Jurnal Kejuruteraan SI 1(6) 2018: 59-69http://dx.doi.org/10.17576/jkukm-2018-si1(6)-08

Reducing Carbon Dioxide Emissions from Malaysian Power Sector: Current Issuesand Future Directions

(Mengurangkan Pengeluaran Karbon Dioksida dalam Sektor Tenaga di Malaysia: Isu Semasa dan Arah Masa Hadapan)

Kazeem Alasinrin Babatundea,b,*, Fathin Faizah Saida , Nor Ghani Md Nora

aSchool of Economics, Faculty of Economics and Management, Universiti Kebangsaan Malaysia,Bangi, MalaysiabDepartment of Economics, College of Management Sciences, Al-Hikmah University, Ilorin, Nigeria

Rawshan Ara Begumc

cCenter for Water Cycle, Marine Environment and Disaster Management (CWMD), Kumamoto University, Japan

ABSTRACT

Malaysia’s power generation mix has always been highly reliance on fossil fuels, mainly from natural gas and coal, with the latter expected to grow from 48% in 2015 to 66% of the overall generation by 2023. Meanwhile, there are growing concerns over the increasing share of coal in the generation mix given its enormous emissions potential and energy security in the future. Electricity generation is responsible for the largest share of GHG emissions in Malaysia As the country pursue to become a high-income economy by 2020, increasing energy demand puts pressure on the government to choose cheaper energy sources when renewable energies become too costly. To date, progress in analysing the current situation and identifying effective emissions reduction strategies in the power sector has been very slow. Current government policy is channelled towards resource diversity and energy security without articulating sufficient emissions reduction targets and measures for the sector. The purpose of this study is to characterise the current issues related to CO2 emissions reduction strategies in the power sector, identify promising mitigation measures based on the experiences from other countries and the contemporary research outcomes, and note limitations and emergent policy issues. Achieving 45% CO2 emissions reduction target by 2030 along with high-income economic goal pose unique and enormous challenges for the Malaysia's economy. For these to be achieved, improving electricity generation efficiency in thermal power plants and implementing a group of emission abatement measures such as emissions trading scheme for efficient decarbonization of the power sector are inevitable.

Keywords: Electricity production; CO2 emissions; reduction target; decarbonization; climate change

ABSTRAK

Penjanaan kuasa tenaga di Malaysia amat bergantung kepada sumber fosil terutamanya gas asli dan arang batu, di mana ia dijangka meningkat daripada 48% pada tahun 2015 kepada 66% pada tahun 2023 bagi keseluruhan penjanaan kuasa elektrik. Selain itu, terdapat juga peningkat dalam nisbah arang batu kepada campuran sumber penjanaan yang meningkatkan potensi pengeluaran pencemaran dan sekuriti tenaga dalam masa hadapan. Penjanaan elektrik menyumbangkan sebahagian besar kepada kesan pengeluaran gas rumah hijau (GHG) di Malaysia. Matlamat Malaysia untuk mencapai sasaran negara berpendapatan tinggi pada 2020, permintaan tenaga yang tinggi memberi tekanan kepada kerajaan untuk memilih sumber tenaga yang murah disebabkan tenaga boleh ubah lebih berkos tinggi. Sehingga kini, progres menganalisis keadaan semasa dan menentukan keberkesanan strategi pengurangan pengeluaran pencemaran udara adalah amat rendah. Dasar kerajaan kini lebih mengamalkan diversiti sumber dan sekuriti tenaga tanpa menekankan sasaran dan pengukuran pengurangan pengeluaran pencemaran yang mencukupi. Tujuan kajian ini adalah adalah untuk membincangkan isu semasa yang berkaitan dengan strategi pengurangan pengeluaran CO2 dalam sektor tenaga, menentukan dasar pengukuran pengurangan pencemaran berdasarkan pengalaman dari negara lain dan keputusan penyelidikan, dan menentukan had dan isu dasar yang penting. Dalam ingin mencapai 45% sasaran pengurangan pencemaran pada tahun 2030 sejajar dengan sasaran ekonomi berpendapatan tinggi memberikan cabaran besar dan unik bagi ekonomi Malaysia. Bagi mencapai sasaran ini, memperbaiki kecekapan penjanaan elektrik dalam sumber jana tenaga dan membentuk pengukuran pengurangan pengeluaran pencemaran seperti skim dagangan pengeluaran pencemaran lebih cekap untuk mengurangkan kesan pengeluaran pencemaran udara di sektor tenaga adalah amat penting.

