ABC’s of Carbon

Pricing

26 March 2024
 1. Introduction

2. Why do we need CPI?

3. Malaysia’s Climate Initiatives

4. Case Study
Content of the Presentation
5. Designing Carbon Tax

6. Conclusion
1 Introduction
 THE CLIMATE CHANGE

CO2 levels have been rising at an alarming pace…

Per capita CO₂ emissions Global warming: monthly Sea level rose to 103.8 mm since Increasing Number of
from fossil fuels and industry temperature anomaly 1993 (as of Dec 2023) Undernourished People
2022: 4.7 Jan 2024:
tonne/person
1.210C

2000:
0.240C
1980: 0.300C
Dec 1900:
-0.060C

1900: 1980:
1.2 4.4
tonne/person tonne/person

Note: Land-use change is not included.

Antonio Guterres,
UN Secretary General
Source: FAO, Climate Data, World Bank.
 EMISSIONS OUTLOOK

Current policies remain massively insufficient to meet governments’ climate pledges…

Global energy-related CO2 emissions, billion tonnes • The prominent black line portrays the historical trend, highlighting the
relentless increase in global CO2 emissions due to population growth and
heightened energy consumption, mainly fueled by fossil fuels.

• The pre-Paris policy baseline, illustrated in grey, reflects the IEA’s anticipation
of continued emissions growth for decades leading up to the COP21 summit
(2015)

• Post-2015, the adoption of new climate policies and the rapid spread of low-
carbon technologies have resulted in a notable slowdown in global emission
growth.

• By 2021, government policies, denoted by the grey-blue line, successfully

facilitated a peak in global energy-related CO2 emissions, with a projected
deeper decline in the 2022 outlook (light blue).

• The latest outlook for 2023 (dark blue) foresees emissions peaking even
sooner than previously expected in 2022, underlining a more rapid decline
following the peak.

• While there's a more optimistic perspective on global emissions, the outlook

shows that current policies remain massively insufficient to meet governments’
climate pledges – including their long-term net-zero targets. If met, these
pledges would see emissions falling along the red line in the figure above.

• Additionally, achieving these climate pledges would still fall significantly below
the required measures to restrict global warming to less than 1.5 degrees
Source: International Energy Association World Energy Outlook. Celsius above pre-industrial levels, as indicated by the yellow line.
 WHAT IS CARBON PRICING?
Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions—the costs of emissions that the public
pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise—and
ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.

A price on carbon helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it.
Instead of dictating who should reduce emissions where and how, a carbon price provides an economic signal to emitters, and allows them to
decide to either transform their activities and lower their emissions, or continue emitting and paying for their emissions. In this way, the overall
environmental goal is achieved in the most flexible and least-cost way to society.

Types of Carbon Pricing Instruments

Carbon taxes set an explicit price of carbon,
establishing a direct link between emissions and tax…
Emissions
1 3 Carbon Tax
Trading System
Taxes add specified
Certificates on carbon
costs to the carbon
Price, Benefit and Cost (RM)

emission issued under a

strict cap which can be
2 Carbon Cap emissions caused by
human activities
traded among actors Maximum amount of
carbon allowed to be
emitted per sector / actor

5 Carbon Offset
4 Carbon Credits
Credits given based on CO2 emissions reduction
the amount of carbon made in order to offset an
kept in the biosphere emission made elsewhere
Output through human actions

MPC = Marginal Private Cost MEC = Marginal External Cost

MSC = Marginal Social Cost MSB = Marginal Social Benefit CPI currently considered by Malaysia
 THE GLOBAL STATE OF CARBON PRICING (1)
As of April 2023, there were 73 CPIs in operation, including 37 carbon taxes and 36 ETSs…

Map of Carbon Taxes and ETSs

Source: State and Trends of Carbon Pricing, World Bank, 2023.

 THE GLOBAL STATE OF CARBON PRICING (2)

About 23% of total global GHG emissions are covered by operating CPIs…

Share of Global GHG Emissions Covered by ETSs and Carbon Taxes

Source: State and Trends of Carbon Pricing, World Bank, 2022.

