Global trade is undergoing a structural shift. For decades, competitiveness was defined by price, quality and efficiency. Today, carbon is emerging as a new determinant. What was once treated as an environmental externality is now becoming a measurable and increasingly monetised cost.

According to the World Bank, around 80 carbon pricing instruments are now in operation globally, covering about 28 per cent of global greenhouse gas emissions. Carbon is no longer invisible. It is priced, tracked, and embedded into economic decision making.

For Malaysian exporters, this shift is no longer theoretical. It is already reshaping how global markets operate.

The rise of carbon border measures

The European Union’s Carbon Border Adjustment Mechanism, or CBAM, is a clear manifestation of this transition. It places a carbon price on imports such as iron and steel, aluminium, cement, fertilisers, electricity and hydrogen, aligning them with the carbon costs faced by producers within the EU.

While the objective is to prevent carbon leakage, the practical effect is the introduction of additional costs and compliance requirements for exporters. For Malaysian firms, particularly those in energy intensive sectors, CBAM represents a fundamental change in the rules of trade.

The EU remains an important market. It was Malaysia’s fourth largest trading partner in 2024, with total trade reaching approximately RM218.9 billion. As CBAM moves towards full implementation in 2026, its impact will become increasingly significant.

When emissions become a business cost

Carbon intensity is now directly linked to competitiveness. Products manufactured using emissions-intensive energy sources are likely to face higher costs when entering regulated markets. In effect, emissions are being translated into financial liabilities.

This presents a structural challenge for Malaysia. Although renewable energy capacity is expanding, the national energy mix remains dependent on fossil fuels. According to the International Energy Agency, coal and natural gas continue to dominate electricity generation.

As a result, even efficient manufacturers may be penalised due to the broader carbon profile of the energy system. The issue is no longer confined to firm level performance. It is systemic.

The measurement and compliance gap

Another critical challenge lies in carbon measurement. Exporters are increasingly required to measure, report, and verify their emissions across production processes and supply chains.

This is complex and resource intensive. Larger firms may be able to adapt, but for small and medium enterprises, the challenge is more fundamental. SMEs account for the vast majority of businesses in Malaysia, according to SME Corp Malaysia, yet many lack the technical capacity to undertake carbon accounting.

For these firms, the question is not just how to reduce emissions, but how to measure them credibly in the first place. Without support, there is a real risk of exclusion from markets that increasingly demand verifiable environmental data.

Beyond protectionism

CBAM is often viewed as a form of green protectionism, and there is some basis for this perception. By imposing carbon costs on imports, it levels the playing field for domestic producers in Europe.

However, it also reflects a broader shift in the global economy. Carbon is becoming embedded in trade rules, investment decisions, and supply chain requirements. As emphasised by the Intergovernmental Panel on Climate Change, limiting global warming requires rapid and deep emissions reductions across all sectors.

For exporters in developing economies, this creates tension. What is framed as climate policy at the global level can feel like a cost shock at the firm level.

Strengthening Malaysia’s response

Malaysia has outlined its transition through the National Energy Transition Roadmap. The challenge now lies in implementation.

A key priority is developing a robust system for measurement, reporting, and verification. Without credible carbon data, Malaysian firms risk being disadvantaged regardless of their actual performance.

Support for industry is equally critical. Transitioning to low carbon operations requires investment in technology, energy efficiency, and renewable energy access. Financial institutions, guided by frameworks introduced by Bank Negara Malaysia, are beginning to incorporate climate considerations into financing, but access must be expanded, particularly for SMEs.

At the same time, accelerating the energy transition is essential. The carbon competitiveness of exports depends heavily on the carbon intensity of the national grid. Expanding renewable energy and improving infrastructure will directly enhance Malaysia’s position in carbon sensitive markets.

Competing in a carbon constrained economy

CBAM is unlikely to remain an isolated policy. Similar measures are being considered globally, signalling the emergence of a carbon constrained economy where emissions performance shapes market access.

For Malaysia, this presents both risk and opportunity. Firms that delay adaptation may face rising costs and reduced competitiveness. Those that move early can position themselves as preferred suppliers in low carbon value chains.

Conclusion

The global economy is entering a new phase where carbon is no longer an externality. It is priced, scrutinised, and increasingly decisive.

For Malaysian exporters, the implication is clear. Carbon is now a core business variable. Adapting to this reality is not optional. It is essential for remaining competitive in the evolving landscape of global trade.

-- BERNAMA

Fairus Muhamad Darus is a Senior Lecturer with the Faculty of Applied Sciences, Universiti Teknologi MARA.