In September 2021, the Malaysian Prime Minister, Ismail Sabri Yaakob, announced the inclusion of a carbon tax in the country’s five-year (2021 - 2025) “Twelfth Malaysian Plan” (12MP) for development. Including a carbon tax is notable because Malaysia is one of the highest carbon emitters in Southeast Asia and has been slower to develop carbon pricing policies than the surrounding nations. This spotlight will recap some recent developments on the island of Borneo, and the progress being made through Sabah and Sarawak’s carbon strategies. Notably, the state of Sarawak will be the first in Malaysia to enforce carbon emission regulations.

What are carbon taxes? 

Carbon taxes are based on the number of carbon emissions produced by a company. Recently, carbon taxes have led to the development of carbon markets, meaning companies can trade their legal right to emit a certain amount of greenhouse gas, or “carbon credits”, on the open market. These carbon markets, or emission trading systems (ETS), use market forces to determine the value of carbon credits instead of government organisations, which have struggled in the past. As climate change is a collective international problem, countries are also developing carbon border taxes to prevent companies from moving their production facilities to lower, or zero, carbon tax economies. Under the European Union’s proposed Carbon Border Adjustment Mechanism (CBAM), the most prominent carbon border tax, EU importers will need to buy carbon credits that correspond to the carbon credit price if the good had been produced within the EU. As Malaysia's fourth-largest trading partner, the CBAM would profoundly affect Malaysia’s economy. 

What is happening in Sabah? 

Following the September 2021 12MP announcement, the State of Sabah approved the Nature Conservation Agreement (NCA), a carbon trading deal, the following month. The NCA, signed between the state government of Sabah and Singaporean Hoch Standard Pte Ltd, is an agreement establishing state carbon trading and the monetisation of forest reserves for carbon sinks. The agreement allocated 70% of the revenue to the state of Sabah and 30% to Hoch Standard. Hoch Standard was tasked with developing a Nature Conservation Management Plan to reforest and protect 2 million hectares of forest. 

However, after the agreement was signed, the state attorney general declared it to be non-binding and it was met with backlash. Specifically, this was over the lease length (100 years), the perceived lack of engagement, as well as the lack of transparency with local indigenous peoples. Local NGOs have argued that the government did not properly engage with local communities, violating the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP). Further scrutiny on Hoch Standard has revealed that a British Virgin Island-based entity, Lionsgate, was Hoch Standard's main shareholder, which had not been disclosed in the agreement. In February 2022, the state of Sabah’s lawyers declared the NCA “legally impotent”, and that the agreement would, therefore, not be honored. Furthermore, Warisan, Sabah's largest opposition party, has filed a complaint with Malaysia’s Anti-Corruption Commission in response.

What is happening in Sarawak? 

In May 2022, the Sarawak State Legislative Assembly passed the Land Code Amendment Bill, paving the way for Sarawak to regulate carbon emissions and ensure companies comply with international carbon treaties. Malaysia is a signatory to both the Kyoto and Paris protocols. This law, therefore, grants the state the power to control land for carbon storage, subject to future approval by the State Planning Authority. Additionally, the law established Sarawak’s carbon trading market and gave companies participation licenses. Section 70 of the Land Code Amendment contains punitive enforcement measures, empowering the state to impose fines and up to 5 years in prison for offenders. As resource extraction dominates the Sarawak economy, this law is notable as it aims to reduce carbon dioxide emissions from the oil and gas industry. The oil, natural gas, and forestry industries make up 49.7% of the state’s economy. Malaysia is the world’s third-largest exporter of liquefied natural gas, mostly from offshore reserves near the coasts of Sarawak. 

Concluding Thoughts

Because Malaysia is one of Southeast Asia’s largest greenhouse gas emitters, the introduction of a carbon tax is a significant policy change. Sarawak’s local carbon tax development is especially significant because of the state’s dependence on the resource extraction industries, while Sabah’s NCA shows the public and legal risks of establishing carbon partnerships. Currently, the magnitude of the proposed change, or its compliance efficiency, is unknown. For companies operating in, or doing business with, Sabah, Sarawak or Malaysia, it will be essential to evaluate the implications of these upcoming regulatory changes.