 SELECTED COUNTRIES: STATE OF CARBON PRICING

Australia March 2023: passed a legislation to reform the Safeguard Mechanism effective July 1, 2023. The Safeguard Mechanism assigns emissions
baselines for over 200 large facilities. Facilities emitting above their baseline must offset excess emissions. The reforms will reduce
emissions baselines for covered facilities and allow the issuance of credits to facilities that overachieve on their baseline. This in effect will turn
the Safeguard Mechanism into a rate-based ETS.
Indonesia Feb 2023: launched a mandatory, intensity-based ETS for the power sector. This will cover 99 coal-fired power plants that accounts for 81.4%
of the country’s national power generation capacity.
Japan Feb 2022: Green Transformation League – a baseline-and-credit system, building upon existing carbon trading system (Joint Crediting
Mechanism).
Singapore 2019: Carbon tax was introduced and from 2024, the price will increase to 25 SGD.

China ETS was operationalized in 2021 covering more than 2,000 big emitters in the power sector. The current scope of the ETS includes annual
emissions close to 4.5 billion tonnes of CO2 per year, or around 40% of China’s total.
EU Dec 2022: introduced a tighter cap for the existing EU ETS for electricity, industry, and aviation and a phase-in of the maritime sector from
2024 onward. A phase-out of free allocation of allowances for the industrial sector will be accompanied by a phase-in of the EU Carbon Border
Adjustment Mechanism beginning in 2026. Moreover, the EU decided to introduce an “EU ETS 2” for buildings, road transport, and process
heat in industry in 2027 or, if energy prices remain high, in 2028
Norway Increased carbon tax by 28% for most fossil fuels in 2022 and 21% in 2023. Norway also introduced a tax on waste
incineration at the rate of USD 18.32/tCO2, as well as on natural gas and liquified petroleum gas at the rate of USD 7.34/tCO2 in 2022.
Thailand Early 2022: launched the Voluntary ETS and published rules and guidelines for carbon credit trading with the launch of the carbon credit
trading platform – Federation of Thai Industries Exchange
Vietnam July 2022: announced a Roadmap for the implementation of an ETS with a declining cap corresponding to Vietnam’s nationally-determined
contribution. The pilot ETS is expected to start in 2026 and fully operationalized by 2028.
 MALAYSIA’S GHG EMISSIONS
The energy sector in Malaysia accounts for ~80% of emissions,
while LULUCF removals address ~65% of emissions…

Energy Sector
2019 GHG Emissions (removals), MtCO2e

33% 20% 2% 10% 9% 3% - 65% of total

13% 10%
emissions

Source: BUR 4, 2022. xx% % of total excluding LULUCF

 Why is the need for CPI in
2 Malaysia?
 WHY IS THE NEED FOR CPI IN MALAYSIA? (1)

Decoupling fossil fuel

consumption from growth
Carbon pricing can facilitate
transition to a more sustainable
growth model with less reliance on
emissions-intensive fossil fuel Sustainable
sources subject to global price Assist Malaysia to meet
Growth
fluctuations.
low-carbon targets and
international obligations
Promote the
Carbon NDC
Carbon pricing can be a
internalisation of GHG powerful tool to assist
emissions Pricing Targets
Malaysia with meeting
Carbon pricing can be a international obligations such
powerful signal for private as the NDC, as well as
Internalising
firms to internalise the cost of domestic low-carbon targets,
GHG
their emissions, incentivizing including net-zero
Emissions
investment in lower-carbon
production and behavioral
changes

Decoupling fossil fuel consumption from growth…
Significant reliance on fossil fuels for
fiscal revenue and external competitiveness
The high reliance on petroleum-related taxes and
royalties for the Federal Government revenue1 needs
to be addressed sooner rather than later. Designing a
resilient tax system that generates new revenue
streams and supports a green economy will be key in
this transition.
WHY IS THE NEED FOR CPI IN MALAYSIA? (2)
The prevalence of energy subsidies propagates The high reliance on coal stems as it being the
inefficiency cheapest energy source
Malaysia spends around 12% share of GDP on fossil Malaysia burns more coal now than it did two decades
fuel subsidies, much higher than several advanced ago, with 43.6% of electricity generated in 2021. It
economies. also exposes the country to energy security risks from
supply disruption and price volatility. Without
aggressive capacity ramp-up in cleaner alternatives,
coal will remain a large part of our energy mix.

