Malaysia’s green business building opportunity on the net-zero journey

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Climate change might be the greatest challenge of our time. Its physical and socioeconomic impacts are already being felt strongly across the world, and globally coordinated actions will be required to overcome the challenges it presents.

Already more than 60 countries, accounting for almost 90 percent of global emissions, have net-zero commitments in place by 2050 or later.1 According to the McKinsey report, Accelerating toward net zero: The green business building opportunity, more than $9 trillion of global annual investments are required to achieve the goal, which could create more than $12 trillion of global annual revenues.

Asia is expected to play a major role in the transition, given its high share of global emissions and strongly growing economies—over 40 percent of those revenues will likely come from the region.2Green Growth: Capturing Asia's $5 trillion green business opportunity,” McKinsey, September 14, 2022. There is already strong momentum in the region, as seen at the COP27 summit in Egypt in 2022 when G20 countries pledged a large climate finance deal ($20 billion) to Indonesian coal power shutdowns by 2030, with similar agreements in the pipeline for India and Vietnam.3

In line with global and regional trends, Malaysia has a significant opportunity to become a major player in green business growth and sustainable development in Asia. The country’s nationally defined contribution (NDC) aims to unconditionally reduce carbon intensity against GDP by 45 percent by 2030, compared to 2005 levels.4 Around 85 percent of the country’s emissions come from three major sectors: power generation, the industrial sector (including oil and gas production) and transportation—amounting to approximately 260 megatons (Mt) CO2e.5

Key themes in Malaysia’s green business building

Malaysia is well positioned for its net-zero transition owing to its strong natural resources and growing economy, creating opportunities for the country.6 Six themes have already started gaining initial momentum: carbon capture and storage, nature-based solutions, renewables, biofuels, e-mobility, and hydrogen.

Carbon capture services

Asia will likely be a major contributor to global carbon capture services (CCS) capacity—by 2050, about 50 percent of global CCS demand will come from the region.7Climate math: What a 1.5 degree pathway would take,” McKinsey Quarterly, April 2020; McKinsey Global Energy Perspective, McKinsey, April 2022. Malaysia’s carbon capture services could create a considerable opportunity to tackle both domestic industry emissions, as well as those from neighboring countries that lack proven storage potential and infrastructure. This could potentially lead to a sizeable revenue pool, create jobs, and help to decarbonize the oil and gas industry while rejuvenating the infrastructure and engineering sectors.

Malaysia is ideally placed to be one of the regional hubs for CCS for a variety of reasons. First, several major gas-producing fields are approaching the end of their lifespan, making them ideal for carbon storage (especially when existing infrastructure such as injection wells and platforms can be repurposed), giving Malaysia a unique cost advantage.8 According to Malaysia Petroleum Management, more than an estimated 46 trillion cubic feet (2.4 gigatons) of potential carbon storage capacity has been identified across 16 of Malaysia’s depleted fields.9 Second, Malaysia’s oil and gas enterprises already possess the technical and knowledge capabilities required to support CCS establishment and expansion.10 And third, the 2023 Malaysia budget—announced in October 2022—incorporates CCS tax incentives (including a 100 percent investment tax allowance for ten years), import duty and sales tax exemption from 2023 to 2027 for CCS technology equipment, and tax deductions on pre-commencement expenses up to five years prior to the commencement of the operation.11

Five key enablers could help unlock Malaysia’s CCS potential.

Clarity on CO2 capture and storage regulations, particularly in terms of governance for the issuance of CO2 storage licenses and permits, liability management framework for remediation and potential leakages, as well as monitoring, measurement, reporting, and verification (MMRV) of CO2 stored in various reservoirs.

Funding for CCS projects, from both local and international sources, including potential subsidies and blended finance options, along with a formal incentive structure that can improve cost of capital for CCS projects and encourage companies to utilize CCS.

Carbon compliance policies, either in the form of a carbon-tax or emissions-trading system, could be considered as a tool for creating further demand for carbon sequestration as industries look to meet their compliance requirements.

