Malaysia’s Energy Transition: 2026 Budget and Carbon Tax Explained

Highlights

• Carbon tax to apply to iron, steel, and energy sectors, in line with the national carbon market policy and climate change bill.
• Renewable energy expansion with FiT programme, corporate renewable energy scheme, and Vietnam-Malaysia-Singapore project to increase solar, biomass, biogas, and small hydro capacity.

Malaysia has announced its 2026 budget at 470 billion ringgit ($111 billion), up from 452 billion ringgit in 2025, which also includes the government’s plans to levy carbon tax from next year onwards.

During his budget speech, Prime Minister Anwar Ibrahim said the economy grew by 4.4% in the first half of 2025, and revised the GDP projection for 2025 to 4–4.8%, despite pressure from the US tariff war.

He also said the economy is projected to expand at 4–4.5% in 2026, which is also affected by global turmoil and geopolitical tensions.

Read More: Malaysia Charts Steel Industry Roadmap 2035 for Low-Carbon Future

At the heart of the government’s announcement is the introduction of a carbon tax in 2026, which will target the iron, steel, and energy sectors at the start. While the tax rate has not been announced, its design would be pursuant to the national carbon market policy and the forthcoming climate change bill.

This is part of Malaysia’s long-term plan to reach net zero emissions by 2050, supported by the National Energy Transition Roadmap (NETR), which aims for 70% renewable energy generation capacity by mid-century. The roadmap benefits from a 150 million ringgit national energy transition fund.

According to the Energy Transition and Water Transformation Ministry, Malaysia’s renewable energy capacity stands at 5.1GW.

Also Read: Malaysia Expands Clean Power with 1.5 GW Solar and Battery Projects

Investment in renewable energy projects will continue in 2026, with government-linked companies mobilising 16.5 billion ringgit for initiatives such as solar farms and electric vehicle charging stations. The green technology financing scheme will be open until 31 December 2026, with incentives for the energy, transport, and manufacturing sectors.

Renewable energy expansion includes an additional 300MW quota under the feed-in-tariff (FiT) programme, which covers biogas, biomass, and small hydropower projects, with operations expected around 2028. Applications are open, and bidding is scheduled for February-March 2026.

Current FiT rates begin from 278.60 ringgit/MWh for biogas, 268.70 ringgit/MWh for biomass, and 240 ringgit/MWh for small hydro. The corporate renewable energy scheme is projected to attract about 3.5 billion ringgit through registration of companies able to generate 500MW of energy. The large-scale solar initiative (LSS6) will have almost 2GW capacity, which attracts private investment of around 6 billion ringgit.

See Also: Think Tank Recommends Carbon Pricing Plan for Malaysia’s Steel Sector

State-owned companies Tenaga Nasional and Petronas are working with partners in Southeast Asia on the Vietnam-Malaysia-Singapore project, which will transmit renewable energy from southern Vietnam to Malaysia and Singapore. This regional collaboration aims to expand renewable energy supply and strengthen cross-border energy infrastructure.

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Source: Argus Media