Malaysia's Oil Production and Petroleum-related Fossil Fuel Subsidies in Selected Countries Electricity Generation by Source
Revenue as Percentage of Total Government Revenue

800 40 60 Solar, Oil, Other RE,

53.9
681 34.7 0.90% 0.60% 0.90%
700 35
622 50
638 573
600 30 Hydro,
28 40 36.2 Gas,
25.3 18.30%
500 25 35.70%
22.4 506 30
400 20.8 20
20.9
300 15 20
11.6 10.2
200 10 10 6
Coal,
1.6 43.60%
100 5 0.3
0
0 0
1990 2000 2010 2020 2022

Oil Prod Share to Gov Rev

Source: Outlook and Policy in 2023, Bank Negara Malaysia.

 WHY IS THE NEED FOR CPI IN MALAYSIA? (3)
Promote the internalisation of GHG emissions…

CPI incentives the transition to low carbon energy sources and products
 WHY IS THE NEED FOR CPI IN MALAYSIA? (4)
Carbon Border Adjustment Mechanism (CBAM) could affect up to 57% of Malaysia’s exports to the EU
by 2026 if the equivalent emissions standards are not complied by domestic manufacturers…

Impact Estimation of CBAM on Malaysia’s Exports to the EU • Malaysia’s trade competitiveness and
investment attractiveness would be further
eroded should other countries impose similar

CBAM Wave 1 (2023) 6.70% regulations.

• As global capital flows shift towards greater

CBAM Wave 2 (2026) 50.10% ESG compliance, this could lead to

divestments and write-offs of stranded assets
domestically, especially in the hard-to-abate
Potential long-term CBAM 16.90%
sectors.

• Therefore, Malaysia must be cognizant of

Other Exports 26.30%
global decarbonization developments when
pursuing its own transition and manage the
likely economic repercussions accordingly.

Wave 1: cement, iron and steel, aluminium, fertilizer

Wave 2: .E&E, machinery, and rubber products
Long term: d exports are items planned to be covered by the EU ETS (e.g. vegetable oils).

Source: BNM Economic and Monetary Review 2022.

 MALAYSIA’S NATIONALLY DETERMINED CONTRIBUTION (NDC)

TARGET: To reduce economy-wide carbon intensity

EMISSIONS INTENSITY 2005
(against GDP) of 45% in 2030 compared to 2005 (baseline)
level.

The updated NDC (2021) is more ambitious from the

earlier submission:
a) The 45% of carbon intensity reduction is
unconditional; 45%
b) This target is an increase of 10% from the earlier reduction
submission; and
c) The GHG coverage is expanded from three (3) to
seven (7): Carbon dioxide (CO2), Methane (CH4),
Nitrous oxide (N2O), Hydrofluorocarbons (HFCs),
Perfluorocarbon (PFCs), Sulphur hexafluoride
EMISSIONS INTENSITY 2030
(SF6) and Nitrogen trifluoride (NF3).
(target)
d) Currently NRES is preparing the NDC Roadmap
and Action Plan to guide the implementation of
Malaysia NDC (expected end-2024)
3 Malaysia’s Climate Initiatives
 CLEAN DEVELOPMENT MECHANISM (CDM)
Clean Development Mechanism (CDM) is defined under Article 12 of the Kyoto protocol, where countries with carbon emission
reduction targets can set up emission reduction projects in developing countries. These Certified Emission Reduction (CER) can
be counted towards their target reductions, and each CER represents one tonne of CO2.

