Budget 2021: Will Malaysia keep up with the Global Green Economy Transition?

By Alizan Mahadi and Darshan Joshi

Joe Biden is set to become the next president of the United States of America, and many analysts have predicted that 2021 will see an acceleration in the global transition towards a green economy. With climate change one of his priority areas, Biden is aiming to rejoin the Paris Climate Agreement on his first day in office, and with that, the USA will join the European Union, South Korea, and a growing number of other nations in targeting a green recovery from the COVID-19 pandemic.

The green transition, led by some of the largest economies of the world, will likely result in disrupting the global supply chain and altering geopolitical dynamics. Imagine, for example, a carbon tax being implemented in major importing countries. Companies with carbon-intensive operations will not be competitive in such a future. Geopolitically, while the peak oil argument has been and still is hotly debated, COVID-19 has seemingly accelerated the decline of the fossil fuel industry. If so, it will adversely affect oil producing countries, particularly those which have not significantly diversified into other sectors.

As both a trading nation and an oil exporting country, what does the future hold for Malaysia in terms of our own transition to a green economy? Budget 2021 provides some clues on if and how Malaysia aims to make this transition.

Budget 2021 has an explicit focus on environmental sustainability. In particular, strategy four, under the economic resilience goal focuses on ensuring resource sustainability. 

Significantly, Budget 2021 has also made steps to align itself to the Sustainable Development Goals (SDGs). While it is unclear how, and to what degree this budget aligns to the 17 Goals and 169 targets of the SDGs, coherence with the SDGs should mean that the budget ensures that all measures either reinforce the means to achieve the SDGs or that they do not conflict with achieving any of the goals and targets across its entire spectrum. This is in line with, for example, the principle of ‘do no harm’ that is applied by some countries in their budgets or recovery plans.

The focus on inclusiveness, environmental sustainability and leaving no one behind demonstrates that the budget is, indeed, coherent with the SDGs. Nonetheless, certain measures such as the allocation for a revolving RM500mil fund for the Forest Plantation Development Loan programme may pose threats to biodiversity and forest protection if not managed sustainably.

Nonetheless, and more directly, a strong focus on implementing the SDGs is also reflected in the establishment of the MySDG Trust fund with an initial allocation of RM20mil. This doubles the previous RM10mil allocation for an SDG fund in Budget 2020. 

Similarly, an RM5mil allocation was provided to the All Party Parliamentary Group on SDGs (APPGM-SDG), more than doubling the previous allocation of RM2mil. The APPGM-SDG is a novel initiative to localise the SDGs in Malaysia. Led by Parliamentarians and facilitated by CSO leaders, academia and local stakeholders, the continued support of the APPGM-SDG demonstrates the general focus on localising development as well as moving towards a whole-of-society approach with regard to the SDGs. Development delivery under this initiative is in the form of partnership, rather than the top-down model that has been the predominant model of delivery over the years. 

This is also made evident by the Budget providing an enhanced role for GLCs and civil society organisations on development issues. RM100mil has been allocated to NGOs, focusing on income generation, social policy issues and environmental conservation initiatives. 

Budget 2021 also recognizes that the green economy will require financing from capital markets. It aims to position Malaysia as a Sustainable Financial Hub. This includes Malaysia issuing the first sovereign ‘sustainability bond’ in 2021. To realise this agenda, there is a need to accelerate the capacity and enabling environment in Malaysia’s financial industry. This includes building capacity for assessing complex risks related to climate change mitigation and adaptation as well as establishing taxonomies to identify and classify economic activities that contribute to climate action and environmental preservation. While the budget allocates for the government to guarantee bonds, there is a need to ensure continued support during its implementation. 

The Budget also has a strong focus on biodiversity protection, increasing the allocation to all state governments from RM350mil to RM400mil for these purposes. With the economic damages brought on by COVID-19, there is a risk that States will take the decision to exploit their natural resources to increase their revenue. Activities such as deforestation would have detrimental environmental impacts including increasing risks to flooding and potentially affecting critical watersheds in Malaysia. Along with an RM70mil allocation for Ecological Fiscal Transfer activities, this Budget provides some incentives as a starting point for states to protect their biodiversity. 

Overall, the activities in the budget demonstrate the promised focus on sustainability. Nonetheless, the aggregate environmental allocation as a proportion of the total budget remains largely unchanged from previous years – and it remains relatively low. Based on the Ministry of Finance’s Estimated Federal Expenditure 2021, 0.66% of the total budget has been allocated to the environmental sector (total includes both operating and development expenditure). This is a slight improvement compared to 2020 but is lower than in 2018 and 2019. As a comparison, the budget for defense makes up 4.2% of the total. Leading nations routinely spend more than 1% of their budgets on the environment, with the EU on average spending 1.6%, and Netherlands leading the way, spending 3.2% of their budget on environmental protection. Further, the EU’s COVID-19 recovery plan devotes about 30% of its stimulus towards a green recovery. 

Table 1 Percentage of Budget Allocated to the Environment Sector

At the same time, it must be noted that the cross-cutting nature of environmental (and, to take a broader definition, climate change adaptation and mitigation) activities means that it is likely the case that more funds are allocated towards programmes that contribute to environment protection than the direct allocations indicate. This includes funding directed towards community farming, as well as the implementation of Organic Agriculture Project, which will likely benefit the environment in terms of pollution control. Support for Malaysian Sustainable Palm Oil (MSPO) Certification and land boundary delineations in Orang Asli Settlements, meanwhile, will likely indirectly result in more sustainable land management. 

However, without the use of climate budget tagging (CBT), where climate-related expenditures in the national budget system are explicitly tagged as such, it is difficult to assess the Malaysian government’s true level of expenditure on environmental sustainability. An in-depth review of development expenditure allocations since 2018 finds numerous programmes that address the environment – most prominently through climate change adaptation and mitigation activities – under the purview of a variety of Ministries beyond just that of the environment. 

These include, but are not limited to, flood alert, control, and mitigation programs conducted by the Department of Irrigation and Drainage, and forestry programs under the Department of Forestry, both of which were until the recent change in government under the Ministry of Water, Land, and Natural Resources. The Ministry of Agriculture also receives budgetary allocations for flood control, drainage, and irrigation programs, all of which can play a role enhancing Malaysia’s resilience to the consequences of climate change. An extensive, though likely not exhaustive, list of programs that can be considered to be environmentally beneficial can be found in Table 2 below.

This exercise shows that beyond direct and explicit allocations for environmental purposes, there exist numerous other policy initiatives that support Malaysia’s commitment to environmental sustainability. Indeed, if these programs were appropriately ‘tagged’ as having environmental, or climate-related, benefits, the share of Malaysia’s budgetary allocation towards the environment would reach the 1% mark that seen in developed countries. The Ministry of Finance should seek to implement such a system in the buildup to next year’s budget; this would allow greater transparency and accountability in future budgets, particularly as they pertain to a global issue in climate action.

This brief assessment of Budget 2021 demonstrates that there are encouraging signs for Malaysia in its transition towards a green economy. However, the challenge is that the transition needs to be holistic and integrated rather than fragmented and scattered. The integrated nature of the budget, both thematically, as well as in terms of expanding stakeholder participation is a first step towards that end. However, fully realizing a transition towards a greener, lower-carbon economy will likely require stronger commitment both in terms of budget allocation to environmental sustainability, as well as ensure the implementation is systemic in the sense that all measures are aligned to accelerate the transition, whether directly or indirectly.

This article was first appeared in Malay Mail on 14 November 2020.