Kata kekunci: Pengeluaran elektrik; pengeluaran CO2; sasaran pengurangan; pengurangan pencemaran; perubahan iklim

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INTRODUCTION

Electric power systems are evolving around the world from highly regulated monopoly (vertically integrated) structures to liberalized structures that enhance competitions among producers and offer consumers with freedom of choice of services (North et al. 2002). The deregulation of the distribution, transmission and most importantly generating sections, as part of the ongoing evolution, offer opportunities for new players in the sector. Economics teaches that this will if market forces work optimally generate improved efficiency expressed in term of higher quality products and services at reduced retail prices (North et al. 2002). In Malaysia, electricity sector has been partially liberalized and termed quasi-competitive one by Ahmad & Tahar (2014).

Sustainable generation and consumption of electricity are sources of intense debates among climate change experts, due to a number of scientific research findings that conventional, CO2 emitting power systems are not economically and environmentally sustainable (Oyeniran & Babatunde 2015; Shah et al. 2013). The threat of natural resource depletion (oil, gas and coal) (Ahmad & Ali 1999; Othman & Jafari 2012) and climate change (Pin et al. 2013; Tukimat et al. 2018) has made the energy transition an urgent priority. Malaysia’s electric power generation mix has always been highly reliance on fossil fuels, mainly from natural gas and coal, with the latter expected to grow from 48% in 2015 to 66% of the overall generation by 2023 (Figure 1).

China, which exposes her to international coal supply fluctuation due to climate change policies from coal exporting countries (APEC 2009), adding motivation for Malaysia to decarbonise her electricity sector by shifting its generation to alternative energy resources.

FIGURE 1. Approved electricity generation mix (Energy Commision 2016)

Meanwhile, there are growing concerns over the increasing share of coal in the generation mix given its enormous emissions potential and energy security in the future. Based on the production level in 2005, It is projected that Malaysia could only sustain current production of natural gas for about 22 years from now (APEC 2006). Coal deposits, on the other hand, are substantial in Malaysia with 1,843 Mtoe in 2006 of which only 1% came from peninsular Malaysia, 16% from Sabah and 83% from Sarawak. However, this structure and extraction cost have made domestic coal production a mere dream (APEC 2009). At present, Malaysia imports coal from Indonesia, Australia, South Africa and

FIGURE 2. Sources of CO2 emissions by sectors in Malaysia (IEA 2007)

According to the Ministry of Natural Resources and Environment (2015) CO2 accounted for 73%, 76%, and 72 % of the total greenhouse gas emissions in 2000, 2005, and 2011 respectively. Methane (CH4) emissions stood at 23%, 20%, and 23% for the same years. Nitrous oxide had only increased from 4% to 5% between 2000 and 2011. NRE (2015) also reports that 55 percent of total CO2 emissions in 2011 were generated from energy industries, followed by transport with a share of 21%, manufacturing and construction industries ranked the third largest carbon dioxide emissions contributor at 11%. Electricity sector, however, remains the largest source of CO2 emissions at 46% as of 2013 (Figure 2). It is, therefore, evident that carbon dioxide is the most significant anthropogenic greenhouse gas emissions, as the largest CO2 was emitted by electricity production. Not surprisingly, the carbon intensity of the electricity production in Malaysia between 1990 and 2013 has increased, as the world average carbon intensity decreases (IEA 2007).