Top 10 Countries in Registered Projects Under CDM

(31 March 2022) • The National Clean Development Mechanism (CDM)
Committee was established in 1994 to guide CDM
4000 3764 implementation.
3500 • It was chaired by the Deputy Secretary-General of the Ministry
of Environment and Water with the Secretary General being
3000 the Designated National Authority.
2500 • Majority of the projects related to oil palm activities,
contributing to more than 90% of the total potential emission
2000
1685 reduction
1500

1000
Malaysia’s CDM Projects
500 344 258 192 149 148 144 112 CERs since 2006 13,777,247
0
Investment USD453.26 million
TOTAL 149

Source: BUR 4, 2022.

 VOLUNTARY CARBON MARKET (1)
Carbon credits can be traded on a “Voluntary Carbon Market” (VCM), where companies make voluntary purchases to
compensate for their emissions
Carbon Credit represents a verified reduction of
• BCX is a shariah-compliant multi-environmental product exchange that carbon dioxide and must pass two key phases before
facilitates the trading of high-quality carbon credits via standardised project developers are awarded the Verified Carbon
carbon contracts. Unit (VCU)

• Corporates may purchase these credits to offset their carbon footprint

while the sale of carbon credits, in return, will help to finance and drive the
VALIDATION
development of domestic GHG emission reduction and removal solutions Developer requires validation of
and projects. emissions reductions according to
applicable methodology by a
Validation, Verification Body (VVB)
VERIFICATION
Reductions must be verified
(approximately 2-3 years after
start of project) by a VVB and
monitored by a third-party

Tech-based Nature-based

RE Agriculture / Soil
EE Carbon
Transport
CCS Forestry
Industrial Gases
Waste Disposal Other Land Use
Household
Devices Blue Carbon
Source: Bursa Malaysia.

Participated Companies
1. AmBank (M) Berhad
2. AmBank Islamic Berhad
3. AmInvestment Bank Berhad
4. AU Synergy Sdn. Bhd.
5. CIMB Bank Berhad
6. Malayan Banking Berhad
7. Malaysia Steel Works (KL) Berhad
8. MIDF Amanah Investment Bank Berhad
9. Permodalan Nasional Berhad
10. Pet Far Eastern (M) Sdn. Bhd.
11. Petroliam Nasional Berhad (PETRONAS)
12. Press Metal Aluminium Holdings Berhad
13. Telekom Malaysia Berhad
14. Yinson Holdings Berhad
VOLUNTARY CARBON MARKET (2)
Carbon Credits
Project Name: Linshu Biogas Recovery And Power Generation Project
Contract Type: Global Technology-Based Contract (GTC)
Location: Linshu Town, Shandong Province, China
Volume: 50,000 Contracts
Reserve Price MYR/ Contract: RM18.50
Project Type: Waste Handling and Disposal (Wastewater Treatment)
Vintage: 2019-2020
Project Name: Southern Cardamom REDD+ Project
Contract Type: Global Nature-Based Plus Carbon Contract (GNC+)
Location: Koh Kong, Cambodia
Volume: 100,000 Contracts
Reserve Price MYR/ Contract: RM68.00
Project Type: Agriculture Forestry and Other Land Use
(AFOLU-REDD+)
Vintage: 2021
Note: Reducing emissions from deforestation and forest degradation in developing countries. The
‘+’ stands for additional forest-related activities that protect the climate, namely sustainable
management of forests and the conservation and enhancement of forest carbon stocks
 APPROVED SCOPE OF PMI SUPPORT IN MALAYSIA
The Government of Malaysia’s RSP was submitted in April 2022 and approved by the Partnership for Market Implementation (PMI)
in August 2022. Under the approved RSP, the World Bank will assist the Government in preparing CPIs and enhancing
stakeholders' understanding of CPIs, under four modules:

Module A: Impact Analysis and
Policy Review
(i) Carbon pricing impact
analysis
(ii) Study on international
lessons learned from carbon
taxes
(iii) National policy evaluation
and CPI option analysis
(iv) Assessment of the regulatory
requirements for a carbon
tax
Module B: National MRV and
Registry Development
(i) Evaluation of MRV gaps and
needs assessment
(ii) Recommendations for a
facility-level MRV platform
(iii) Recommendations for a
national registry system
(iv) Legislative analysis to
support the MRV elements of
the CPI
(v) Training and technical
support
Module C: Domestic Crediting
Scheme Development
(i) Recommendations for offset
standards and protocols
(ii) Integration of nature-based
credits into the national CPIs
Module D: Capacity Building and
Stakeholder Engagement
(i) Assessment of capacity
building needs [Lot 1]
(ii) Communications /
awareness raising strategy
(iii) Recommendations for a just
transition action plan
(iv) Capacity building support to
private participants [Lot 1]
(v) Arrange study tours

(i) and (iv)

Lot 2: Monitoring, Reporting Lot 3: Support on Offsets Lot 4: Development of

Lot 1: Carbon Pricing Impact
and Verification (MRV) and Integration of Nature- Communications Strategy
Analysis and Policy Design
Support and Development Based Credits and Just Transition Plan
MALAYSIA HAS BEEN ENHANCING ITS CLIMATE COMMITMENTS AND TARGETS

2006 2009 2015 2016 2017 2020

CDM National Policy Submitted Ratified Paris Green National

on Climate 1st NDC Agreement Technology Automotive
Change Master Plan Policy

2021 2022 2023 2024 and beyond

Updated and VCM NETR Climate Change Act
Enhanced to address the LT-LEDS
NDC challenges posed NDC Roadmap
by climate National Carbon
Low-Carbon change, enhance
Mobility Market Policy
energy security
Blueprint and ensure long-
National Adaptation
term sustainability Plan
National Low Study on CPIs
Carbon Cities New Industrial
Masterplan Masterplan
(NIMP) 2030 –
COP 26 Push for Net Zero

i-ESG Framework
To enhance ESG
practices
4 Case Study
 SINGAPORE

Singapore was the first country in ASEAN to implement a carbon tax through a phased-
approach

• Implemented in 2019 under the Carbon Pricing Act (CPA) covering 6 gases: CO2, methane (CH4), nitrous oxide (N2O),
hydrofluorocarbons (HFCs), perfluoro carbons (PFCs) and Sulphur hexafluoride (SF6)
• Covers 80% of total GHG emissions and implemented at the upstream facilities which emit more than 25,000 tCO2 per
annum
• Implementation of support measures such as financial support for businesses and support for low-income households
through the Climate Friendly Households Programme

From 2024, the price will be S$25, including nitrogen trifluoride
(NFs) and allow up to 5% of taxable emissions to be offset by
“high-quality” international carbon credits
Carbon Price (S$ per tCO2e)
Emission Intensive Trade Exposed (EITE)
Key Administrations
Transition Framework
• National Climate Change Secretariat is
responsible for the design and adoption of
• EITE entities are defined as businesses

carbon tax and complementary

90 which face high emissions and will need to programmes for household helping with
80
70 adjust to the impact of carbon taxes on energy efficiency.
business competitiveness. • National Environment Agency is the chief
50 50
45 • A transition framework was implemented to regulator and responsible for
30 provide allowances to existing EITE administration of the CPA, including
25 registration, MRV, and taxation
10 companies based on their performance to • The Competition & Consumer Commission
5
efficiency benchmarks or decarbonization was noted to be involved with the
-10 2022 2023 2024 2025 2026 2027 2028 2030 plans. monitoring of cost-pass through to
• Similar to the EU, South Korea and California consumers
Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
 INDONESIA

Indonesia outlined the design of a carbon tax in October 2021 as one of a number of
initiatives set out under the Carbon Pricing Roadmap

• Carbon Pricing Roadmap was signed in October 2021 which outlined design and implementation of an ETS and carbon
crediting mechanism to complement carbon tax.
• Carbon tax passed in law in October 2021 as part of law for tax regulation harmonization which is levied upstream on coal-
fired power plants; however, implementation has been postponed.
• Carbon tax envisaged as a “cap-and-tax” system; but broader carbon pricing policy mix is to be implemented by 2025 with
mandatory ETS launched for power generation sector in 2023 for coal-fired plants >100MW

