The Muamalat Newsletter Vol. 2 2023

FEM eNewsletter | Dec 2023 52 fostering the development of new technologies, and expanding an industrial base capable of creating jobs and competing in international markets (Moerenhout, 2022). Unfortunately, these subsidies often lead to excessive energy consumption and reduce incentives for improving energy efficiency or mitigating pollution and greenhouse gas emissions (Heine & Black, 2019). As a result, they have far-reaching consequences for the health of the energy sector, the affordability and quality of energy service delivery, government fiscal positions, and debt sustainability. They also impact people’s livelihoods and the competitiveness of businesses, worsen a country’s trade balance, strain government finances and macroeconomic stability, and exacerbate environmental issues (Flochel & Gooptu, 2017). Energy Subsidies in Malaysia Malaysia has provided energy subsidies to the public since 1983. In 2011, fuel subsidies accounted for over 10% of the government’s operating expenditure, representing 7.2% of GDP, higher than the global average of 2.7% (Clements et al., 2013; Ilias et al., 2012). In 2019, due to rising global crude oil prices, Malaysia saw a significant increase in operating expenditure, mainly attributed to fuel subsidies, totalling RM2.4 billion (Ministry of Finance, 2019). In 2022 the government spent more than RM28 billion on petrol, diesel, and liquefied petroleum gas subsidies. Additionally, over RM6.5 billion was allocated for electricity tariff subsidies to mitigate the impact of inflation (Bernama, 2022). These substantial subsidies pose a financial burden for Malaysia, especially as the country grapples with mounting debts and an economic slowdown. The projected amount of RM77.3 billion in subsidies for the future, equivalent to 9% of Malaysia’s gross domestic product, is deemed “dangerously high,” an optimal amount should be less than 2% of GDP (FMT Reporters, 2022). Despite targeting the vulnerable and low-income groups, a report by the former Minister of Finance, Tengku Zafrul Aziz, revealed that for every RM1 fuel subsidy, 53 cents benefit the T20 group. At the same time, only 15 cents reach the B40 group (FMT Reporters, 2022). With the introduction of carbon pricing policies in Malaysia, the government must review the energy subsidymechanisms to ensure they are more targeted and focused on assisting the vulnerable segments of the population. Reforming Energy Subsidies Achieving a sustainable and socially responsible reformation of energy subsidies necessitates a comprehensive understanding of economic, financial, social, and political factors. Subsidy reform redirects government expenditures toward less environmentally detrimental behaviours and internalises external costs, potentially freeing up substantial resources (Metcalf, 2017). Carbon pricing and changes in energy prices complement each other, enhancing policies that improve energy accessibility, service quality, and environmental sustainability (World Bank, 2015). Often, politicians are concerned about potential disruptions to societal harmony resulting from controversial subsidy changes. Governments may worry that eliminating subsidies could increase prices for essentials like energy and heating. However, they can mitigate these risks with policies that minimise social impacts, such as transitional assistance programs and progressive energy tariffs. Inflation is another concern, exemplified by Iran, where inflation surged after subsidy reform (OECD, 2013). The experiences of Indonesia and Iran have illustrated three fundamental aspects of successfully implementing subsidy reform. First, getting the energy price right involves gradually phasing out subsidies consistently and systematically. Second, mitigating the consequences of change requires a thorough analysis and careful implementation, especially regarding vulnerable populations and international competitiveness. Third, garnering support for reform necessitates implementing long-term and comprehensive reform programs (Caody et al., 2015). One of the most significant challenges for policymakers is the potential opposition from political parties, lobby groups, and key stakeholders. To achieve the desired reform, policymakers can employ inter-ministerial approaches, strong leadership, and stakeholder participation and maintain transparent and open communication with the public to create an enabling environment for reform. Recently, many countries have capitalised on low global oil prices to address consumer price subsidies in the energy sector. The significant voluntary commitments made by governments in Paris to combat climate change have also brought attention to the concerns regarding greenhouse gas emissions resulting from the