Recent studies have also revealed that carbon dioxide emissions will continue to increase as long as Malaysian economy grows (Azlina & Mustapha 2012; Begum et al. 2015; Saboori et al. 2012), unless there is a shift in the development paradigm of “grow first, clean up later” towards a greener and sustainable development paths. Hence, fossil-fuel combustion remains a major source of CO2 emissions to sift when considering the transition to a low-carbon economy, resource-efficient growth path (Yahoo 2016). Admittedly, Malaysia is projected to be a net energy importer by 2040

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due to its growing demand for coal in the electricity sector and oil in both transport and industry (APEC 2009).

Noticeable efforts to ensure environmental sustainability in Malaysia started with the adoption of the Environment Quality Act (EQA) in 1974 which provides the legal basis for the protection and control of environmental pollution and the enhancement of environmental quality (Hezri 2011; Kadir 2008). Since then, environmental sustainability has been consistently addressed in Malaysia’s development plans starting from the 3rd Malaysia Plan (1976-1980) up to the present 11th Malaysia Plan (2016-2020). One of the main policy thrust of the current Malaysian national plan is on ‘Green Growth for Sustainability and Resilience’(Ministry of Natural Resources and Environment 2015).

Despite these government efforts, electricity generation still contributes the largest share to the greenhouse gas emissions in Malaysia. As the country pursue to become a high-income economy by 2020, increasing energy demand puts pressure on the government to choose cheaper energy sources when renewable energy sources become too costly. To date, progress in analysing the current situation and identifying effective emissions reduction strategies in the power sector has been very slow (Babatunde et al. 2017). Current government policy is channelled towards resource diversity and energy security without articulating sufficient emissions reduction targets and measures for the sector. The purpose of this study is to characterise the current issues related to CO2 emissions reduction strategies in the power sector, identify promising mitigation measures based on the experiences from other countries and the contemporary research outcomes, and note limitations and emergent policy issues.

MALAYSIAN ELECTRICITY SECTOR (MES)

The electricity sector works in a direct model of transforming energy inputs into electricity. Before the liberalisation period, Malaysia’s electric power industry was owned and managed by the state (vertically integrated). Due to the complex electric power structure, operation and huge sunk and

FIGURE 3. Electricity production networks in Malaysia

FIGURE 4. Distribution of installed capacity in Malaysia (KeTTHA, 2015)

FIGURE 5. The structure of the peninsular Malaysia electricity industry (Energy Commission 2010)

fixed costs implication, many predominantly believed that electricity utility is a natural monopoly in the electric power market across the world (See & Coelli 2013, 2014). Figure 3 reveals how energy resources are transformed into electrical energy and get connected via a national grid system called transmission, which will eventually be transported through a distribution network to various end users such as industrial, commercial and domestic electricity users (AWER 2011).

The Malaysia’s power sector has been vertically integrated and monopolized since 1949. The corporatization of the National Electricity Board (NEB) was instituted in 1990 and consequently privatized into Tenaga Nasional Berhad (TNB) two years after.

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As a result of massive power failure of 1992, TNB monopoly in electricity generation was broken by allowing Independent Power Producers (IPPs) for the first time to enter into the generation of electricity but only to be sold to TNB at a fixed rate based on Power Purchase Agreement (PPA) for the period of 21 years.

Currently, there are three key players; Tenaga Nasional Berhad (TNB), Sarawak Electricity Supply Corp (SEB) and Sabah Electricity Sdn. Bhd (SESB). However, the ownership and control of transmission and distribution system remain the same. Thus TNB still owns and manages these power business functions in the Peninsular Malaysia (See & Coelli 2014). As of September 2015, Malaysia‘s total installed capacity stood at 26,768 MW; the geographical distribution of which is shown in Figure 4 Peninsular maintain the largest share of about 80.8% of the total installed capacity, followed by Sarawak at 13.6% and Sabah at 5.6% (Figure 4).