Industry associations to facilitate collaboration between governments, the private sector, and academia. As CCS is a relatively new technology, coordination across the value chain and various stakeholders will be key to developing domestic inbound and outbound supply, and continue progressing technology advances through R&D.

Bilateral agreements with other countries for cross-border CO2 storage, which could help to secure additional CCS demand in the near term, helping Malaysia achieve scale while supporting the greenhouse gas (GHG) reduction targets of other countries in the region.

Similar actions are being taken to enable other CCS hubs across the globe. In Norway, for example, the government has committed, together with multiple oil and gas companies, to fund $1.6 billion for Northern Lights, a CCS project spearheaded by multiple oil and gas major players.12 In the United States, the government has increased its 45Q tax credit under the Inflation Reduction Act to $85 a ton, benefitting many existing and new local CCS projects.13

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Nature-based solutions

Malaysia is strongly placed to address both local and regional requirements of carbon offsets, given the abundance of forests, peatlands, and mangroves that provide a secure supply base for developing nature-based solutions (NBS).14How carbon markets can help Malaysia achieve its climate targets,” McKinsey, September 19, 2022. Around 40 to 210 megatons (Mt) CO2e carbon credits can likely be generated annually, primarily from forest and peatland restoration, which could address over 10 percent of current domestic emissions (Exhibit 1). At carbon prices of $10 to $20 per tCO2e, Malaysia could realize an opportunity of more than $4 billion in this space.15How carbon markets can help Malaysia achieve its climate targets,” McKinsey, September 19, 2022.

Malaysia has the potential to address local and regional carbon offsets through nature-based solutions.

However, some key unlocks are needed to free up Malaysia’s ecosystem as a major regional supplier of high-quality credits.

  • Clarity on potential compliance carbon market policy in Malaysia: The government is currently conducting a carbon-pricing feasibility study, including carbon taxation and an emissions-trading scheme, as set out in the Twelfth Malaysia Plan.16 This aims to create transparency on the allowance of carbon offsets that can be used toward a company’s compliance requirements. Additionally, Bursa Malaysia—the country’s stock exchange—launched a voluntary carbon market (VCM) in December 2022.17
  • Standardization of carbon project policies: Currently, high-potential land for NBS projects is either owned by state governments or private concessionaires.18 Standardized carbon project policies (for example, guidelines on carbon rights or ownership, royalties, and so forth) and a streamlined approval process across states could reduce the friction faced by project developers.
  • Targeted fiscal support for carbon projects: At the current carbon pricing, NBS projects may lack attractiveness for state governments due to their marginal economics compared to other land concessions that may offer better royalty to states. In addition to the new revenue stream generated from carbon credit from NBS projects, fiscal support may be required to compensate for the loss of income from alternative use of land for state governments.
  • Building local capabilities: Certain capabilities like project development, verification, validation, etcetera, are critical parts of the NBS value chain as they oversee the implementation and verification of on-the-ground activities. Building local core capabilities will be essential to unlock the NBS value chain in Malaysia.
  • Supplying project financing: Given the infancy of the market in Malaysia, few traditional investors may be willing to provide financing for NBS projects due to the back-ended return profile and risks associated with a nascent market. Providing project financing for the initial set of projects will likely be crucial in unlocking further NBS opportunities in Malaysia.


Under the National Energy Transition Roadmap (NETR), the country has high ambitions for 70 percent of installed power capacity to be renewable by 2050, which will require 55 to 65 gigawatts (GW) of total clean electricity capacity, translating to up to 2 GW of new capacity each year.19 As laid out in the Malaysia Renewable Energy Roadmap 2035, cumulative investment in renewables is expected to reach $7 billion, creating 47,000 jobs by 2035.20

Malaysia is already today an established solar PV manufacturing hub, as the country has manufactured and exported more than 10 GW of solar modules with a 22 percent year-on-year growth. However, the local market is still fairly limited, with solar accounting for about 2 GW installed in total, outlining a strong potential to grow the local market.21

