Analysis: Carbon tax a turning point for climate policy framework

KUCHING (March 11): Malaysia’s planned carbon tax marks an important turning point in the country’s climate policy framework, says researchers with Kenanga Investment Bank Bhd (Kenanga Research).

The government has signalled its intention to introduce carbon pricing beginning in 2026, supported by the forthcoming Climate Change Bill (RUUPIN) that will provide the legal and regulatory foundation for the mechanism.

“While the final design of the policy, including the carbontax rate, sector coverage and compliance thresholds have yet to be announced, the direction of policy is becoming increasingly clear: carbon pricing will form a central component of Malaysiaís strategy to manage climate transition risks and align with global decarbonisation trends and the European Union’s carbon border adjustment mechanism (EU CBAM),” it said in an analysis yesterday.

Malaysia’s carbon tax policy is progressing through a staged legislative process. The government first signalled the introduction of carbon pricing during Budget 2025, with enabling legislation expected to be introduced under the Climate Change Bill.

Current policy discussions indicate that the carbon tax could take effect in 2026 starting with iron, steel and energy sectors.

“Although the policy framework is now taking shape, several key parameters remain pending. The government has not yet announced the final carbon tax rate, the precise sectors to be covered in the first phase, or the emissions thresholds above which firms will be taxed,” Kenanga Research said.

“These details are expected to be clarified once the Climate Change Bill is tabled and supporting regulations are issued by the Ministry of Finance. The Bill was last reported to be scheduled for its first reading by March 2026.”

Although Malaysia has not yet announced a formal price trajectory, policy discussions suggest that the country could adopt a gradually increasing carbon price pathway.

Malaysia is also exploring the possibility of complementing the carbon tax with a broader emissions trading framework. Discussions have indicated the potential for a pilot Emissions Trading System between 2025 and 2027, which could eventually evolve into a more comprehensive carbon market.

Over time, Malaysia may adopt a hybrid carbon pricing architecture that combines carbon taxes, emissions trading mechanisms and voluntary carbon markets.

“Such an approach would align Malaysia with evolving global practices in carbon pricing and provide greater flexibility for industries to manage emissions costs,” Kenanga Research noted.

“Although key details of the policy remain under discussion, the direction is increasingly evident. Carbon pricing will become an integral part of Malaysia’s strategy to manage climate risks and align with international decarbonisation efforts.”