At a time when Malaysia must accelerate its climate transition, can we afford foreign and domestic policy shocks that destabilise our climate finance and green technology agenda?

The recent announcement by U.S. President Donald Trump to impose a sweeping 25% tariff on “any and all Malaysian products” starting Aug 1, 2025, has jolted Malaysia’s economy and, potentially, its entire energy transition trajectory.

This move not only threatens our US$80 billion annual trade relationship with the United States, but risks undercutting the financial and industrial scaffolding needed to meet our net-zero ambitions by 2050.

For a country that has pledged a 45% reduction in carbon intensity by 2030, this is not just an economic setback but also a stress test of our climate governance, resilience and readiness.

The potential impact is immense. Sectors like electrical and electronics (E&E), which comprise nearly 40% of our exports, stand particularly exposed.

With the Green Technology Master Plan relying heavily on E&E to drive decarbonised manufacturing, this development places our climate-linked industrial strategy in jeopardy.

At the same time, Malaysia’s expanded Sales and Service Tax (SST) which came into effect July 1, 2025 adds pressure from within.

Over 4,800 previously exempt items, including industrial equipment and low-emission machinery, are now taxed at 8%, up from the previous 6%. While the SST expansion is projected to yield RM3 billion in additional revenue, its timing couldn’t be worse.

FMM warning

The Federation of Malaysian Manufacturers (FMM) warns that these cascading tax burdens will inflate costs, shrink margins, and deter future investment especially in capital-intensive green infrastructure.

The National Energy Transition Roadmap (NETR), launched in 2023, sets ambitious targets: increasing renewable energy in the national mix to 70% by 2050, developing CCUS (Carbon Capture, Utilisation & Storage), and attracting RM435 billion in investment. But these goals rely on a strong private sector, foreign direct investment, and investor confidence.

Reduced export earnings due to tariffs, paired with higher domestic operating costs from the SST, could stall clean energy adoption, battery storage scaling, and smart grid investments.

Small and medium green-tech enterprises already navigating tight financing margins may pivot to survival mode, postponing R&D or abandoning green upgrades entirely.

This fiscal constriction directly threatens the creation of 23,000 green jobs forecast under NETR, and it risks reducing Malaysia’s contribution to global clean energy supply chains at a time when demand is rising.

On the other hand, Malaysia’s Voluntary Carbon Market (VCM), launched via the Bursa Carbon Exchange (BCX) in late 2022, was one of Southeast Asia’s most promising climate finance innovations.

With a projected market value of US$237 million by 2030, it was expected to fund reforestation, conservation, and industrial decarbonisation projects.

However, the VCM and the upcoming carbon tax and Emissions Trading Scheme (ETS) under the National Climate Change Bill (RUUPIN) are all sensitive to macroeconomic conditions.

Carbon governance mechanisms

Historically, economic downturns or trade disruptions often lead governments to delay carbon pricing reforms in the name of economic recovery. Malaysia is no exception.

Unless insulated, our carbon governance mechanisms may stall or regress under fiscal and political pressure just when they’re needed to drive long-term decarbonisation and attract green capital.

Climate change disproportionately affects the poorest and most vulnerable communities in Malaysia from coastal erosion in Sabah to urban flooding in KL. But so too will economic instability.

Tariff-related export losses could result in job cuts in key industrial areas, while SST inflation will raise living costs. When people are forced to choose between short-term survival and long-term sustainability, the environment always loses.

Without targeted support, our vision of a “just transition” risks becoming rhetorical. The RUUPIN framework, which emphasises equity and protection for vulnerable populations, must be backed by resilient fiscal policy and progressive social safety nets not sacrificed in budget cuts driven by external shocks.

In this regard, what can Malaysia do?

Firstly, Malaysia must demand clarity on the tariff scope and seek exclusions for clean technology, solar components, and environmental goods, aligning with WTO environmental exceptions.

Next, allocate funds from the new SST intake to fund VCM capacity-building, CCUS pilots, and green job retraining programmes. SST exemptions or rebates for low-emission equipment, energy-efficient machinery, and carbon audit services must also be provided to incentivise clean industrial investments.

Also, as the Chair of ASEAN this year, we also have an upper hand in using this moment to lead within ASEAN, pushing for regional carbon border adjustments and green mutual recognition agreements that support decarbonised exports.

Lastly, fast-track funding for climate policy education, especially in carbon markets, climate law, and environmental economics, to prepare the next generation of climate experts.

In conclusion, economic shocks will come and go. But the climate crisis is permanent and intensifying. As floods grow more frequent, air pollution worsens, and biodiversity collapses, the cost of inaction grows steeper each year.

Trade policy and tax policy must serve, not sabotage our climate goals. Malaysia must not retreat from climate ambition in the face of tariffs or taxes.

We must instead use these shocks to recalibrate our economic tools, reaffirm our global leadership in climate governance, and build a greener, more resilient Malaysia that doesn’t trade short-term relief for long-term collapse.

-- BERNAMA

Mogesh Sababathy is a Youth Climate Advocate and a National Consultative Panel Member to the Ministry of Natural Resources and Environmental Sustainability of Malaysia. He is also a PhD candidate at Universiti Putra Malaysia (UPM).