To sum it up, Malaysia’s Electricity sector used a single buyer model and the industry structure is divided into three parts, namely distribution and supply, transmission, and generation. Figure 5 shows this structure in Peninsular Malaysia, where there are only three key generating entities: co-generators, independent power producers (IPPs) and Tenaga Nasional Berhad (TNB) whose is in full control of the transmission and distribution activities. Electricity portfolio for Sabah and Peninsular Malaysia is controlled and managed by the Ministry of Energy, Green Technology and Water (KeTTHA) with the assistance of Energy Commission in the regulation of the industry along with end users. However, the industry is faced with different organization chart where the Ministry of Public Utilities is in charge of policy development and regulation of the sector from generation (IPPs and Sarawak Energy Berhad (SEB)) to the usage sector (AWER 2011).

Figure 6 shows that the contribution of the coal in the electricity generation is far more than its share of the total installed capacity. Due to cost implications and supply shortage, many natural gas fueled plants accounted for in the capacity are not, in reality generating power. With the introduction of FIT in 2011, there has been an observable growth within the renewable sector (see Figure 7). Electricity generation from renewable energies increased noticeably from 2012 to 2017 but only represented 0.8% of all power.

Owing to the rising demand for electricity and dwindling energy resources in Malaysia, there will be future energy challenges (Mannhart 2014). According to International Energy Agency (2015), the demand for electricity will continue to rise in Malaysia because electricity is seen as a social good that is key to economic growth and more specifically to poverty alleviation (ISIS 2014). Due to the fossil fuel combustions to generate the required electricity, the carbon dioxide emissions related to the electricity production will keep on growing in the near future in Malaysia unless the industry moves toward energy transition (Mannhart 2014).

FIGURE 6. Comparison of installed capacity and electricity generation by fuel types in Malaysia

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FIGURE 7. Electricity generation from renewable sources under the FiT (SEDA 2017)

ThE KEY ENERgY INSTITuTIONS

There are several government institutions that are in charge of energy sector regulation and energy policy formulation in Malaysia. The energy division of the Economic Planning Unit (EPU) is the apex energy planning institution responsible for setting and overseeing energy related policies and reports directly to the prime minister (Yatim et al. 2016). Next to EPU is the Ministry of Energy, Green Technology and Water (KeTTHA) that is concerned with the formulation and regulation of water, green technology, and energy sector with a kin interest in the electricity industry in Peninsular Malaysia and the state of Sabah (KeTTHA 2015). Another key institution in the energy sector is Energy Commission (EC) that was established in 2001 and is responsible for regulating the energy sector, specifically the electricity and piped gas industries in Peninsular Malaysia and Sabah (Energy Commission 2015). Malaysia Energy Center (MEC) which is now known as Malaysian Green Technology Corporation (GreenTech Malaysia) is another important institution set up by KeTTHA to promote the deployment of green technologies as one of the strategic policy tools towards carbon free economic development (KeTTHA 2009).

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CO2 EMISSIONS OF ELECTRICITY SECTOR

The energy mix in Southeast Asia countries is predominantly dominated by natural gas and coal with the exception of Lao PDR, Myanmar, and Cambodia where hydro dominated their generation mix. Southeast Asian members including Malaysia are turning towards coal in order to ensure electricity security through technology and fuel diversity albeit environmental considerations.

Figure 8 reveals the energy mix for electricity generation in 2014 for Southeast Asian member countries and Figure 9 presents the corresponding carbon intensity of their respective electricity sectors. While the intensities of Indonesian and Malaysian power sectors remain in excess of 600 gCO/kWh, reliance on hydro power has allowed a country like Lao PDR to keep her carbon intensity at zero (here we assume that carbon intensity of renewable energy including hydropower is zero).