Indonesia’s Proposed Hybrid System Energy Pricing Reforms

• Similar to Malaysia, Indonesia has a blanket
Emissions Subject to carbon taxes which are linked subsidy structure for energy prices with a
Key Administrations
Deficit to price on domestic carbon market fixed price irrespective of income level • The Ministry of Finance is responsible for
setting the tax rate, legislative framework
Emission Offset with • This was benefitting the middle and upper-
CAP Deficit emission surplus
class households who used 42%-73% of fuel
and application of the carbon tax
• Ministry of Energy and Mineral Resources
Emission subsidies (MEMR) is responsible for regulation and
Surplus
• As part of the implementation of carbon planning of the country’s energy sector
pricing, the Indonesian government which piloted the mandatory ETS.
suggested a reform of its energy subsidies to • Ministry of Environment and Forestry
released Guidelines for Carbon Economic
transition towards direct social assistance in
Value Implementation which provides legal
2020 but this was delayed due to current basis for cross-sectoral ETS.
conditions
Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
 THE EUROPEAN UNION

The EU has the oldest ETS in the world and largest in terms of trading volume

• Started in 2005 and operates in 30 countries (all 27 EU countries + Norway, Iceland and Liechtenstein)
• In 2022, the value of the trading exceeded 1.7 trillion euro
• Applies to emissions from the electricity and heat generation, industrial manufacturing and aviation within Europe
• Covers about 36% of the EU’s GHG emissions (8500 stationary installations and 400 aircraft operators)
• In 2023, the ETS Directive was reviewed:
✓ Stronger: more stringent cap
✓ Larger: covers new sectors – maritime (2024) and building and road transport (2027)

The EU ETS is based on a cap and trade system that places European Green Deal
a market-based price on carbon emissions of specified goods • European Climate Law
in certain covered sectors. Improved Revenue
✓ Climate neutrality by 2050
Allocated free allowances Allocated free allowances ✓ Reducing emissions by 2030 to at least • Current carbon price: 80 – 90 euro/tCO2
55% as compared to the 1990 levels • Emission reductions: -37.3% below 2005 in
Excess
Allowance
✓ Carbon pricing plays a key role in 2022
emissions Unused allowances achieving EU’s climate target • Total revenue from 2013 - today: 152 b
auctions for sale
• Carbon Border Adjustment Mechanism euro
• ETS Modernization Fund: to modernize
Emissions (CBAM) energy systems in lower-income Member
✓ CBAM sector represents 54% of the State, focusing on investments
total free allocation between 2021-25 • ETS Innovation Fund: to focus on innovate
Allowances
✓ Free allocation under the ETS and technologies
CBAM are interlinked – free allocation • ETS 2 Social Climate Fund: To provide
Money will be phased out as CBAM is phased temporary income support
in
Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
5 Designing Carbon Tax
 DESIGNING CARBON TAX

The World Bank Partnership for Market Readiness (PMR) Carbon Tax Guide (2017) outlines five broad
elements of carbon tax design

1 2 3
Tax Base Tax Rate Unwanted Effects

Define the tax base and Determine the tax rate charged Address the potential
determine the scope of for emissions and how it may undesirable effects from the
coverage of the carbon tax evolve over time implementation of carbon
to meet policy objectives taxes

4 5
Revenue Use Institutions

Determine how the Determine the institutional

revenues accrued from and regulatory requirements
carbon taxes will be used necessary to ensure
oversight and compliance

Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
 DESIGNING CARBON TAX: TAX BASE

Defining the tax base requires careful analysis of the sectors and gases a proposed carbon tax will consider…

Reducing emissions in the top 3 sectors, is crucial to meet the nation’s

Decide which sectors to long-term decarbonization target
Decide which gases to
cover – based on
cover – targeting direct
emission intensity and
emissions or the types
feasibility of
of fuels
implementing CPI