Distributed generation scale is expected to scale quickly, with 4 to 5 GW additional capacity anticipated by 2035, driven by declining solar cost, but also favorable regulations such as the Net Energy Metering (NEM) program that enables consumers to feed back the excess electricity to the grid for at least ten years.22 The current NEM 3.0 program, which has a total allocation of up to 1.05 GW, is expected to be extended to 2024, continuing to boost the local industry.23

Large scale solar (LSS) has also significant potential in Malaysia: the latest LSS3 bids were oversubscribed by a factor of 13, attracting bids for 6.7 GW versus a cap of 500 MW.24 Therefore, Malaysia solar deployment could be significantly higher if LSS cap were to be lifted.

Solar installations will likely be scaled up by solar power suppliers; engineering, procurement, construction, and commissioning (EPCC) players; and solar-PV manufacturers. Various companies have already recognized Malaysia’s potential in this arena. For example, one of the world’s largest solar developers entered the country in 2018 and currently has over 240 MW of installed capacity.25

Other opportunities presented include the need for grid upgrades and battery storage solutions to cope with the intermittency of renewables, and there are signs that Malaysia could benefit from the manufacture and export of wind towers or turbines—in 2017, for instance, CS WIND acquired Eco Tower to be Malaysia’s first wind tower exporter.26

To enable these opportunities, however, sufficient financing and regulatory unlocks will be required, such as reconsidering the limited quotas on LSS and new auctions for storage.

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Green Growth: Capturing Asia’s $5 trillion green business opportunity


The use of biofuels has been an effective decarbonization method for the transport sectors for decades and their role is only expected to continue to increase globally.27 Currently, more than 90 percent of the global demand for biofuels is attributed to road transport through ethanol blending in gasoline (with Brazil and the United States being the largest markets) and FAME (fatty acid methyl ester) biodiesel in diesel—here Europe, Southeast Asia including Malaysia, and the United States are the biggest markets.28Global Energy Perspective 2022, McKinsey, April 2022; “Global ethanol by country or region,” Alternative Fuels Data Center, December 2022; Nathan Lash, Tapio Melgin, Agata Mucha-Geppert, and Ole Rosler, “Charting the global energy landscape to 2050: Sustainable fuels,” McKinsey, July 7, 2022.

Malaysia has recently announced its intention to implement a 20 percent biodiesel mandate (B20) nationwide, which would more than double the current market size in road transport alone (Exhibit 2).29

Malaysia has significant supply potential: It is the second largest in Asia for currently available ‘advanced’ biofuel feedstocks.

Additionally, there is strong potential to grow sustainable aviation fuel (SAF) production in Malaysia due to feedstock availability, accounting for 5 to 8 percent of the global supply. Used cooking oil (UCO) and palm oil mill effluent (POME) are among the cheapest sources for SAF production.30 Already, Malaysia is the second largest exporter of UCO globally, following China, at 460,000 tons per year (despite moderate collection rates of 45 percent), and the second largest producer of POME.31

While this precious feedstock has been exported in the past, recently there has been increasing momentum for SAF to be produced and used locally within Malaysia. Two players have announced plans for SAF production by 2024 to 2025, one being the PETRONAS and Eni plant with a 0.7 million tonnes per annum (Mtpa).32

Globally, demand is still expected to outstrip supply by 2030, creating an opportunity for additional players looking to enter the field.33Charting the global energy landscape to 2050: Sustainable fuels,” McKinsey, July 7, 2022. Regionally, Japan and Singapore are expected to be the biggest demand centers, given their net-zero commitments and upcoming regulations on SAF (Japan has just announced a 10 percent mandate for 2030, while Singapore is currently finalizing its own rules).34

Locally, Malaysian Aviation Group has signed a memorandum of understanding to receive more than 230,000 tons of SAF starting in 2027, following the operation of its first flight using SAF in 2022, with additional airlines expected to announce voluntary targets, especially for international flights toward regions with net-zero commitments.35

Given its privileged feedstock position, Malaysia could not only supply local and regional demand but also has the potential to become a global sustainable fuels powerhouse, exporting globally at cost-competitive prices. To unlock the opportunity, Malaysia could consider taking the following actions.