Malaysia is at a critical stage of becoming a fully developed in less than three years to go and the demand for electricity increases sporadically. Electricity generation reached 25,154 MW, 5,016 MW and 2,414 MW in Peninsular, Sarawak and Sabah in 2015 respectively, making the electrification rate at 99% (Energy Commission 2017). Meanwhile, about 85% of electricity in Malaysia is generated via fossil fuel (Figure 6). Therefore, the demand for electricity orchestrated by higher economic performance and urbanization was the largest contributor of the CO2 emissions in the country (Begum et al. 2017; Begum et al. 2015). The CO2 emissions from electricity generation increased by 344.7% from 12.8 Mt in 2005 to 220.5 Mt in 2014 (Figure 10).

The electricity generation sector, as an essential service industry, is saddled with the responsibility of ensuring safe, stable and sufficient power supply. Sustainable development is still the primary policy thrust of the current Malaysian national plan, so effective mitigation measures should be channelled towards reducing emissions, under the premise of fuelling the social and economic development. With the introduction of FIT in 2011, there has been an observable growth within the renewable sector. Power generation from renewable energies increased noticeably from 2012 to 2017 (Figure 7). Although some achievements have been recorded in mitigating CO2 emissions, a comparatively huge gap from the renewable energy target and energy efficiency targets still exists. Therefore, workable policy toolkit for reducing CO2 emissions from electricity sector should be identified and explored with a few of realistic energy decarbonization in Malaysia.

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FIGURE 8. Energy mix for southeast asian countries in 2014 (IEA 2016b)

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FIGURE 9. Carbon intensity of electricity sector in southeast asian countries in 2014 (IEA 2016a)

FIGURE 10. CO2 Emissions from fuel combustion (IEA 2016a)

CO2 MITIgATION MEASuRES OF ELECTRICITY SECTOR

The high electrification rate achieved over the last decade might have accelerated the economic growth in Malaysia, its environmental consequences have never gone unnoticed. Electricity production leads to CO2 emissions. Given Malaysian power plants high share of total emissions, electricity sector remains an important sector for active emissions reduction options such as demand management,

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fuel switching, innovation and investment in greener technology. In this study, we focus on energy efficiency and investment on greener power generating infrastructure to reduce carbon dioxide emissions in Malaysia.

DEMAND-SIDE MANAGEMENT

That human-related activity sparking global warming is well beyond scientific misunderstanding. hence, energy demand management is probably the most cost-effective way of reducing CO2 emissions in power sector. Because the electricity we consume is primarily generated from fossil fuels, reduction in electricity demand directly translates into reduced CO2 emissions.

Due to a persistent economic boom laced with higher population surge and urbanization, electricity consumption has been on the increase in all parts of Malaysia (Figure 11). Electricity demand will almost double its current level and is projected to increase by 4.2% per year until 2040. In addition, the low elasticity of demand for electricity observed in Malaysia among other factors reveals that the potential of electricity demand management alone is limited compared to the intended nationally determined contribution (INDC) pledges.

increase the adverse effects of generating electricity with fossil fuels. The global average efficiency of coal power plants, for instance, is around 33% which is much lower than the 45% of modern ultra-supercritical coal plants (IEA 2014). Aside from energy efficiency from demand-side management, there is a need for an upgrade of the existing plants. Relative success has been achieved in this respect when a total of 2,825.5MW new plants entered the national grid in 2016. In addition, TNB Manjung five (M5) plant, an ultra-supercritical technology, is on track to be commissioned by October 2017 making TNB’s coal power generation capacity a quarter of Peninsular Malaysia’s installed capacity, amounting to nearly 5,000MW(Energy Commission 2017).

LOw CARbON TEChNOLOgY

To fulfil our future energy demand in an affordable and a low carbon path, innovation across different technologies is indispensable. However, investment and innovation in research, development and demonstration (RD&D) has been hindered in the power sector. Such that most of the current technologies in power generation, transmission and distribution were invented a century ago. The RD&D intensity of electricity is very small compared with another innovative sector, such as pharmaceuticals and biotechnology, software and computer, hardware and equipment. Hence, there are two fundamental market failures (i.e., rear excludability of other companies from ground-breaking innovation from individual companies and externality nature of greenhouse gas) in the RD&D of low carbon technologies which have led to gross underinvestment in electricity innovation and provided justification for government interventions.

