Steep rise in carbon tax necessary to decarbonize Malaysia's steel industry, according to a research organization
In a bid to shift Malaysia's steel sector towards a low-emissions, high-value path, an emissions trading system (ETS) is proposed as a solution for greater flexibility in adapting to carbon pricing. According to the Institute for Democracy and Economic Affairs (IDEAS), a phased but rapid increase of the carbon price for the iron and steel sector is recommended, up to RM200 (US$47) per tonne of carbon dioxide and its equivalents (tCO2e0).
The steel sector, which currently produces 100 per cent EAF and has moved to 70 per cent blast furnace (BF) between 2014 and 2022, has seen an increase in carbon emissions intensity from about 0.4 to 1.7 tonnes of CO2 per tonne of steel. This shift has raised concerns about the sector's growing risks and potential fall behind other countries if no action is taken on carbon pricing.
IDEAS believes that a carbon price of RM200 by 2030 would make low-carbon steel production commercially viable in Malaysia. At this price, costs for emissions-heavy blast furnace production, which currently accounts for 70 per cent of local output, would rise by about 11 per cent.
An ETS would allow firms to offset or trade credits, reducing emissions at a lower cost. It could also provide clearer long-term signals for investors within a stable, rules-based framework. Moreover, the ETS could generate revenue that could be reinvested as targeted rebates for low-carbon steel and investment support for decarbonisation technologies.
The proposed carbon tax, set to be introduced on hard-to-abate sectors in 2026 as part of Malaysia's Budget 2025, could generate up to RM3 billion (US$711 million) in government revenue annually. This revenue could then be used to support the steel industry's transition towards net zero emissions.
However, a direct carbon tax could face political resistance and might act as a consumption tax without driving investment in cleaner technologies. To address this, an ETS framework tailored to Malaysia's sectoral needs is recommended.
Data from the Malaysian Steel Institute (MSI) 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. Inaction on carbon pricing could leave heavy-emitting steel producers facing higher costs and reduced access to international markets.
The ETS could help support the industry's net zero transition while ensuring fair treatment of domestic and imported products under international trade rules. IDEAS has previously proposed carbon pricing as a viable solution for cutting emissions in Malaysia's rapidly expanding steel industry.
In conclusion, the proposed carbon pricing intervention is expected to play a significant role in aligning the emissions trajectory of Malaysia's steel sector with national goals. By transitioning towards low-carbon steel production, the sector could not only reduce its carbon footprint but also position itself for long-term success in a low-carbon economy.
