Bloomberg reported that Malaysia is planning to introduce a carbon tax at an initial rate of RM15/tCO₂e, although Minister of Finance II Datuk Seri Amir Hamzah Azizan clarified that the final rate has yet to be determined.
Within the power sector, coal and natural gas plants are the dominant sources of Scope 1 emissions and would therefore bear the brunt of any carbon tax implementation.
We expect the carbon tax to be passed through to consumers under the IBR framework in line with global practice, resulting in limited direct earnings impact on power producers. Under a no-pass-through scenario, we estimate an FY26F earnings impact of -10% for TENAGA, -81% for MALAKOF, and -4% for PETGAS.
Based on 2022 grid emission factor of 0.774 tCO₂/MWh, a carbon tax of RM15/tCO₂e could necessitate an electricity tariff impact of c.1 sen/kWh (3% of the RP4 base tariff).
We maintain Overweight on the Power & Utilities sector, viewing the proposed carbon tax as earnings-neutral in practice. Our top pick is TENAGA (BUY, TP: RM15.77), as we believe the market continues to price in zero Investment Tax Allowance (ITA) claims under Schedule 7B, with any successful claim acting as a major re-rating catalyst.
Carbon Tax Proposal. Bloomberg reported that Malaysia is planning to introduce a carbon tax at an initial rate of RM15/tCO₂e. Discussions are ongoing, and details could still evolve. Under the proposed mechanism, companies would be allocated specific emission quotas, with those exceeding their limits required to either pay the tax, purchase credits via Malaysia’s carbon exchange, or buy unused quotas from other firms. However, Minister of Finance II Datuk Seri Amir Hamzah Azizan clarified yesterday that the final rate has yet to be determined.
Carbon Tax Structure. The framework resembles Singapore’s carbon pricing model, where the tax is levied at a fixed rate per tonne of CO₂ equivalent on Scope 1 emissions once a facility exceeds a defined threshold. For reference, Singapore’s carbon tax, implemented on 1 Jan 2019 at S$5/tCO₂e for facilities emitting ≥25,000 tCO₂e annually, was raised to S$25 in 2024–2025, and will increase further to S$45 in 2026–2027, and S$50–80 by 2030.
Sector Impact. Within the power sector, coal and natural gas plants represent the dominant sources of Scope 1 emissions, and would therefore bear the brunt of any carbon tax implementation. Encouragingly, under the IBR framework, carbon tax should be fully passed through to consumers, consistent with global practice. This implies minimal direct earnings impact for regulated utilities. To illustrate the downside risk if pass-through is delayed or disallowed, we model a worst-case “no-pass-through” scenario below.
Impact on TENAGA. Assuming Scope 1 emissions of 38.75m tCO₂e (FY24 level) and a carbon-tax rate of RM15/tCO₂e, (deductible for tax purposes, in line with global precedent), applying the formula “Adjusted Core Profit = Core Profit - Carbon Tax X (1 - Effective Tax Rate)” implies an earnings impact of c.10% for FY26F (Figure 1 & 2). Each RM10/tCO₂e increase in carbon tax would reduce FY26F earnings by 6.5%, while every additional 2m tCO₂e emissions cuts earnings by about 0.5%.
Impact on MALAKOF. At 19.06m tCO₂e (FY24 level) and RM15/tCO₂e, the carbon tax would erase nearly all profits, implying a c.81% earnings impact for FY26F (Figure 3 & 4). Each RM10/tCO₂e increase in carbon tax reduces earnings by 54.2%, and every 2m tCO₂e rise in emissions drags earnings by 8.5%.
Impact on PETGAS. Given that power generation is not the core business of PETGAS, the Group’s direct Scope 1 emissions are considerably lower, resulting in a minor carbon tax exposure relative to TENAGA and MALAKOF. At 6.07m tCO₂e (FY24 level) and RM15/tCO₂e, the carbon tax would imply a c.4% earnings impact for FY26F (Figure 5 & 6). Each RM10/tCO₂e increase in carbon tax reduces earnings by 2.5%, and every 2m tCO₂e rise in emissions lowers earnings by 1.2%.
Estimated 1 sen/kWh Tariff Impact. Based on 2022 grid emission factor of 0.774 tCO₂/MWh, a RM15/tCO₂e carbon tax translates to an incremental electricity cost of c.1.2 sen/kWh, equivalent to 2.6% of the current 45.4 sen/kWh base tariff. This assumes uniform cost sharing and full pass-through to consumers.
Minimal Direct Impact on Power Producers. We expect the proposed carbon tax to be earnings-neutral for utilities, as costs are likely to be incorporated into the IBR pass-through mechanism. To mitigate political backlash, we think domestic and low-usage consumers will likely be exempted or subsidised. Under a no-pass-through scenario, we estimate FY26F earnings impact of -10% for TENAGA, -81% for MALAKOF, and -4% for PETGAS.
Maintain Overweight. We maintain an Overweight stance on the Power & Utilities sector. The proposed carbon tax should be earnings-neutral in practice. Our top pick is TENAGA (BUY, TP: RM15.77), as we believe the market continues to price in zero Investment Tax Allowance (ITA) claims under Schedule 7B, with any successful claim acting as a major re-rating catalyst.
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