"Green Transition Ahead: Insights from Malaysia’s Carbon Tax for Indian Steel Producers"

In an ambitious move to decarbonize heavy industries, Malaysian Prime Minister Anwar Ibrahim recently announced that Malaysia will implement a carbon tax on the steel, iron, and energy sectors by 2026. This policy aims to propel the adoption of cleaner technologies and support green technology research through revenue generated by the tax. Notably, UEM Lestra and Tenaga Nasional Bhd are investing MYR 16 billion ($3.67 billion) to upgrade distribution networks and decarbonize industrial zones, showcasing a robust alignment between government policy and private-sector investment in sustainable initiatives.

This report analyzes the potential impacts of Malaysia’s carbon tax on its domestic steel sector, identifies the strategic motivations behind the policy, and explores key takeaways for the Indian steel industry as it faces similar decarbonization challenges.

Analysis of Malaysia’s Carbon Tax on Steel

i. Encouraging Sustainable Technologies and Green Investments

The proposed carbon tax incentivizes the Malaysian steel and iron industries to adopt technologies that can curb greenhouse gas emissions, reduce resource use, and boost energy efficiency. By directing the tax revenue to green technology initiatives, Malaysia demonstrates a strategic plan to transition its steel industry toward cleaner production practices, signaling the growing importance of sustainable development for maintaining competitiveness in global markets.

ii. Positioning for Global Market Requirements

Malaysia’s move aligns with global trends, including the European Union's Carbon Border Adjustment Mechanism (CBAM), which imposes carbon pricing on imported steel. By internalizing a carbon tax, Malaysia’s steelmakers could mitigate future border taxes when exporting to regions like the EU that require carbon transparency, potentially positioning themselves as preferred partners in international markets.

iii. Private Sector Investment in Decarbonization Infrastructure

The partnership between UEM Lestra and Tenaga Nasional Bhd indicates that the Malaysian government has effectively incentivized the private sector to align with its sustainability agenda. This MYR 16 billion investment will improve distribution networks to industrial areas and aid decarbonization efforts, creating a more sustainable supply chain and potentially lowering production costs for clean energy in the long term. This investment strategy underpins Malaysia’s carbon tax plan, reducing reliance on fossil fuels and further supporting the transition to green technology.

Key Learnings and Takeaways for the Indian Steel Industry

For India’s steel industry, which faces mounting pressure to decarbonize due to regulatory demands and market forces, Malaysia’s carbon tax policy and its complementary initiatives offer insightful strategies.

i. Carbon Pricing: Preparing for Policy Changes

The Indian steel sector may soon encounter similar regulatory measures, as policymakers strive to align with global carbon reduction commitments. Malaysia’s approach suggests that India could benefit from instituting a phased carbon pricing strategy. By gradually introducing carbon taxes on heavy emitters, the Indian government could encourage the steel sector to transition toward low-emission technologies, supported by a clear timeframe for compliance.

ii. Stimulating Private Investments in Green Technology

Malaysia’s collaborative approach between the government and private sector offers a model for India, where private sector investments in renewable energy infrastructure and decarbonization technology are crucial. With targeted incentives, Indian steelmakers could be encouraged to partner with energy companies to fund renewable infrastructure projects, including hydrogen production facilities, green electricity supply chains, and improved distribution networks. Such partnerships could mitigate the high upfront costs associated with green technology adoption and foster a shared responsibility for decarbonization.

iii. Export Competitiveness: Aligning with Global Carbon Standards

Indian steel producers have already experienced the effects of CBAM, and with more countries expected to adopt carbon pricing policies, aligning production standards with global requirements is increasingly important. A domestic carbon tax, if reinvested into clean technology, could not only reduce carbon intensity but also bolster India’s steel industry’s competitiveness by reducing exposure to international carbon tariffs. This proactive approach could help Indian producers secure access to key export markets, positioning Indian steel as a sustainable, low-carbon alternative.

iv. Supporting MSMEs in the Steel Sector

Unlike Malaysia, where larger corporations like Tenaga Nasional Bhd can absorb significant decarbonization costs, India’s steel sector includes numerous small and medium enterprises (MSMEs) that may struggle to adopt green technologies. Lessons from Malaysia’s targeted investments indicate that India could develop specific programs for MSMEs, such as tax incentives, subsidies for energy-efficient technology, and access to green finance. Supporting MSMEs in this way would ensure that the broader industry benefits from a carbon pricing policy while maintaining the resilience of smaller players in the steel sector.

Conclusion

Malaysia’s planned carbon tax on the steel industry marks a progressive step toward a low-carbon economy, with significant lessons for India’s steel sector. The carbon tax policy, when combined with substantial private-sector investment and targeted government incentives, provides a model for the Indian steel industry to reduce emissions, meet global market standards, and increase export competitiveness. With policies that encourage both major corporations and MSMEs to adopt cleaner technologies, the Indian steel industry could navigate the challenges of decarbonization more effectively while driving long-term growth in line with global sustainability standards.