Key
considerations
for defining
the tax base

Choose the points of Choose the entities to

regulation – upstream, regulate and set
midstream or thresholds – the
downstream minimum level activity is
responsible to pay tax

Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
 DESIGNING CARBON TAX: TAX RATES
Tax rates can be determined via three different approaches, implementation requires economic impact and
political feasibility assessment

1 3
Social Cost of Carbon Economic & political feasibility

What is the total estimate of economic Most common approach – start slow and
damages from the emission of an ramp up
additional ton of CO2

2
Target-Based Approach
What is the carbon price necessary to
meet specific climate targets?

Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
 DESIGNING CARBON TAX: UNINTENDED EFFECTS
In designing a carbon tax, it is important to consider the potential for unintended effects to arise, and to
develop measures to address these. Two potential effects are particularly important in this context:

1 2
Carbon Leakage Distributional Impacts
Market shares shift from covered to uncovered firms,
promoting emissions in areas not covered by CPIs

Reduction in Increase in
emissions emissions Unequal impacts on different Unequal impacts on
regions due to differences in different income groups
CPI Covered CPI Not Covered economic structure and resulting due to differences in
emission intensity consumption patterns
Flow of resources
Geographical Income

Potential Solutions

Policy Coordination Eliminating the price differential with competing jurisdictions through tax measures or border-carbon adjustments

Subsidy Direct payments or support provided to groups that have been disproportionately affected by the tax

Transitory Allowances Support existing companies in EITE sectors as they transition towards lower-carbon operations to minimize the impact on their
competitiveness
Supporting Actions Provide direct support to companies or sectors through technical assistance programme
Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
 DESIGNING CARBON TAX: HOW THE REVENUE IS USED

Carbon taxes can raise significant revenue, it is important for policy makers to consider how that revenue will be
used; as it will have implications for the overall economy, the efficiency of the tax system, and public welfare…

Budget Neutral Increase Spending

Passed directly along or offset by
To support government initiatives
reductions in other taxes
and pursue public policies
(climate and non-climate related)

Rebates to households or Reduction in other others

businesses General Budget Earmarks

Redistributing revenue back Able to increase the Moved into general Constrain the allocation of
to households (transparent efficiency of the tax budget for unrestricted new carbon tax revenue
and popular) or businesses system as carbon taxes spending. to specific uses
(to address leakage) typically have fewer
inefficiencies and social
costs Debt reduction

Paying down debt to

reduce the debt burden in
future budgets

Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
 DESIGNING CARBON TAX: INSTITUTIONS

Effective tax administration requires effective institutions and processes to implement the tax and enforce
compliance with tax obligations…

a. Determine tax liability

1 b. Oversee tax administration
Map required c. Enforce the tax
roles and
functions

5 2
Map existing
a. Ensure appropriate leadership a. Determine existing institutions can assume
Ensure competences
b. Designate decision makers coordination and assign those functions
c. Establish special working groups functions b. Establish new structure if there is no
d. Develop communication channels institution to undertake the tasks required

4 3
a. Identification of capacity building needs a. MRV
Strengthen Establish
b. Methods and tools for capacity building capacities procedures b. Tax assessment and payment
c. Learning by doing c. Claiming rebates
d. Audit and inspection
e. Investigation of fraud and prosecution

Source: World Bank PMR’s Carbon Tax Guide and MOF PMI Project.
6 Conclusion
 CONCLUSION

1. Carbon Pricing Instruments (CPIs) are pivotal tools in combating climate change
2. It offers various approaches for nations to reduce greenhouse gas (GHG) emissions.
3. Malaysia, actively engaged in climate action, is designing CPIs tailored to its commitments and needs.
4. The successful implementation of these CPIs relies heavily on factors such as tax rate, coverage, and
governance.
5. It is also imperative to analyse not just the environmental but also the social impacts of these policies to
ensure they are equitable and beneficial for all segments of society.
 Thank You
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