From carbon tax to fuel subsidy cuts: What’s next for Malaysia’s sustainable development agenda in 2025?

Malaysia is spearheading the operationalisation of the Asean Common Carbon Framework (ACCF) via an agreement with representatives from Singapore, Thailand and Indonesia, struck late last year at COP29 in Baku, Azerbaijan.

Renard Siew, president of Malaysia Carbon Market Association (MCMA) told Eco-Business that 2025 will be a transformative year for the country’s carbon market. He said the development of an emissions trading scheme, mentioned in Malaysia’s National Climate Change Policy 2.0, could pave the way for the co-existence of both voluntary and compliance carbon markets in Malaysia going forward.

The country’s highly anticipated draft climate change bill could see the establishment of a legal framework for climate action in Malaysia, with long-term climate targets put in place. However, the plan has been criticised by civil society groups for its lack of provisions for climate adaptation, loss and damage and the rights of Indigenous peoples.

Malaysia is poised to advance its sustainable development agenda this year by continuing crucial structural reforms such as the fuel subsidy cut that began last May and the introduction of a locally-assembled electric vehicle (EV). But challenges in transitioning to cleaner energy sources remain, as Malaysia has yet to launch an emissions trading system to tax the most polluting industries and the addition of new data centres will further drive up greenhouse gas (GHG) emissions.

From cross-border collaboration to economic reform, Eco-Business has identified five developments that could shape Malaysia’s sustainability story in 2025.

Regional carbon market leadership

Malaysia is expected to leverage its leadership as Asean chair to drive the adoption of the ACCF, an initiative that aims to foster regional collaboration on  the carbon markets and advance sustainable development across member states.

In July 2024, Malaysia proposed an Asean standard for carbon projects that is said would ensure the integrity of carbon credits in the region. A month after this announcement, it launched the MCMA to accelerate the development of Malaysia’s carbon market. At COP29 last year, a memorandum of cooperation (MoC) was signed between Malaysia, Singapore, Thailand and Indonesia to advance cross-border carbon trading. As Asean chair, Malaysia is pushing for the mutual recognition of member states’ methodologies on carbon crediting rules. 

The MoC signed in Baku, Azerbaijan, provides a two-year roadmap for collaboration which extends beyond Malaysia’s Asean presidency. Siew noted that the main challenge in developing the Asean carbon market is to get countries to agree on methodologies for what constitutes a credible carbon project.

“Once this is sorted out there will be scrutiny of the governance structure and how to ensure standards and methodologies are consistent with the latest science,” he added.

Siew also said that nature-based solutions continue to be an area of interest in the carbon space and 2025 could see the debate around biodiversity credits evolve; will they will add value to carbon credits generated from nature or be a distraction?

Domestically, Malaysia will be engaging companies in the iron, steel, and energy sectors to prepare for the carbon tax announced in the 2025 budget. Conversations this year will delve into how the tax will be implemented, the emissions thresholds for taxation, and the capacity-building efforts required to support big polluters. While the specifics of the carbon tax have yet to be formalised, Siew anticipates 2025 to be pivotal for shaping governance, policy, and operational frameworks.

Improvisation to climate change bill

Malaysia’s long-awaited draft climate change bill underwent the first round of public consultation in October 2024. The proposed legislation seeks to institutionalise long-term climate targets, providing a robust legal framework to ensure consistency in climate action amid political change. While Natural Resources and Environmental Sustainability (NRES) minister Nik Nazmi Nik Ahmad has emphasised the need to depoliticise climate commitments, concerns have been raised about gaps in the draft bill.

Sustainability lawyer and co-chair of the Malaysian CSO-SDG Alliance, Kiu Jia Yaw told Eco-Business that the consultation process lacked rigour as only “vague descriptions of tentative aspects” of the bill text were made public.

The consultation paper failed to set out the drafting framework and guiding principles, which are essential components for the public to assess the bill, he said. Kiu highlighted the need for inclusive and participatory climate governance and called for diverse representation in the decision-making processes, including youth, women, Indigenous peoples, and other marginalised groups.

Previously, civil society representatives have criticised the bill for lacking in emphasis on issues such as Indigenous land rights, climate adaptation and environmental impact assessments.

“Climate action must be evidence-based. Malaysia needs to adopt an open and transparent approach to climate data,” Kiu said, stressing that substantial improvements need to be made to the bill, as the safety and wellbeing of future generations depend on it.

The draft climate change bill is expected to be tabled in parliament this year.

