Aligning tax strategy with environmental requirements

By Mohd Noor Musa, Research Analyst, Institut Masa Depan Malaysia

The World Economic Forum’s latest Global Risk Report 2022 announced the top three global risks by severity over the next 10 years — climate inaction, extreme weather and biodiversity loss.

Meanwhile, the United Nations Intergovernmental Panel on Climate Change insisted that all must reduce fossil fuel use substantially.

Malaysia recently expressed its commitment to addressing climate change during the 26th United Nations Framework Convention on Climate Change conference where it will play an integral part in updating the Nationally Determined Contributions target.

Malaysia aspires to achieve a net-zero greenhouse gases emissions target at the earliest by 2050, and reduce carbon emission by 45 per cent in 2030.

In September 2021, the government announced that it would take into account environmental, social and governance requirements and principles in its decision-making process to support this effort outlined under the 12th Malaysian Plan (2021-2025).

The 12MP also aimed at developing a sustainable economy, including the launch of a Voluntary Carbon Market and expansion of green tax incentives.

These timely proposals, coupled with the goal of achieving carbon neutrality, echo Malaysia’s commitment to the Paris Agreement to reduce up to 45 per cent of its greenhouse gas emissions intensity by 2030 based on the level in 2005.

The Environment and Water Ministry announced that it was developing a domestic emission trading scheme to execute carbon credit transactions at the domestic level.

The government has yet to make public the details on carbon emission-related policy.

If carbon tax or any other environmental tax is imposed, the question is, will such tax be used to aid in the country’s finance or will it be channelled towards environmental degradation efforts?

The driving force and barrier in the implementation of carbon tax need to be studied thoroughly.

Many emerging economic countries like Brazil, Costa Rica, South Africa and Colombia have introduced their carbon tax as early as 1997. Denmark and Finland are among the first few to adopt carbon tax since 1990s.

Sweden faced rejection by its people in its first attempt in introducing carbon tax. Carbon tax proposals have been undone, sometimes at an advanced political stage — in Australia (in 2014), France (in 2000), Switzerland (in 2000 and 2015) and Washington State (in 2016).

Undeniably, there is a need for strong commitment and political will on the part of the government for a clear, transparent and stable framework of price incentives and non-price regulations that could drive and attract sufficient technology development and a diverse portfolio of low-carbon options in Malaysia.

Firm and coordinated collaborations between government agencies and ministries, enhanced capacity-building and coherent interactions of enforcement agencies on climate change, technology and fiscal policies should be put in place first to see the implementation gets going.

Environmental and budgetary impacts, concurrent policy of carbon tax and subsidy on conflicting environmental and economic objectives could determine the outcome of the policy.

Studies have shown that implementing a carbon price in developing countries may be more difficult due to financing and resource constraints.

Conversely, there should be clarity and transparency on channelling carbon tax collections. Lack of understanding of the carbon tax framework, and the public acceptance and support of carbon tax will only result in significant obstacles at the early stage of implementing the policy.

It may not last long enough to have the desired economic or fiscal impacts. We should learn from the abolition of Goods and Services Tax in 2018, which saw RM18 billion in tax collection.

Towards this, building public support is critical for successful implementation of carbon tax. With the aim of achieving an ultimately low-carbon economy as one of the instruments or strategies in the national recovery plan, Malaysia’s energy policy needs to be consistent with all other policies on climate change and subsidy-based policies.

It is crucial that the government strengthens its political and financial mechanisms by conducting a regular series of review processes and continuous engagement with all relevant stakeholders to get rid of the perception of policy incoherence and uncertainty.

The time is ripe for businesses and people alike to assess their operations to include climate change-related risks and plans, and be ready to embrace the push for a carbon-neutral economy.

Although carbon tax should be significant to drive emitters to invest in green technology and reduce carbon footprint, it should not burden or hinder business operations and ensure consistent transparency and accountability.


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