MY Say: Hard-to-abate sectors — the pricing and impact of carbon taxation

This article first appeared in The Edge Malaysia Weekly on June 1, 2026 – June 7, 2026

Carbon taxation is no longer a theoretical policy debate in Malaysia. With the proposed Carbon Tax Act (CTA) expected to be implemented in 2026, the country is moving closer to placing an explicit price on carbon emissions. The question is therefore no longer whether carbon will be priced but how the cost will ripple through the economy, particularly across industries that cannot easily decarbonise — the hard-to-abate sectors.

As announced during the Budget 2026 briefing in 2025, the Malaysian government intends to introduce the carbon tax in phases, beginning with emissions-intensive industries such as mining; iron and steel manufacturing; and energy production. These are hard-to-abate industries because viable low-carbon alternatives remain limited or commercially expensive.

These sectors are far from peripheral to Malaysia’s economy. As highlighted in my earlier analysis, titled “We can build a sustainable industrial future” (The Edge, April 15, 2024), they collectively form a core pillar of the country’s industrial base and account for approximately 14% of Malaysia’s gross domestic product. Any policy that materially alters their cost structure will therefore have implications that extend well beyond the industries themselves, influencing supply chains, investment decisions and ultimately consumer prices.

At its core, carbon taxation manifests as a production cost. Businesses may absorb part of this cost in the short term but a portion of it will inevitably travel through the value chain before reaching the downstream industries and consumers.

When industrial sectors are highly interconnected, even a modest cost increase at the upstream level can propagate through multiple stages of production. A small price adjustment at the quarry or smelting stage, for example, may eventually translate into noticeably higher prices for downstream goods such as cement, steel products and building materials.

Understanding how these costs cascade across the industrial value chains is therefore critical when assessing the broader economic impact of carbon taxation. This is particularly important because the extent of cost pass-through determines whether the tax merely shifts margins or fundamentally reshapes pricing structures.

To illustrate this dynamic for mining, iron and steel manufacturing, the infographic examines the potential cost impact of a hypothetical carbon tax rate of RM15 per tonne of carbon dioxide emission equivalent (tCOe) across several upstream industries including stone, sand and clay quarrying; cement production; and iron and steel manufacturing, and how these costs may ultimately affect construction materials.

The analysis suggests that a carbon tax would embed incremental costs across several stages of production. In quarrying operations, the estimated carbon tax impact translates into approximately RM0.09 per tonne of stone, sand and clay output. When incorporated into the cement production processes, the cumulative carbon cost rises to roughly RM13.70 per tonne of output. In iron and steel manufacturing, the estimated carbon tax component is approximately RM30 per tonne of output.

While these figures may appear modest at the individual input level, their cumulative effect becomes more visible when applied to downstream economic activities. Based on the material composition of a typical two-storey terraced house of approximately 2,200 sq ft, the embedded carbon tax could increase baseline construction material costs by roughly 1% under a frictionless cost pass-through scenario.

In practice, the final impact may exceed this estimate once profit margin, operational adjustments and market dynamics are incorporated. Even relatively small percentage changes can translate into significant absolute costs when applied to large-ticket assets such as housing.

When compared to the actual cost of decarbonisation, a hypothetical carbon tax rate of RM15 per tonne of carbon emissions appears largely symbolic.

In cement manufacturing, most emissions come from two sources: the chemical process of breaking down limestone, known as calcination, and the fuel used to heat kilns. Substituting part of the clinker with materials such as fly ash from coal plants or slag from steelmaking can cut emissions by 10% to 30%. Switching kilns to renewable electricity or hydrogen can reduce emissions by another 15% to 30%. The costs of these solutions vary widely, ranging from US$10–30 per tonne for clinker substitutes to US$40–80 for electrification, US$60–100 for hydrogen kilns and US$40–120 for carbon capture.

Steel production faces similar challenges. Around 70% to 80% of emissions come from burning coke in blast furnaces. Alternatives include using hydrogen in a process called Hydrogen Direct Reduced Iron (H-DRI) or adopting Electric Arc Furnaces (EAF). The costs of these solutions range from US$40–US$120 per tonne.

Taken together, the approximate cost of cutting emissions in cement and steel ranges between US$60 and US$90 per tonne, or roughly RM240 to RM360. Hence, costs of decarbonisation are at least 16 times higher than a RM15 carbon tax rate. Nevertheless, setting a moderate initial carbon tax rate may reduce resistance and encourage industries to begin transitioning towards greener technologies.

This reality calls for a delicate policy balancing act. If carbon pricing is set too low, it risks becoming largely symbolic and may fail to meaningfully influence emissions behaviour. If the tax is introduced too aggressively, it could impose sudden cost pressures on the industries, leading to market disruption and unwanted resistance.

Policymakers must therefore balance three important considerations: consumer price pressures, the affordability threshold of the affected sectors and the need to generate sufficient government revenue to fund green investments. The credibility of the carbon tax will depend on striking this balance in a way that is both economically sustainable and politically feasible.

Bridging this gap between carbon pricing and decarbonisation costs requires not only a carefully calibrated tax rate but also a fiscal structure that supports industrial transition.

To manage the impact of carbon taxation, a 25:75 fiscal split is proposed. Under this structure, about 25% of the carbon tax burden would be passed on to consumers while the remaining 75% would be absorbed by industry. The industrial share of the split could be supported through a dedicated transition fund, financed by reallocating part of existing corporate income and product tax contributions from the affected sectors.

This fiscal design provides flexibility to balance consumer price impacts, operational margins and funding for green technologies. On this basis, an initial carbon tax rate of RM20 per tonne of carbon emissions could serve as a reasonable starting point for Malaysia, signalling its commitment to net-zero emissions.

An initial carbon tax of RM20 per tonne of CO emissions, structured on a 25:75 fiscal split, may provide the balance needed to roll out CTA.

With a 25% pass-through rate, this translates into RM5 per tonne being reflected in consumer prices, keeping inflationary pressure below 1% (see Infographic). The remaining 75% allocated from the existing tax system would provide hard-to-abate sectors with the time, space and policy certainty to adjust their operations and investment strategies. Coupled with a progressive tightening carbon road map, Malaysia can begin steering its industrial base towards greener technologies while cushioning the transition for both businesses and consumers.

Dr Lim Kok Tiong is a financial economist, credit and climate risk specialist, seasoned project/programme manager and independent researcher

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