Investment in a clean energy, carbon-free technologies and the extension of the existing plants with Carbon capture and storage (CCS) (Madzaki et al. 2018) are essential options to address climate change. They can help mitigate CO2 emissions from electricity generation from fossil fuels. Despite the emission reduction potential of CCS, no single CCS project has been undertaken in Malaysia except the scoping study that was carried out in 2010. To overcome the problem of mispricing of fossil fuel due to externality, the government may impose a carbon tax or introduce an emission trading scheme that reflects the environmental cost more adequately. Electricity producers make investment decisions under aforementioned policy uncertainty, volatile fuel prices, unpredictable competitor reactions and uncertain technological development. In this study, the main option for CO2 reduction is an investment by power companies with their investment behaviour increasingly difficult to predict.

FUEL SWITCHING

Natural gas emits the lowest carbon dioxide per unit of electricity generated by all fossil fuels at around 14 carbon/GJ compared to others such as oil at 20 carbon/GJ and coal at about 25 kg carbon/GJ. Increasing the share of natural gas remains critical to CO2 emissions reduction because coal

FIGURE 11. Maximum electricity demand (MW)

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SuPPLY-SIdE MEASuRES

Fossil fuels played a significant role in supporting the growing electricity demand in Malaysia. Nearly all the emissions from electricity generation have been due to the use of coal, oil and natural gas. Based on the current generation mix, the CO2 mitigating policy responses can be grouped into three categories.

EFFICIENCY IN ThERMAL POwER

In light of rising share of coal in the fuel mix, and that it currently generates, on average, greater CO2 emissions per unit of electricity produced, the need for improved efficiency is undeniable. The relatively low efficiency of much of the existing stock of Malaysia’s thermal power plants significantly

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releases more than twice the amount of CO2 than natural gas for the same power generated (Table 1).

TABLE 1. Greenhouse gas emissions per kwh by generating technology

Generation technology Source G CO2/kWhe

Coal Combustion 900Natural Gas Combustion 400Photovoltaic Construction 100-200Wind Construction 10-30Hydro Construction 18Nuclear Uranium enrichment 4

Generating electricity from fuels with less carbon content and renewable is promising ways to address climate change (ASM 2015). That is the so-called fuel-switching phenomenon. For instance, the sources of electricity generation are categorized into three: non-renewable (oil, coal, mineral, gas), renewables (such as solar, wind, geothermal, biomass hydro-power) and nuclear source.

Figure 12 affirms our earlier argument that electricity production from fossil fuels worsen the condition of our climate more than when using renewables or nuclear energy. However, technical barriers limit the switching of fuels at the

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FIGURE 12. GHG emissions from different types of electricity generation (WNA 2011)

TABLE 2. Policy options for CO2 reduction

Policy Price Volume of Allocation of Region/Country of Implementation Instruments Emissions Emissions

Cap-and-Trade Market-Based Capped Grandfathering or EU, EEA, Switzerland, Kazakhstan, Auctioning South Korea, Australia, New Zealand, China (Pilot), California & QuebecCarbon Tax Set by Government Not Known Can Shift between Finland, Germany, Denmark, France, Ireland, Netherlands, Sweden, UK, Switzerland, USA, Canada, Costa Rica, Australia, New Zealand, Taiwan, South Korean, Japan, India, China, Zimbabwe and South Africa.Performance- Market-Based Not Known Benchmarking & NilStandard-Rate PerformanceFeed-in-Tariff Subsidize Production Not Known Per Source More than 80 countries around the world now use or have used feed-in tariffsCommand and No price Regulated Per Source Per Source Not for CO2Control

individual plants, especially in developing countries where power plant designs differ very greatly. This among other things has made switching from coal to, for example, natural gas and other fuel types in an existing plant economically unattractive. Thus, the potential of emission reduction from this option is limited.

