Malaysia’s carbon initiatives can be a timely driver of regional harmonisation

Malaysia’s chairmanship of ASEAN in 2025 offers hope that strides can be made to better align carbon markets in the bloc, if not in Asia-Pacific (APAC) as a whole.

In Malaysia’s Budget 2025, the government announced plans to implement a carbon tax aimed at the iron, steel and energy industries by 2026¹. This puts a minimum price on carbon and incentivises carbon reductions in these sectors.

In recent years, Malaysia has seen a rise in emissions due to increased industrialisation, urbanisation and population growth. The country targets a 45% reduction in carbon intensity (emissions per unit of output) against GDP by 2030 across the whole economy (compared to 2005 levels), and it aims to achieve net-zero greenhouse gas emissions by 2050². The new carbon tax could theoretically lead to reduced emissions should companies decide carbon intensive activities are too costly to continue.

Although it is too early to determine how successful this will be, we at Lombard Odier believe that things are moving in the right direction across the region, with regulations making CO₂ emissions more costly and requiring greater transparency

Invigorating Malaysia’s carbon market

Depending on how the tax is implemented, it could also invigorate Malaysia’s nascent carbon market, with one of the options under discussion being to allow carbon credits to offset tax liabilities, which could see an increase in carbon credit participation. Such a move would mirror that of Singapore, where carbon tax-liable companies in the city-state are allowed to use voluntary carbon credits to offset up to 5% of taxable emissions^3.

Although it is too early to determine how successful this will be, we at Lombard Odier believe that things are moving in the right direction across the region, with regulations making CO₂ emissions more costly and requiring greater transparency^4.

However, it is clear APAC is experimenting with a variety of approaches when it comes to carbon markets.

APAC’s fragmented markets

China, for example, introduced a carbon emissions trading scheme (ETS) in 2021, for the power sector, and it is already the largest in the world in terms of covered emissions. The government recently announced plans to expand the scheme to steel, aluminium and cement, which will raise the share of national carbon dioxide emissions covered by the market from 40% of China’s total to 60%, according to China’s Ministry of Ecology and Environment (MEE)⁵. In contrast to most other major carbon markets, China’s ETS is based on carbon intensity rather than total emissions. This means it could incentivise less carbon intensive production but only have a limited effect in reducing emissions on an absolute basis^6.

Other markets have dabbled with their own versions of carbon pricing and ETS. Vietnam, Thailand, and Singapore are increasingly aiming for synergy between their carbon pricing policies and carbon markets by incorporating carbon credit frameworks into their strategies. Indonesia’s intensity-based ETS for the power sector and Korea's ETS allow the use of domestic and international carbon credits⁷. Thailand is preparing to impose a carbon tax⁸, and Indonesia plans to introduce a hybrid cap-tax-and-trade scheme in 2025⁹. Taiwan, meanwhile, aims to introduce a carbon fee in 2025 on power and gas suppliers and manufacturing firms that emit the equivalent of more than 25,000 tons of carbon dioxide per year^10. There will be preferential rates for entities that submit self-determined reduction plans.

Some APAC countries are also seeking to participate in international carbon market transactions:  Singapore, for example, signed a deal with Peru in 2024 for the trading of carbon credits^11.

Read more about APAC’s autonomous vehicle sector that aims to decarbonise transportation and reduce emissions.

Harmonisation could realise the region’s potential

The fragmented nature of these initiatives suggests regional harmonisation will be difficult; however, there is huge potential. A more unified market, blending voluntary and compliance efforts, could enhance climate ambition and market integrity as well as strengthen APAC’s global competitiveness, foster cross-border collaboration and attract green investment.

This may be easier to achieve in ASEAN than in Asia-Pacific as a whole. In November, Singapore, Malaysia, Indonesia, Singapore, and Thailand signed an agreement to create a unified ASEAN Common Carbon Framework. This collaboration aims to reduce implementation costs and unlock regional carbon project opportunities^12.

A more unified market, blending voluntary and compliance efforts, could enhance climate ambition and market integrity as well as strengthen APAC’s global competitiveness, foster cross-border collaboration and attract green investment

Malaysia must get its tax right

For the time being, Malaysia must get the balance right with its new carbon tax. An appropriately priced carbon tax provides a clear financial incentive for businesses to reduce their carbon emissions, driving innovation and investment in cleaner technologies while supporting economic growth.

If the tax is too low, it may fail to alter behaviour or achieve meaningful emissions reductions. Conversely, a tax set too high can burden industries and consumers, potentially leading to economic instability.

Similarly, while high-quality carbon credits can help channel finance for initiatives such as protecting forests and promoting sustainable agriculture, if there is a high price differential between the carbon tax and allowable carbon credits, companies may opt to purchase credits rather than facing the pressure to pay the carbon tax, potentially undermining the incentives to reduce energy and industrial emissions. Policymakers can seek to balance priorities by limiting the proportion of carbon credits that can be accepted¹³.

At Lombard Odier, we see several forces combining to convert today’s linear, wasteful economic model into one which is Circular, Lean, Inclusive and Clean (CLIC®)^14, and developing the region’s carbon markets is an important step. However, more collaboration is needed in APAC. Perhaps Malaysia, with its chairmanship of ASEAN and its own carbon initiatives to refine, can push this forward in 2025.