Fossil fuels subsidy rationalization and renewable energy initiatives in Malaysia: results from a CGE analysis

Abstract

The paper aims to analyse the economic and environmental impacts of Malaysia’s fossil fuel subsidy on GDP, electricity prices and output, external trade, sectoral outputs, employment, welfare, demand and price effects, and CO2 emissions. It further examines the Renewable Energy (RE) expansion policy. The study employs Computable General Equilibrium (CGE) model with a disaggregated electricity sector, tailored to Malaysia’s subsidy schemes by considering different types of fossil fuels and consumer categories. The recently published GTAP database is utilized as the base data source, with 2017 as the reference year. The study updates and extends the database to model policy simulations for two periods: 2017-2022 and 2023-2025. To prevent overestimation of energy transition costs, through modelling and database improvements, this study incorporates real data for natural gas subsidies, disaggregates electricity generation, transmission and distribution for power generation sector, and differentiates between production and consumption subsidies. This paper adds to the current literature by addressing empirical and methodological gaps through detailed energy sector disaggregation modelling and counterfactual policy impact evaluations. There is a trade-off between subsidized natural gas for power generation and export opportunities. Efficiency improvements from subsidy rationalization generate positive effects, although energy-intensive sectors experience a slight decline in their competitiveness. Policy implications suggest reviewing the adverse impacts of subsidy rationalization in favour of targeted subsidies. The study incorporates updated energy trade data for Malaysia, substitution possibilities between fossil fuels and RE, real natural gas subsidy values, disaggregated electricity generation mix (including transmission and distribution), and differentiation between production and consumption subsidies. The fossil fuel subsidy rationalization together with RE expansion, foster greater decarbonization. To better achieve the 2050 zero-emissions target, the government should phase out natural gas and coal subsidies and reinvest in solar power and biofuel development.