BY DARSHAN JOSHI

A further 19 jurisdictions , including Malaysia and other Southeast Asian peers such as Indonesia , the Philippines , Thailand , and Vietnam , are implementing or considering the implementation of their CPIs . In Malaysia , the 12th Malaysia Plan indicated the government ’ s intention to assess the feasibility of carbon tax and cap-and-trade mechanisms in meeting its climate ambitions and driving a low-carbon transition .

But what is carbon pricing , and what are carbon pricing instruments ? How can carbon pricing play a role in addressing climate change ? Can carbon pricing play a role in the achievement of broader sustainability goals ?

CARBON PRICING : THE BASICS

At its core , carbon pricing attempts to address the critical market failures driving climate change . Market failures occur when free market allocations of goods fail to translate into desired economic outcomes ; in the context of climate change , the most prominent market failure is the oversupply of negative externalities in the form of greenhouse gas ( GHG ) emissions .

Given that the increasing atmospheric concentration of GHGs is driving the rise in surface-level temperatures and resultant climate impacts , attention is rightly turning towards measures to mitigate these emissions . Carbon pricing is – potentially – one such measure .

By associating a cost with each unit of GHGs emitted , enforced either through a carbon tax or cap-and-trade system , polluting becomes more costly to emitters , who are now forced to internalise the social costs of their activities . It creates an economic signal in favour of decarbonisation : pay for the costs of emissions or shift towards more sustainable practices and adopt low-carbon technology .

When it comes to carbon , however , the story doesn ’ t end with the oversupply of this negative externality . Carbon can be emitted but sequestered in forests and soils , for example . Yet the benefits of sequestration are not realised without a price on carbon , and economic returns do not accrue to landowners for conserving , rather than exploiting their natural capital .

By associating a monetary value to each ton of carbon sequestered , carbon pricing can be an essential variable in the business case against the loss of nature . This is a critical aspect of climate action in countries such as Malaysia , where forests sequester more

A good example of an activity ripe for low-carbon disruption is energy generation , which in Malaysia is typically the result of fossil fuel combustion . The energy sector is responsible for roughly 80 per cent of Malaysia ’ s annual emissions , with approximately one-third of the total impact of electricity generation alone .”

carbon annually than is emitted by energy generation , which itself causes up to 80 per cent of total national emissions . The forestry sector is critical to Malaysia ’ s hopes of achieving net zero emissions .

Carbon pricing can therefore play a role in Malaysia ’ s journey towards meeting its domestic and international climate targets by making adopting sustainable , low-carbon practices and technologies more financially attractive . Yet the success of any CPI depends on how these instruments are designed and implemented and their interactions with the broader ecosystem of related policies and programmes .

This article will cover four facets of carbon pricing design and implementation to illustrate how CPIs can best assist Malaysia ’ s push towards becoming a sustainable and resilient low-carbon nation .

TARGETING THE RIGHT SECTORS

CPIs issue incentives to decarbonise across economic activities within their scope ; for this reason , comprehensive CPIs should cover as broad a range of economic activities as possible , ensuring consistent signalling across all industries and sectors . It is particularly pertinent given the complexity and cross-sectoral nature of contemporary supply chains and the economy-wide consequences of climate change .

Nevertheless , the immediate implementation of CPIs within industries where technology-switching remains costly or even infeasible risks , generating costs that can be detrimental to industrial and , thus , economic growth in exchange for little environmental benefit .

Instead , to begin with , CPI scope should be limited to activities that generate high levels of emissions and which can employ cost-effective avenues towards adopting low-carbon practices and technologies .

A good example of an activity ripe for low-carbon disruption is energy generation , which in Malaysia is typically the result of fossil fuel combustion . The energy sector is responsible for roughly 80 per cent of Malaysia ’ s annual emissions , with approximately one-third of the total impact of electricity generation alone .

This creates significant scope for emissions reductions . The past decade has seen tremendous growth in the viability of low-carbon energy technologies such as solar , wind , and biofuels from both technical and economic standpoints . A strong carbon price signal can further speed up the transition from fossil fuels to renewable energy .

Indeed , levelled costs of electricity for biomass and those observed during Malaysia ’ s third large-scale solar auction ( LSS 3 ) reach parity with that of coal under a carbon price of just RM26 per ton . Levelised costs for small hydro , biogas , and those observed during LSS 4 are already on par with coal , and carbon pricing will only further reinforce their

competitiveness . In tandem with existing renewable energy ( RE ) and energy efficiency ( EE ) incentive programmes , carbon pricing can issue a strong impetus for an effective energy transition .

A stepwise approach to regulating carbon would entail feasibility assessments of decarbonisation options across vital economic activities and sectors . This can feed into a well-communicated strategy towards expanding the scope of CPIs and allow Malaysia to circumvent some of the potentially negative impacts of carbon regulation .

This may , for instance , include impacts on the international competitiveness of export-oriented industries , or on food security , mainly where agricultural practices are carbon-intensive . Over time , as the lowest-hanging fruit in the decarbonisation spectrum are captured , as carbon prices rise ( see next bullet ), and as more countries move towards the adoption of CPIs , a greater number of low-carbon technologies will become economically viable , adding further fuel to efforts to transition successfully to a low-carbon future .

PRICING CARBON WITHIN THE GOLDILOCKS ZONE

The pricing of carbon should be rooted in science . The social cost of carbon ( SCC ), a science-based measurement of the costs of each ton of carbon dioxide , is often touted by economists and scientists as the optimal carbon price .

One of the latest and more comprehensive estimates of the SCC , published in the journal Nature , suggests an average of roughly US $ 185 / ton of carbon dioxide . At the same time , the Carbon Pricing Leadership Coalition cites a figure of between US $ 40 – 80 / ton to be consistent with the temperature goals of the Paris Agreement . In practice , however , economic and political constraints hinder the adoption of a high SCC as the carbon price . This issue is especially pertinent for developing , carbon-intensive economies , where the imposition of stringent carbon costs , or emissions caps , in the absence of economically feasible , low-carbon technologies can negatively affect industrial growth that may outweigh the monetary value of any environmental benefits . A carbon price that is too low may be ineffective in driving the achievement of climate targets .

A solution to the pricing dilemma can involve feasibility assessments of various carbon pricing points ( under a carbon tax ) or emissions reduction pathways ( under a cap-and-trade scheme ) that assess the economic and environmental impacts of a range of carbon prices .

Prices could thus be tailored to provide sufficient incentives to ensure meeting ( preferably ambitious ) emissions reduction targets , such as the Nationally Determined Contribution ( NDC ) to reduce the emissions intensity