As Malaysia’s iron and steel sector prepares to face a carbon levy in 2026, a local think tank has called for a phased but rapid increase of the carbon price for the sector up to RM200 (US$47) per tonne of carbon dioxide and its equivalents (tCO2e0).
To continue reading, subscribe to Eco‑Business.
There's something for everyone. We offer a range of subscription plans.
- Access our stories and receive our Insights Weekly newsletter with the free EB Member plan.
- Unlock unlimited access to our content and archive with EB Circle.
- Publish your content with EB Premium.
The Institute for Democracy and Economic Affairs (IDEAS), in a policy paper released last week, said this carbon price would make low-carbon steel production commercially viable in the country. At a carbon price of RM200 by 2030, costs for emissions-heavy blast furnace production which currently accounts for 70 per cent of local output, would rise by about 11 per cent, making low-carbon steel more competitive. Blast furnaces rely on carbon-intensive fuel sources, particularly coal.
IDEAS previously proposed carbon pricing as a viable solution for cutting emissions in Malaysia’s rapidly expanding steel industry. Globally, the sector accounts for around 8 per cent of annual greenhouse gas emissions. While many countries are pivoting toward cleaner electric arc furnace (EAF) technologies, Malaysia’s growth has been dominated by coal-based Blast Furnace–Basic Oxygen Furnace (BF-BOF) plants. The report noted that much of this expansion is driven by Chinese investments, with new China-backed blast furnace mills worsening overcapacity concerns in Malaysia and across Southeast Asia.
Between 2014 and 2022, steel production in Malaysia moved from 100 per cent EAF to 70 per cent blast furnace (BF), increasing carbon emissions intensity from about 0.4 to 1.7 tonnes of CO2 per tonne of steel, undermining Malaysia’s net zero target and exposing the sector to new trade measures such as the EU’s Carbon Border Adjustment Mechanism (CBAM) and reducing competitiveness.
This trend undermines the country’s net zero target and exposes the industry to new trade measures such as the EU’s Carbon Border Adjustment Mechanism (CBAM), while also reducing competitiveness.
In Malaysia’s Budget 2025, tabled in October last year, the government had proposed a carbon tax be introduced on hard-to-abate sectors in 2026.
The proposed levy is said to affect the construction sector the most, with costs potentially rising from 3.5 to 4.6 per cent. This is because steel makes up a significant portion of construction costs and the sector relies on relatively low-grade steel with similar emissions intensity to higher grades. Most construction steel is also produced domestically with tight profit margins, compounding this risk.
Data from the Malaysian Steel Institute (MSI) also showed that emissions from steel production reached 12,228 gigagrams of carbon dioxide equivalent (GgCO2e) in 2019, a 370 per cent spike from the 2,593GgCO2e in 2011.
Now that the government is seriously considering of implementing a new tax to cut emissions, associate professor at the Asia School of Business Dr Renato Lima de Oliveira, who co-authored the IDEAS report, said a sufficiently high carbon price could shift Malaysia’s steel sector onto a low-emissions, high-value path.
“It could open the door for new technologies, reduce exposure to emerging trade restrictions and secure access to markets that are moving quickly to decarbonise,” he said.
He added that the carbon levy could generate up to RM3 billion (US$711 million) in government revenue annually, which could then be reinvested as targeted rebates for low-carbon steel and investment support for decarbonisation technologies for steel producers and consumers.
This would also support the industry’s net zero transition while ensuring fair treatment of domestic and imported products under international trade rules.
Still, the report cautioned that a direct carbon tax could face political resistance. A low carbon price, it said, might simply act as a consumption tax, raising costs without driving investment into cleaner technologies, as firms would likely pass the burden on to consumers or cut production.
Instead, it suggested that an emissions trading system (ETS) would offer greater flexibility for firms to adapt to carbon pricing by offsetting or trading credits, allowing them to reduce emissions at a lower cost and providing clearer long-term signals for investors within a stable, rules-based framework.
IDEAS recommended a phased but rapid introduction of carbon pricing at the stipulated rate, implemented through an ETS framework designed around Malaysia’s sectoral needs. Without such intervention, it said the emissions trajectory of the country’s steel sector will remain misaligned with national goals and expose the sector to growing risks, eventually falling behind as other countries move ahead.
It also warned that inaction could leave heavy-emitting steel producers facing higher costs and reduced access to international markets that require low-carbon products and operations.
