How Will Malaysia’s Carbon Market Policy Affect Businesses?

Road to achieving net-zero greenhouse gas emissions by 2050 in Malaysia

Malaysia signed the Paris Agreement on April 22, 2016, which was the very first day the treaty was open for signature at the UN Headquarters in New York. It then officially ratified the agreement shortly after, depositing its instrument of ratification on November 16, 2016. Under the Paris Agreement, Malaysia is committed to achieve net-zero greenhouse gas emissions by 2050.

Malaysia has undertaken significant actions in displaying its seriousness in doing its part for the treaty, which the carbon market policy will be taking a central role as a roadmap towards achieving Malaysia’s commitment.

The introduction of the Bursa Carbon Exchange (BCX) is one such action. Launched in December 2022, the BCX is Malaysia’s premier Voluntary Carbon Market (VCM) exchange. Its purpose is to allow the trading of carbon credits and renewable energy certificates (REC) at a voluntary level.

The other significant action is the launching of the National Climate Change Policy 2.0 (NCCP 2.0) by the Ministry of Natural Resources and Environmental Sustainability (NRES) in September 2024. It is Malaysia’s updated strategic framework designed to guide the country towards a low-carbon, climate resilient future. The NCCP 2.0 is also a precursor to the upcoming Climate Change Act.

In addition, Malaysia is set to introduce carbon tax sometime this year on selected sectors, with indication that such tax will be expanded to more sectors in the near future.

What is changing?

It is widely anticipated that Malaysia will be tabling the National Climate Change Bill in Parliament sometime this year. The bill, among others will introduce a carbon tax which will be focused initially on the iron, steel and energy sectors. The bill will also introduce a mandatory Monitoring, Reporting and Verification (MRV) system to govern carbon trading activities at both domestic and international levels.

Once passed, the bill will be enacted as the Climate Change Act. When the Act comes into effect, it will introduce a legal and regulatory compliance carbon market, which will co-exist alongside the current voluntary market system. Compliance market will allow the usage of carbon credits to be legally recognised as a means to allow affected corporations to reduce the amount of carbon tax imposed on them.

What does this mean?

For those in the affected sectors, you will be included in the first wave of carbon tax coverage. That means paying a tax per tonne of emissions, with rates expected to rise over time. Even if you are not directly taxed initially, you will feel knock-on effects through higher energy and input costs as regulated suppliers pass on their carbon tax.

Taking the page of how carbon tax works in other parts of the world, it is likely that carbon credits will become relevant in reducing the carbon tax rate imposed under the Climate Change Act. With proper management and procurement, carbon credits are expected to reduce costs and maximise profits for affected sectors. This also means that carbon credits recognised under the Act are slated to be highly sought after commodities, encouraging more to participate in producing quality carbon credits.

In short, this means a more robust carbon market.

What should businesses do now?

Here is a concise roadmap for the next 12–24 months.

Step 1: Map your carbon exposure

Identify and estimate potential carbon tax exposure, whether directly or otherwise.

Step 2: Build a credible emissions baseline

• Establish a robust, auditable baseline for your emissions using recognised standards, such as the Greenhouse Gas (GHG) Protocol, Global Reporting Initiative (GRI) or ISO.
• Put in place systems and controls for ongoing data collection and verification.
• Treat emissions data like financial data – errors can have tax, regulatory and contractual consequences.

Step 3: Develop a real decarbonisation plan (not a slogan)

• Prioritise decarbonisation internally.
• Align your plan with national timelines and sectoral incentives to maximise available support.
• Decide what role carbon credits will play and set internal rules on when and how they can be used for decarbonisation when required.

Step 4: Review contracts and pricing

• Revisit supply and offtake contracts to address carbon-related costs, changes in law, both domestically and internationally.
• For export contracts, consider how carbon costs and reporting duties are allocated between buyer and seller.

Step 5: Strengthen governance and communication

• Clarify board and management responsibilities for climate risk and carbon strategy.
• Integrate climate into existing risk management and strategy processes, rather than treating it as a separate ESG add-on.
• Carefully review climate-related statements in annual reports, marketing and investor decks to avoid greenwashing risk.

Where legal advice makes a difference

Carbon policy has evolved into an increasingly legal issue: new taxes, new regulations, more complex contracts and stricter expectations on disclosure.

A lawyer who understands Malaysia’s evolving carbon market can help your business to:

• Interpret how carbon tax and related rules apply to your specific operations and group structure.
• Design governance, policies and adopting mandatory MRV frameworks that comply with regulation and support credible reporting.
• Draft and renegotiate contracts to allocate carbon-related costs and risks fairly, and carbon credit transactions.
• Shape climate-related communications and claims to minimise greenwashing risk while still telling a compelling story to customers and investors.

The businesses that start this work now will not only avoid unpleasant surprises when the carbon tax bites, they will also be better positioned to compete – at home and abroad – in a carbon constrained world. Also with demand comes supply – quality carbon credits are likely to be very much in demand and paving the way for businesses to consider a new venture and be pioneer of what is potentially and new and profitable market.

How can Evalon Group Law Practice help?

Evalon Group Law Practice, with its in-depth experience in helping clients identify, assess and manage risks, is able to assist businesses in preparing for compliance, managing tax liability, and adapting to new environmental reporting standards.

With the impending implementation of Malaysia’s 2026 carbon tax timeline looming, legal advice will heavily focus on preparation and navigating the addition of mandatory carbon pricing.