and Environmental Sustainability hoping for a carbon tax on hard-to-abate industries as early as 2025.
In fact, the OECD recommended that Malaysia should introduce a carbon tax as far back as August 2021. No action has been taken yet, but the report acknowledged that the finance ministry is currently working with the World Bank to study the feasibility of a compliance carbon market, which is expected to conclude in 2025.
The report noted that the country is an “outlier” compared to other countries, including less developed ones, which already have a positive carbon price through mechanisms such as an explicit carbon tax or emission trading scheme.
“In fact, the most common source of positive carbon rates is simply a fuel excise tax that raises the price of fossil fuels at the pump,” said the OECD.
However, it acknowledged that high prices of carbon intensive goods and fossil fuels could disproportionately affect low-income households and recommended targeted transfers to lower-income households, which could cushion the social impact of subsidy removals and facilitate political support.
The report also added that Malaysia should incorporate regulations and sectoral policies in addition to carbon pricing. “While a carbon tax or an emission trading scheme is the economically most efficient approach to reduce emissions, mitigation efforts should rest on a mix of pricing and regulations,” it said. It called on Malaysia to introduce more stringent environmental policies that curb greenhouse gas emissions.
