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Carbon Webinar Session 4-4: Carbon Pricing in the Malaysia Context

Updated: Nov 24, 2023



In her opening remarks, Datin Seri Sunita Rajakumar, the Chair of Climate Governance Malaysia, expressed her gratitude to the participants for joining the fourth session of the ERCST - CGM webinar series on the crucial issue of carbon pricing. She outlined the series' progression, with preceding sessions addressing pivotal topics such as carbon valuation, mandatory and voluntary carbon markets. She further emphasized the urgency of carbon pricing in addressing market failures, where polluters benefit while society bears the environmental costs. Moreover, she underlined the significance of an economically efficient market-based approach to emission reduction, generating government revenue, and aiding a just transition. These opening remarks from Datin Seri Sunita Rajakumar encapsulate the intention of CGM, in collaboration with its ASEAN CGI partners, to explore various design elements and implementations of carbon pricing policies, while also addressing social impacts, equitable transitions, and industry-related considerations.


Dr. Gary Theseira – council member of CGM – kicked off the webinar with a first approximation of a comprehensive strategy for effective climate policy implementation, drawing upon insights from the previous three CGM-ERCST sessions. He commenced by highlighting the diverse scope of carbon pricing instruments, including carbon taxes, emissions trading schemes, and result-based payments, underscoring the need for a tailored approach that addresses various types of market failures. The importance of setting parameters such as emissions thresholds, entry criteria, and progressive tax structures was emphasized as integral to these instruments' success. Dr. Theseira, in agreement with the distinguished panellists of the first three sessions, pointed out that no single instrument can solve all challenges, emphasizing the necessity of a holistic, society-wide approach within an enabling environment. He elucidated the symbiotic relationship between carbon pricing and the circular economy, shedding light on how designing for durability, stewardship, and extended producer responsibility can effectively reduce emissions and enhance sustainability. His presentation concluded by emphasizing the interconnectedness of policy goals, transparency, and environmental integrity, and called for the deployment a comprehensive strategy that aligns with achieving the Sustainable Development Goals.


Next up in our list of speakers was Mr Darshan Joshi, Climate Consultant at World Bank. In Mr Joshi's presentation on climate economics and carbon pricing initiatives in Southeast Asia, he delved into the concept of market failures driving climate change, advocating for policy responses to address these issues. He outlined economic instruments categorized into mitigation, adaptation, and co-benefit approaches, highlighting their role in stimulating behavioural changes through monetary incentives. Focusing on Southeast Asian countries like Indonesia, Singapore, and Thailand, he examined their carbon pricing initiatives, emphasizing Indonesia's phased journey toward emissions trading and a carbon tax, Singapore's well-defined legislative framework, and Thailand's multi-faceted approach. Mr Joshi's recommendations included progressive implementation, policy consistency, offsetting encouragement, and using carbon pricing to sustain comprehensive climate efforts, underscoring its vital role in achieving both climate goals and sustainable economic development in the region.


Last, but certainly not least, Dr. Alizan Mahadi – Senior Director of the Institute of Strategic & International Studies – focused directly on the context of carbon pricing policy in Malaysia. He began by stressing the importance of having a clear purpose and rationale for implementing carbon pricing instruments, which should primarily aim to reduce emissions. He further discussed the existing climate policy landscape in Malaysia, highlighting the absence of a specific emission reduction target. Dr. Mahadi emphasized the challenges and considerations in designing and implementing carbon pricing instruments, such as choosing the appropriate regulatory point, addressing sectoral coverage, and determining the use of revenue generated from carbon pricing. He underscored the necessity of incorporating climate-related investments and support for just transition in revenue utilization. Additionally, Dr. Mahadi emphasized the need for accurate data and understanding the social cost of carbon in Malaysia to effectively implement carbon pricing. He concluded by distilling his insights into concrete recommendations for designing carbon pricing policies that align with climate goals while navigating Malaysia's unique challenges.


Q&A Session

Q: How can Malaysia create a sense of urgency for large emitters to decarbonize quickly? Should Malaysia implement a carbon tax or cap-and-trade system?


A: Dr. Gary Theseira: Malaysia needs to engage neighbouring countries and start a gradual process of integrating carbon pricing. A carbon tax seems more administratively feasible. Urgency is emphasized by the increasing frequency and severity of extreme weather events.

A: Mr. Darshan Joshi: Malaysia should start at the country level due to varying domestic contexts. Gradually, countries should move towards a unified carbon pricing framework to equalize incentives for decarbonization.

A: Dr. Alizan Mahadi: A hybrid approach is suitable based on sector-specific considerations. While Malaysia might start alone, engaging neighbouring countries and eventually aiming for a regional market integration is important.


Q: How can Malaysia overcome the challenge of market size for effective carbon pricing, and should it consider linking up with neighbouring countries?


A: Dr. Gary Theseira: Malaysia should consider engaging neighbouring countries, particularly those already implementing carbon pricing. Consensus should be sought on a time frame that will include a readiness period (during which pricing will be initiated through a progressive tax), followed by a pilot emission trading phase involving the carbon market integration of two or more ASEAN member states, then, in the final phase, gradually expanding into a full-fledged integrated ASEAN regional market, or even possibly a larger, ASEAN PLUS international carbon market.

