ENERGY ASIA: Malaysia to coordinate its carbon tax with fossil fuel subsidy regimes

Malaysia has announced its plans to launch a national carbon tax regime by 2026 to coordinate with existing fossil fuel regimes, ensure resource allocation and expedite decarbonization, policy and industry leaders said during the Energy Asia conference, which is being held over June 16-18 in Kuala Lampur.

"Within our system, where subsidies are still provided to the energy sector, one of the key things that we're trying to do is to dial back in subsidies, because it doesn't make sense to tax one side and, at the same time, freely give away subsidies to petrol and diesel and so on," Malaysia's Minister of Finance II Datuk Seri Amir Hamzah Azizan said at the conference.

The minister said Malaysia needs a well-coordinated framework to align different policies and collectively push the country's decarbonization.

"It cannot be single-standing policies. And the trick for the government is actually to tie it up in a better form," he said.

"From the perspective of the government's move to rationalize subsidies, I, of course, will defer to the official announcements, but we believe that the government is targeting how to do this to make sure that those most at risk get least affected," Tengku Muhammad Taufik, CEO of Petronas, told Platts, part of S&P Global Energy, at a press briefing June 17.

He said a common understanding has been established across different regions that some fuel subsidies are not sustainable, distort supply and demand, and hinder optimal resource allocation.

He shared that once the carbon pricing regime is established within Malaysia, it could create new revenue streams for Petronas, like revenues from providing carbon sequestration solutions. The regime would also push the company to incorporate the cost of carbon emissions in assessing the feasibility of their business decisions, he added.

"At the end of the day, you can see that the Malaysian government is much like its contemporaries in the region, fully cognizant of the impacts of climate change, and while it cares for the welfare of the society, it cannot also ignore the real crisis we're facing as a planet," he said.

Plans and underlying challenges

The government's initial plan was to introduce a carbon tax regime by 2026, starting from the iron and steel and energy sectors, which could be delayed due to the recent resignation of the country's environment minister, Nik Nazmi Nik Ahmad, carbon industry participants told Platts.

Mixing the carbon tax-related discussions with the talks of fossil fuel subsidy cuts could further delay and complicate the carbon tax policy's implementation, carbon industry sources said.

However, they echoed the Malaysian finance minister's views that fossil fuel subsidies must be cut significantly, and the government's financial aid should flow to other sectors that can support the country's sustainable growth.

Notably, before 2024, fuel subsidies accounted for over 70% or RM 52 billion of the country's total expenditure on subsidies, and subsidized items included 95 RON gasoline, diesel, LPG for cooking and other essentials like palm oil, the government's data showed.

The government of Malaysia has managed to cut some subsidies over 2024-2025 despite the resistance from affected sectors and the public's concerns over increasing energy costs.

In June 2024, Malaysia announced that it would partly remove diesel subsidies, but nationwide logistic fleets, nationwide households that meet certain criteria, and two states in eastern Malaysia, Sabah and Sarawak, were exempted from the subsidy removal.

The government has also announced a plan to cut the subsidies for 95 RON gasoline by 2025.