EXPLORINg ThE POLICY OPTIONS FOR CO2 EMISSIONS REDUCTION

Reducing emissions from power generation will require redirecting investments from dirty energy source to cleaner energy supply along with an additional spending on energy efficiency. while investment decisions may not significantly address short-term emissions, they are very crucial to long-term power decarburization. As argued above, the market will not bring about these investments by “itself”; policy measures

are inevitable to reduce or remove market inefficiencies. The real cause of these inefficiencies is the fact that emissions are priceless in the market. To address these obstacles efficiently and effectively, governments across the globe have applied a myriad of policies that are essential for a timely transition to a low-carbon power generation (see Table 2). To these ends, three types of policies are identified: direct intervention, price/quantity mechanism and subsidy-based option.

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DIRECT INTERVENTION

The use of direct intervention measures or Command-and control (CAC) regulations; such as performance standard or absolute emission limits instruments impose regulations for emission reduction and technological standards (Yahoo & Othman 2017). While direct intervention measures were successful in regulating greenhouse gases from previously unregulated firms, a few decades after implementation, CAC regulations are now viewed as economically oppressive (Austin 1999). Although direct intervention measures are still prevalent in the world, there has been rising interest in market-based instruments since a ban on CO2 is very unlikely (Chappin 2011).

PRICE/QuANTITY bASEd MEChANISM

The key theoretical campaign for carbon pricing which includes “cap and trade” and carbon taxes is its high potential to achieve CO2 emissions reductions at lower cost effective

means than achievable under either performance standard nor mandated technologies as a direct intervention (Lawrence et al. 2013). The carbon price permeates throughout the economy and permits firms and households, rather than the government, to select their best carbon abatement options. Economists have persistently argued that pricing a carbon, either through a carbon tax (price mechanism) or emissions trading (quantity based instrument), is the most economically efficient means of mitigating greenhouse gas emissions (Climate Group, 2013; Morris 2016). For illustrative purpose, emission trading scheme offers electricity producers that are facing marginal abatement cost the opportunity to buy CO2 emissions right from producers with lower costs. As a result, the scheme is expected to achieve mitigation goal at lower abatement costs compared to command and control instruments(Gabriel et al. 2012). Since each individual electricity company is afforded the flexibility to opt for least cost of achieving emissions reduction target, investment in low-carbon technology would inevitably flow through cost effective means (Lawrence et al. 2013).

TABLE 3. Carbon trading vs carbon tax

Policy Price Emissions Simplicity Transparency Security International Certainty Certainty Linkage

Carbon Trading X XCarbon Tax X X X X Note: X means a relative advantage

There are two fundamental ways of establishing a carbon price based on which market instrumental variable we try to fix – quantity or price. First, a tax or charge or duty can be levied on carbon content (i.e. the direct or indirect carbon equivalent emissions caused the production of its inputs and itself). Here, carbon tax regulates the CO2 price and allows the quantity to fluctuate (Othman & Yahoo 2014).

Second, a quota system can be established where the total level of emissions under the quotas is equated to the national emissions target and individual quotas are tradeable – emissions trading scheme. under this scheme, the amount of carbon emissions is fixed and its price is variable. The electricity sector is a classic example. Zhou et al. (2014), McKibbin et al. (2014) and Riesz et al. (2014) found that the optimal Chinese, American and Australian electricity portfolios made up of coal-fired generation primarily in the absence of a carbon price respectively. But, with a carbon price, the generation mix change with more share of cleaner generating facilities laced with low carbon emissions. However, if electricity price is market oriented it will vary progressively with carbon price and regressively with overall economic activity for the European countries (Richstein 2015), United States (Lanz & Rausch 2016), China (Zhou et al. 2014) and India (Gambhir et al. 2014).

Table 3 shows a number of additional differences between the two measures in respect to the simplicity of the establishment and implementation, transparency, security

and more importantly international linkage, implying that governments will always prefer the option and design that best suit their national and domestic circumstances (Bowen 2011; Morris 2016).

