Industry compliance: How ready are we for carbon tax?

KUCHING (March 11): The financial impact of carbon pricing will vary significantly across industries depending on emissions intensity, production technologies and energy consumption patterns.

Industries with substantial process emissions are structurally more exposed to carbon costs, observed analysts with Kenanga Investment Bank Bhd (Kenanga Research).

“For example, the metals sector, including iron, steel and aluminium production generate significant emissions through chemical reactions inherent in the manufacturing proces,” it said in a special report on carbon tax yesterday.

“Similarly, cement production produces emissions during the calcination of limestone, making decarbonisation particularly challenging.

“By contrast, sectors such as power generation and transportation are primarily exposed through fuel combustion.”

The research firm noted that in these industries, the financial impact of carbon pricing will depend largely on factors such as fuel mix, energy efficiency and regulatory mechanisms governing tariff structures.

For instance, electricity generators that rely heavily on coal may face higher carbon costs, whereas companies with greater renewable energy penetration may experience lower exposure.

“Scenario analysis presented during the webinar indicates that carbon pricing could lead to medium to very high earnings impacts for certain carbon-intensive sectors,” it continued.

“Carbon prices above RM50 per tonne of emissions may begin to materially affect corporate profitability, especially for industries with high emissions intensity and limited short-term mitigation options.

“Companies may mitigate these risks through several strategic approaches, including fuel switching, renewable energy procurement through power purchase agreements, operational efficiency improvements and product innovation that reduces emissions intensity.”

Corporate exposure to carbon pricing arises through both direct and indirect channels. Direct exposure occurs when companies are taxed on their own operational emissions.

“For instance, an utility emitting approximately 200,000 tonnes of carbon dioxide annually could face carbon tax liabilities of around RM5 million under a tax rate of RM25 per tonne, with the figures possibly increases over time.

“The illustration above is simplistic in that we have not assumed a taxable threshold (an emissions floor) which is a common feature for adoption in neighbouring countries where companies are only taxed on emissions exceeding a specific limit.

“However, the actual financial impact will depend heavily on policy design. Mechanisms such as emissions trading systems, free
emissions allocations or the use of carbon credits could reduce effective liabilities.

“Conversely, hybrid systems that combine carbon tax floors with emissions trading markets may increase the overall carbon price faced by companies.”

Since Malaysia’s electricity generation mix still includes coal and natural gas, Kenanga Research noted that carbon pricing applied to power producers may eventually be reflected in electricity tariffs if costs are passed through to consumers.

In such scenarios, even companies with relatively low direct emissions could experience higher operating costs through increased electricity prices.

“While companies may initially attempt to pass carbon costs on to consumers, we believe this approach is unlikely to be sustainable over the longer term.

“Persistent cost pass-through could weaken demand and reduce competitiveness, particularly in sectors exposed to global trade. Instead, companies will likely need to address emissions more structurally across their operations and value chains.

“Although decarbonisation initiatives may require higher upfront capex, such as investments in energy efficiency, cleaner technologies or fuel switching, we believe these investments could be more viable over time compared with repeatedly absorbing or passing through rising carbon tax liabilities.”