Fossil fuel subsidy cuts will posit Malaysia as clean energy leader, but require phased approach: experts

A phase-out of diesel subsidies does not come without political risk and short-term pain for consumers, but could position Malaysia as a regional frontrunner for clean energy policy, say academics and business owners.

Petrol pump in Malaysia
A September 2023 study by ISEAS–Yusof Ishak Institute found that Malaysians are more likely to oppose fuel subsidy cuts than any country in Southeast Asia besides Brunei. Image: 

Malaysia’s hesitation to cut blanket fossil fuels subsidies reflects the political risk of increasing energy prices amid a cost of living crisis, despite the benefits to climate, public health and the clean energy economy that phasing down support for dirty energy would bring, experts say.

Malaysian premier Anwar Ibrahim castigated media outlets earlier this week for reporting that the country would ditch diesel subsidies as early as next month. Anwar said that any subsidy cuts need to be explained to the public first. “The principle is that it [cutting subsidies] does not burden the people,” he told journalists on Monday.

Dr Vinod Thomas, visiting senior fellow at ISEAS–Yusof Ishak Institute, acknowledged that getting the timing right for phasing out subsidies was “tricky” as it would mean rising energy costs for consumers and fossil fuel producers and posed a risk to Malaysia’s short-term economic competitiveness.

A September 2023 study by the Singapore-based research centre found that Malaysians are more likely to oppose fuel subsidy cuts than any country in Southeast Asia besides Brunei.

Malaysians enjoy among the lowest fuel and electricity prices in Southeast Asia. 

Lower-income Malaysians are more likely to support cuts than wealthier groups who benefit the most from subsidies, noted Sharon Seah, senior fellow and coordinator of ISEAS–Yusof Ishak Institute’s climate change programme.

Among Malaysians who are in favour of fuel subsidy reform, the greatest proportion are in business and industry (38 per cent), the lowest proportion are affiliated with the government (3.1 per cent) – even though fuel subsidy reform would save Malaysia an estimated RM45.2 billion (US$9.53 billion) in public funding.

Businesses want a phased approach

Hong Ding Sing, president of the SME (small and medium-sized enterprise) Association of Malaysia, said that while removing fuel subsidies was necessary, it should be done gradually and with support for small firms to manage the transition.

Currently, many Malaysian SMEs rely on subsidised diesel to transport their goods. Losing this support would send a shock up their supply chains, he warned.

While industrial fuel sold in Malaysia is not subsidised, transport diesel bought at petrol pumps still enjoy a subsidy of about RM1.35 (US$0.28) per litre, to keep fuel prices at RM2.15 (US$0.45) per litre.

A gradual subsidy reduction would also allow micro-enterprises, as well as small and medium enterprises – which account for 97.4 per cent of all Malaysian businesses, half of all jobs and 38.4 per cent of gross domestic product (GDP) – to remain competitive and weather the proposed fuel price shock with a margin of safety.

When industrial diesel, which is used to fuel boilers for manufacturing, lost its subsidy in Malaysia, products such as noodles and textiles immediately became more expensive, Hong said.

He warned that the rising price of diesel could dent Malaysia’s competitive edge versus other manufacturing hubs such as China and Vietnam, as these costs would be felt in the supply chain.

Fuel subsidies distort market

Economics expert Dr Geoffrey Williams pointed out that the biggest portion of Malaysia’s subsidy bill were diesel and petrol subsidies, and it made sense to begin the subsidy rationalisation there. 

“These subsidies are very expensive and take money from other priorities such as healthcare, education and social protection, and benefit the wealthy more than the poor and are a very inefficient way of dealing with cost of living problems,” Williams told Eco-Business.

Subsidies also distort the market, he said, leading Malaysians to choose high-usage petrol and diesel vehicles rather than more fuel-efficient ones or electric vehicles.

As for Malaysian consumers facing more shocks from having to budget more for fuel and passed on costs from businesses, Dr Williams said as most households used RON95, a popular type of petrol, the impending diesel cut would not affect them as much.

“In the future, higher RON95 prices will encourage people to change their habits and be more conscious of their petrol use,” he said.

When asked about Anwar’s response to news reports of the diesel cuts, Dr Williams said the prime minister was correct in highlighting that the decision on the final details of the diesel subsidy cut had not yet been made.

Hong said he expected the cut to be announced in the third quarter of 2024. 

“We know it is coming – just not so soon after a by-election,” Hong said, referring to the upcoming vote for the Kuala Kubu Bharu state seat in Selangor state on Saturday, which is being viewed as a test for Anwar’s Unity Government political coalition.

Clean energy competitive edge

Cutting fuel subsidies would aid Malaysia’s ambition to reduce greenhouse gas emissions to net zero by 2050, said Thomas.

Malaysia has a “significant edge” compared to other countries in Southeast Asia on renewables energy sources such as solar and hydrogen, and subsidy reform would be a boon for the country’s clean energy status, he said.

Subsidies cutting is a “low hanging fruit” that could spur renewables growth in other Southeast Asian countries, Thomas said, pointing out that the region is experiencing the highest rate of emissions growth globally as fossil fuel consumption soars.

Indonesia will be watching how the implementation of Malaysia’s subsidy cut play out with interest, as it deploys similar levels of subsidy, said J. Grant Hauber, strategic energy finance adviser, Asia, for think tank Institute for Energy Economics and Financial Analysis (IEEFA).

Indonesia relies heavily on fossil fuel subsidies, which totalled US$12 billion in 2024.

“This is foremost a fiscal rebalancing effort, and that is what is at the top of leaders’ minds. Reduced levels of emissions, improved public health, higher resource efficiency, better economic productivity are byproducts of such a decision [to cut subsidies]. Decarbonisation is one of those dividends,” he said.

Thomas said that clear communication on the reasons for subsidy reform, combined with safety nets for marginalised consumers and businesses, are needed to ensure such policies work.

Communicating the public health benefits of a cleaner energy system would be a better selling point for subsidy reform than climate change, he commented.

“People are choking to death in some Asian cities. And yet the health benefits of cutting polluting fuels subsidies are poorly understood – this needs to change,” he said.

Malaysia’s fuel subsidy reform could be followed by a carbon tax, such as in Singapore and Japan, or mandatory carbon markets, as in South Korea and China, to speed up the process of decarbonisation, Thomas suggested.

“Southeast Asia has everything to gain from flipping from fossil fuel subsidies to carbon taxes [to address climate change],” he said.

In some Asian countries, spend on fossil fuel subsidies exceeds public spending on education and health. Globally, dirty energy subsidies have totalled US$7 trillion since 2022, dwarfing spend on climate finance, at US$1.27 trillion.

“There’s no point looking back and saying subsidies have helped economies to grow fast. It’s just not possible to grow with subsidies anymore. Times have changed,” said Thomas.


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