While there seems to be general agreement in the literature as to the potential benefits of carbon pricing, there is an unresolved debate over the particular form – cab and trade or carbon tax – is the best mitigation policy option. Economists offer a different perspective. For instance, Cong, & Wei (2010), Verma, & Kumar (2013) and Li & Tang (2016) favour emissions trading system, while Elliott et al. (2010), Benavides et al. (2015) prefer carbon tax. In sum, Goulder, & Schein (2013b) review existing literature and conclude that in principle carbon tax has a number of attraction over emissions trading scheme, but faced with practical hostility such as political hindrance.

SubSIdY-bASEd OPTION

Rather than the stick approach of the price and quantity based instruments, the subsidy-based mechanism offers a carrot when considering electricity from renewable energy sources (RES-E) by promoting activities that emit little or no CO2. Most widely used in this category is Feed-in Tariff (FiT) (Alizamir et al. 2016; Sambodo et al. 2017). According to Chua et al. (2011), a FiT scheme guarantees viable and long-term renewable investment for companies and even

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individual by assuring a favourable rate per unit of renewable energy generated and access to the national grid. FiTs have been successfully implemented across the world with its highest success recorded in Germany (Lecuyer & Quirion 2016), Spain (Schallenberg-Rodriguez 2014), and Denmark (Pyrgou et al. 2016) as a world torchbearer for the scheme. In the developing world, India has been making progress in renewable energy generation. From 2011, renewable energy installed capacity that stood at 18, 842 MW has increased to 31, 690 MW as of January 2015, partly because of the implementation of FiTs (GIZ 2015). China through FiT scheme has experienced similar trend within the last few year of implementation by achieving the largest installed capacity of RE across Asia-Pacific region and adding 15,000 MW of solar PV in 2015, up from 10,950 MW in 2013 (Zhang et al. 2017).

CONCLUSION

Achieving 45% CO2 emissions reduction target by 2030 along with high-income economic goal pose unique and enormous challenges for the Malaysia’s economy. As a signatory to the Paris Agreement on climate change which came into force in 2016, Malaysia has to devise cost effective low carbon pathways, especially in the electricity sector. The government has taken steps to increase shares of renewable energy in the national energy mix through policies such as FiT, Large Scale Solar PV (LSS) and Net Energy Metering (NEM) with many ambitious targets that are unlikely to be met due to past policy support lapses for renewables and absence of market for carbon dioxide emissions.

For example, low feed-in rates have led to boom and bust cycles that have discouraged the required investment uptake in renewable energy electricity generation. Therefore, CO2 emissions reduction from electricity generation requires concerted efforts not only from effective demand side management programmes and efficient fuel utilization but also by placing an economic burden on carbon intensive electricity generating technologies. Based on our analysis, this can be practically instituted in either of these ways: a carbon tax or an emissions trading scheme. Therefore, emissions trading scheme has been tipped for long-term emission reduction potential and relative public acceptability as against tax.

ACKNOWLEDGEMENT

The authors greatly ackowledged the financial support from Universiti Kebangsaan Malaysia under the grant GUP-2018-015.

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*Kazeem Alasinrin BabatundeSchool of Economics, Faculty of Economics and Management, Universiti Kebangsaan Malaysia, 43600 UKM Bangi, Selangor, Malaysia.

Department of Economics, Faculty of Management Sciences, Al-Hikmah University, Ilorin, Nigeria.

Fathin Faizah SaidSchool of Economics, Faculty of Economics and Management, Universiti Kebangsaan Malaysia, 43600 UKM Bangi, Selangor, Malaysia.

Nor Ghani Md NorSchool of Economics, Faculty of Economics and Management, Universiti Kebangsaan Malaysia, 43600 UKM Bangi, Selangor, Malaysia.

Rawshan Ara BegumCenter for Water Cycle, Marine Environment and Disaster Management (CWMD), Kumamoto University, 2-39-1 Kurokami, Chuo-ku, Kumamoto 860-8555, Japan.

*Corresponding author; Email: alasinrin@siswa.ukm.edu.my

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