Waste reduction driven by polluter-pays policies

Malaysia is moving towards a polluter-pays model to encourage industry to reduce waste. The Ministry of International Trade and Industry (MITI) introduced a circular economy framework for the manufacturing sector in September 2024 with a plan to implement a mandatory Extended Producer Responsibility (EPR) scheme within the next five years.

MITI’s circular economy framework will hold producers accountable for the entire lifecycle of products, including post-consumer waste management.

Malaysia also plans to launch a number of waste-to-energy (WTE) plants to tackle the country’s growing municipal solid waste burden, despite concerns that  WTE generates GHG emissions and discourages recycling efforts. Non-governmental organisations, Zero Waste Malaysia and Center to Combat Corruption & Cronyism (C4) told Eco-Business that having measurable waste reduction targets and timelines with the right economic incentives and penalties for non-compliance are crucial to motivate the transition towards EPR.

For an effective implementation of EPR, they said, Malaysia will require policies that  prioritise waste segregation and retrieval to ensure that recyclables are sent back to producers or manufacturers to be re-processed. Data reporting mechanisms  are also needed to monitor progress.

Over 1,000 kilotonnes of manufacturing waste is currently classified as “others”, indicating a gap in how Malaysia identifies and processes used materials. At the same time, policies should focus on reducing resource extraction and ensuring  products  are used for longer, re-used, and repaired.

Energy sector reforms

The energy sector contributes to the majority of Malaysia’s GHG emissions. As energy demand grows, Malaysia is undertaking sector reforms to enhance efficiency and promote renewable energy integration in line with its 2050 net-zero emissions target.

The government is focusing on substantial investments in grid infrastructure and comprehensive electricity planning in the medium term. This includes upgrading the national grid to accommodate a higher share of renewable energy sources, revising electricity planning and tariff structures, and liberalising the electricity market.

In September 2024, the Ministry of Energy Transition and Water Transformation introduced the Corporate Renewable Energy Supply Scheme (CRESS), allowing corporate consumers to purchase renewable energy directly from independent power producers (IPPs).

However, there is a push to further liberalise the renewable energy market to increase participation from new players in the system as Malaysia is expected to see a surge in energy-intensive data centre operations this year. While the government is freeing up the electricity market for third-party involvement, it is likely to retain control of the industry. 

Malaysia plans to increase renewable energy capacity to 31 per cent of the energy mix this year, for instance by adding 1,058.4 megawatts of additional solar power. The year will also see the execution of flagship projects under the National Energy Transition Roadmap (NETR) such as 2.5GW of hybrid hydro floating solar projects at Chenderoh Hydro-reservoir, Perak and Tasik Kenyir, Terengganu. 

Fuel subsidy cuts

Malaysia is pressing ahead with fuel subsidy reforms as part of its broader strategy to enhance economic efficiency and promote environmental sustainability. Following a 56 per cent increase in diesel prices (from US$0.46 to US$0.71 per litre) in June 2024, Prime Minister Anwar Ibrahim announced during the tabling of the 2025 federal budget that subsidies for RON95 petrol would be cut for the top 15 per cent of income earners, starting mid-2025.

These reforms aim to reduce government expenditure, curb fuel smuggling, and eliminate blanket energy subsidies while redirecting support toward lower-income groups. However, there are concerns about pushback from high-income earners over the government’s move to cut-back subsidies with increasing fears of inflation that could disproportionately burden lower-income groups. 

Economist Professor Dr Geoffrey Williams told Eco-Business that a tiered pricing system similar to an electricity tariff is necessary to ensure these reforms are equitable and do not disproportionately burden lower-income groups. Under this system, subsidies would gradually decrease as consumption increases, with full subsidies provided for the first 10 litres of fuel and no subsidies for consumption exceeding 40 litres.

“This ensures fairness, as those buying small volumes of petrol for motorcycles and small cars – mainly low-income groups – receive full subsidies, while those with big cars, typically wealthier individuals, get less,” Williams said, adding that such a system would also incentivise reduced fuel usage while maintaining some level of subsidy for all consumers.

As the government slowly cuts back on blanket subsidies, the expansion of electric vehicles (EV) is expected to continue an upward trend with more wealthier individuals purchasing EVs. In December 2024, Malaysian carmaker Proton launched its first locally assembled EV, the e.MAS 7. This significant milestone is expected to boost EV adoption nationwide, supported by government-led incentives and infrastructure development.

While some advocate for additional incentives to accelerate EV uptake, Williams says market forces are already driving the shift. “There is no need to have incentives for EVs. The market is bringing down prices and creating new cheaper models available to low-income groups,” he said. 

He noted that rising petrol prices from the removal of blanket subsidies would also naturally make EVs more viable.