A: Mr Darshan Joshi: Starting at the country level allows customizing carbon pricing to domestic contexts. Eventually, a unified framework is needed. The EU's carbon border adjustment mechanism is an example of equalizing incentives.

A: Dr. Alizan Mahadi: Malaysia should focus on its economic integration within ASEAN. Gradual engagement with neighbouring countries and showcasing a regional market integration can help overcome market size challenges.


Q: What is your preferred approach, carbon tax or cap-and-trade, and why?


A: Dr. Gary Theseira: A carbon tax might be more feasible due to administrative readiness. It can be modeled based on previous tax experiences. Urgency is emphasized by increasing extreme weather events.

A: Mr. Darshan Joshi: A hybrid system is preferable, considering the advantages of both carbon tax and cap-and-trade. The choice can depend on sector-specific considerations and administrative feasibility.

A: Dr. Alizan Mahadi: For power generation, both carbon tax and cap-and-trade are suitable. Different sectors might require different approaches, and it's essential to align with the sector's structure and feasibility.


Q: How can Malaysia balance economic growth with environmental degradation through carbon pricing?


A: Dr. Gary Theseira: Carbon pricing aims to achieve a balance between fossil fuel-driven growth and environmental degradation. The objective is not to eliminate fossil fuel use but to internalize the negative externality cost.

A: Mr. Darshan Joshi: Gradually getting accustomed to carbon pricing can help address the challenge of balance. The process may start at the country level but will eventually need a global unified framework.

A: Dr. Alizan Mahadi: Achieving a balance involves designing carbon pricing instruments that address sector-specific issues and economic contexts. Economic integration within ASEAN could aid in aligning regional goals.


Q: Should Malaysia consider going it alone with carbon pricing, or should it link up with neighboring countries?


A: Dr. Gary Theseira: Malaysia should strongly consider developing its own instruments, methodologies, protocols and standards, backed by science and public peer-reviewed research, as its equatorial forest and agro-plantation ecosystems are unique and, unlike temperate or even tropical ecosystems, capable of intensive year-round sequestration as part of a nature-based solutions strategy..

A: Mr. Darshan Joshi: Starting at the country level is important, but regional integration should be the long-term goal to equalize incentives for decarbonization.

A: Dr. Alizan Mahadi: Malaysia should initially focus on its domestic carbon pricing efforts but aim to collaborate and integrate within the ASEAN region for a more impactful approach.


Q: What would you want the prime minister to do regarding climate change?


A: Dr. Gary Theseira: I would propose that the Hon PM recognise and endorse an open platform on which all stakeholders, including private sector, NGOs, and civil society, can be empowered to engage in frank and constructive dialogues to find hyper-localized solutions.

A: Mr Darshan Joshi: Prioritize climate change as a priority, encourage innovation and flexible responses to new information, and focus on establishing economic valuations for environmental goods.

A: Dr. Alizan Hamadi: Set climate change as a priority, rely on industry innovation and policy design, and promote a national conversation about reducing emissions through a just transition.


Q: Can you talk briefly about the ill-advised plan in Sabah led by Jeffrey Kitigan?


A: Forest-related climate instruments are supported by safeguards that protect the rights of indigenous populations and forest-dwelling communities. These safeguards include free, prior, and informed consent (FPIC) as per the UN Declaration on the Rights of Indigenous Peoples (UNDRIP). FPIC is necessary for any forest carbon project in Sabah.


Q: What is the expected threshold for the carbon tax? What is the expected emissions threshold for respective industries? What projects are allowable for the ETS?


A: In Singapore, the carbon tax applies to all industrial facilities with annual direct GHG emissions of 25,000 tonnes of CO2e. There's no differentiation between industries or sectors. Malaysia can set its own thresholds, but there should be a clear rationale if differentiation is desired. As for allowable projects for the ETS, all projects must meet additionality criteria, regardless of type, to avoid generating controversial credits.


Q: Going forward, which international standard will be adopted for capacity building for industries and validation and verification bodies (VVB)?


A: The International Sustainability Standards Board (ISSB), formed by the IFRS Foundation, IASB, and CDSB, has developed Sustainability (S1) and Climate Change (S2) standards based on the TCFD structure. These standards can guide capacity building and validation/verification processes.


Q: Are there any studies on the effectiveness of these climate economic instruments in changing behaviours? It seems like industries and governments continue pursuing economic growth despite carbon credits discussions.


A: Yes, studies have been conducted to assess effectiveness. High prices and trading volumes don't necessarily lead to desired outcomes like sharp reductions in GHG emissions.


Q: What types of projects are allowed for offsetting carbon emissions, especially considering the numerous palm-based projects in Malaysia?


A: Malaysia should educate the world on the environmental integrity of nature-based solutions. Projects and sectors with verified emissions reductions or low-emissions production of essential commodities (food, fats, fibre, feed, fertilizer, and fuel) should be supported and their access to international markets, defended as low-emission commodities.


Q: Have any studies been done on the required carbon pricing level to drive behavioral change in Malaysia?

A: There's a recent study establishing the social cost of carbon in Malaysia, which assesses the carbon price needed to meet its NDCs. While references to past studies exist, the literature remains relatively scarce outside of studies conducted by international organizations.


Q: Should eligibility criteria be formulated alongside additionality for projects?

A: Yes, eligibility criteria should consider social and environmental benefits, in addition to complying with various additionality tests.


Click here for the recordings




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