| Summary: | Environmental pollution is an emerging issue in many developing countries and its mitigation is
increasingly being integrated into national development policies. One approach to mitigate the problem is
by implement pollution control policies in the form of pollution tax or clean technology incentives. Empirical
studies for developed countries reveal that imposition of a carbon tax would decrease CO2 emissions
significantly and do not dramatically reduce economic growth. However, the same result may not apply for
small-open developing countries such as Malaysia. The objective of this study is to quantify the impact of
pollution tax on the Malaysian economy under the backdrop of trade liberalization. To examine the economic
impact and effectiveness of carbon tax, a single-country, static Computable General Equilibrium model for
Malaysia is constructed. The model is extended to incorporate output-specific carbon tax elements. Three
simulations were carried out using a Malaysian 2000 Social Accounting Matrix. The first simulation examines the impact of halving the baseline tariff and export duty while the second solely focused on the impact of output-specific carbon tax. The third simulation combines both former scenarios. The model results indicate that the Malaysian economy is not sensitive to further liberalization. The reason could be attributed to the fact that Malaysian export duty is already low. Additionally, simulation results also indicate that while imposition of carbon tax reduces carbon emission, it also results in lower GDP and trade.
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