Malaysia sets 2026 carbon tax, reaffirms decarbonization goals in Budget 2025

Malaysia will implement a carbon tax by 2026 on the iron, steel and energy industries, prime minister and finance minister Datuk Seri Anwar Ibrahim announced in Malaysia’s Budget 2025 speech on Oct. 18, emphasizing the country’s commitment to its emissions reduction goals.

Platts, part of S&P Global Commodity Insights, previously reported that the timeline for introducing the carbon tax was expedited amid pressure from emission-intensive and trade-exposed sectors that expressed concerns about significant compliance costs under the EU’s Carbon Border Adjustment Mechanism starting in 2026.

CBAM will impose carbon taxes on commodities exported to the EU market, including cement, iron and steel, aluminum, fertilizers, electricity and hydrogen. Companies may pay less if they have already paid domestic carbon prices under their carbon tax or ETS regimes.

The tax revenue collected will be used to support further research for decarbonization technologies within the country.

For sectors not covered by the carbon tax, Malaysia may continue exploring the possibility of a domestic emissions trading scheme in the future.

“Given the coverage of the proposed carbon tax on the iron and steel and energy sectors, it is crucial that the government have in place the Emission Trading Scheme, which is the preferred mechanism by the industry, to drive more cost-effective emission reductions,” the Federation of Malaysian Manufacturers said in a release Oct. 18 following the national budget announcement.

The Federation also hopes the carbon tax will not lead to higher electricity tariffs for the industrial sector.

In the Budget 2025 Economic Outlook, new platforms, including a voluntary carbon market, were suggested to contribute to Malaysia’s financial growth going forward.

This aligns with the expectation that the carbon tax could allow for a specific proportion of carbon offsets to be used for compliance obligations, much like the mechanism in Singapore, which could generate demand for carbon credits issued by domestic projects. However, the government has not provided further details.

Biochar emissions reduction

Malaysia aims to achieve net-zero greenhouse gas emissions by 2050 and to reduce its economy-wide carbon emissions intensity against gross domestic product by 45% in 2030.

Aside from carbon market mechanisms, the outlook also detailed the nation’s interest in exploring biochar as an emerging solution to address climate change and promote sustainable development, particularly in managing organic agricultural waste disposal which is often a large contributor to emissions.

Biochar is charcoal produced by heating organic biomass, such as crop residue or animal manure, in an atmosphere absent of oxygen through pyrolysis, also known as the biochar carbon removal process or Pyrogenic Carbon Capture and Storage.

The potential of biochar as a new source highlights the dual benefits of GHG storage and land rehabilitation. Countries like the EU, the US, Australia, Japan, Thailand and others have also looked into biochar as another way to cut GHG emissions.

Platts assessed Tech Carbon Capture's current-year price at $140/mtCO2e on Oct. 18, unchanged from the previous session. The Platts Tech Carbon Capture prices reflect the most competitive and internationally fungible credits generated from, but not limited to, biochar, direct air capture, mineralization and bioenergy carbon capture and storage.

Over the past few sessions, Platts heard Puro.earth certified biochar credits with the latest vintage valued at $120-$150/mtCO2e for delivery in the spot market.