Market-Based Instruments for Environmental Protection: Piloting Presumptive Charge and Emissions Trading in Malaysian Smis1

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The Government advocates expanded use of market-based instruments (MBIs) in high-level planning, including the Seventh and Eighth Malaysia Plans and the National Economic Recovery Plan. The palm oil and rubber mills effluent charge system implemented in 1978 in Malaysia was one of the first (MBIs) in the world that is still functioning today. Another successful use of MBIs for other environmental problems has been limited to the differential pricing on leaded and unleaded petrol, introduced in 1994. User fees charged by treatment facilities for scheduled waste (Kualiti Alam) and centralized wastewater treatment plants at industrial estates (e.g., Bukit Kemuning) can be regarded as recent examples of MBIs. Malaysian documents often refer to all economic instruments as MBIs. Our paper first clarifies the differences between MBIs and other environment-related economic instruments, such as the fiscal and financial incentives. We also highlight the differences between MBIs and "command and control" (CAC) approaches. We review previous studies and reports on Malaysia's experience in the use of MBIs, and finally, assess the feasibility of introducing two new promising MBIs: a presumptive charge on input material containing toxic or hazardous substances for the textiles industry, and an emissions trading system for BOD for food processing industries.


Malaysia was one of the first few countries in the world to implement market-based instruments (MBIs) for environmental protection when, in 1978, it introduced charges on effluent from palm oil and rubber mills. This effluent charge system is still functioning today, more than twenty-five years later. Despite this pioneering effort, Malaysia has made little use of MBIs for addressing other environmental problems, except for the differential pricing of leaded and unleaded petrol that was introduced in 1994. However, neither the agro-based effluent charges nor the differential pricing of petrol represent pure applications of MBIs; in both cases, command elements were also important. User fees charged by treatment facilities for scheduled waste (Kualiti Alam) and centralized wastewater treatment plants at industrial estates (e.g., Bukit Kemuning) can be regarded as recent examples of MBIs. In some ways, these user fees are more "market-based" than the earlier examples because they involve transactions between private parties.

The Government has advocated expanded use of MBIs in high-level planning documents issued both before, during and after the financial crisis. The Seventh Malaysia Plan 1996-2000 and the Eighth Malaysia Plan 2001-2005 made several references to MBIs:

* "In order to further substantiate efforts to promote sustainable development, innovative economic mechanisms will be instituted to supplement legislative and enforcement means to encourage the private sector to adopt and develop environmentally-sound technologies." (7MP: p. 589)

* "This legal and regulatory framework [i.e., the Environmental Quality Act and associated regulations] will be complemented by the use of innovative economic and tax instruments such as presumptive charges which collect payment based on presumed annual total pollution discharge, forest taxes based on impacts of different types of activities, pollution charges based on levels of compliance. ..." (7MP: p. 606)

* "... the imposition of fees will be considered for wastewater discharge." (7MP: p. 608)

* "Efforts will also be channeled at promoting environmental performance measurements and market-based instruments as well as engaging communities in addressing environmental and natural resource issues." (8MP: p 539)

* "... increasing the use of fiscal policy in pursuit of environmental objectives and promoting the use of appropriate market-based instruments and self-regulatory measures among industries.... (8MP: p.549)

The National Economic Recovery Plan (NERP), issued in August 1998 endorsed MBIs as medium- and longer-term measures for reducing environmental degradation in the country, recommending "that an economic approach, via the usage of economic or market based instruments, be used in addressing environmental and resource issues" (pp. …


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