Economics and Environmental Implications of Carbon Taxation in Malaysia: A Computable General Equilibrium Approach

Abstract

Due to high use of energy input in industrialization process, Malaysia has experienced a continuous rise in emission coinciding with the period of rapid economic development. Against the backdrop, the paper has taken initiatives to examine the economy-wide impacts of carbon taxation in Malaysian economy. The inevitable use of energy inputs in production chains and consumption necessitates an assessment covering economy-wide framework. The paper, has therefore applied, computable general equilibrium model for the empirical analysis. The model adopts Malaysia Input-Output Tables 2010 as the main database in the simulation. The investigation assumes three hypothetical carbon taxation ranged from RM50/tonne to RM300/tonne (~USD12-70/tonne) CO2. These tax rates are imposed on crude oil, natural gas, and coal which are the main energy inputs to produce petroleum products and electricity. The simulation result shows that the carbon taxation is effective to control the rise in CO2 emissions in a positive economic performance, if the tax revenue is recycled back to the economy as compensation scheme. Compared to the standalone carbon taxation policy, the tax recycling reform does appear more economically acceptable considering inflation impact and employment rate. At sectoral level, the energy intensive industries become more efficient in managing their energy use, as intended. As the policy implications, the paper recommends that the country may consider implementing carbon taxation by phased-in gradually to promote energy saving and emission control while keeping economic competitiveness. In conclusion, Malaysia may introduce a policy package with a carefully designed carbon taxation system, in combination with revenue recycling measures, for a more balanced economic efficiency and environment conservation in transitioning towards a more sustainable economic growth.