Continue improving feedstock collection rates: For both UCO and POME, collection rates could be increased to further generate even more feedstock. Increasing collection rates requires private and public sector collaboration and, by prohibiting the disposal of used cooking oil and running campaigns on its importance in the energy transition, more players could increase the collection rate.

Ensure that the highest sustainability standards are in place: Given that the use of sustainable fuels is primarily driven by decarbonization commitments, Malaysia needs to ensure the highest sustainability standards; in other words, prove sustainable agriculture measures. This could be done by end-to-end feedstock tracking.

Boost local demand: While Malaysia is already one of the biggest exporters of POME and UCO, and has started building an SAF refinery for exports, incentivizing the use of sustainable feedstock locally (for example, through mandates on blending rates) could further enhance the creation of a downstream industry and favor players along the value chain.

Start investing in next-generation feedstock: Despite being one of the leaders in UCO and POME feedstock, additional technology might be needed for Malaysia to reach net-zero targets. The country has great biomass potential and, while many technologies are currently not cost-attractive for biofuels production (for example, lignocellulosic biomass), R&D could help Malaysia become a leader in next-generation feedstocks, as well as in UCO and POME.


The transport sector accounts for almost 15 percent of global GHG emissions in 2019, with the share having increased over the past few decades.36 However, the growth of electric vehicles (EVs) in recent years could change the course, considering that EV sales reached 14 percent of global car sales in 2022.37 According to the most recent McKinsey estimates, this could reach up to 45 percent by 2030 globally, with major markets such as China and Europe already having announced bans on internal combustion engines (ICEs) by 2035.38Why the automotive future is electric,” McKinsey, September 7, 2021; Jason Eden, “EU approves 2035 bank on internal combustion engines,” Energy Intelligence, May 28, 2023.

While China has been the biggest EV market for many years, other markets in Asia, including Malaysia, have lagged developing economies.39 However, as battery prices drop and EVs become cost competitive, uptake will likely increase in Malaysia. In fact, the recently announced National Energy Transition Roadmap aims for 50 percent of vehicles sales in the country to be electric by 2040, and 80% by 2050.40

Malaysia does not have the natural resources, such as nickel required for battery materials, for it to capitalize on the transition to EV, limiting its play in battery cell production.41 However, there are multiple business models still available in the EV value chain for Malaysia.

Vehicle production and battery assembly: Currently, Malaysia’s automotive industry is the third largest in Southeast Asia and contributes more than 40 billion ringgit (approximately $8 billion to $9 billion) to its GDP.42 The country is also a large producer and exporter of electronics, particularly semiconductors, which could place the country in a unique position for EV and battery manufacturing.43 An EV has at least twice as many semiconductors as an ICE vehicle, with a large portion of the semiconductors located in the electric powertrain.44

E-mobility service provider: One of the biggest hurdles to EV adoption today is its higher capital expenditure; however, thanks to their efficiency, EVs are cheaper to run than ICE vehicles—even in a country with low gasoline prices like Malaysia—especially when considering lower maintenance costs.45 Companies could enable EV adoption in Malaysia by providing subscription services that reduce the upfront capital needed, providing turnkey EVs for a monthly fee. There are already a few doing so and a wider expansion, especially to taxis, e-mobility providers, and corporate fleets, could jump start the EV ecosystem in the country.

EV-charging play: EVs require both private and public charging infrastructures, and players could capitalize on this need with an integrated offering. While the majority of charging will likely be done at home (especially for early adopters), customers tend to expect a sufficient amount of public charging to avoid “range” anxiety. Providing an offer that supplies both home and public charging facilities could address a key customer need, while at the same time provide a sizeable value proposition to companies.


The demand for clean hydrogen is expected to grow significantly globally. In the next three to five years, this demand will likely be concentrated in the grey-to-green shift, such as ammonia in captive demand for chemicals and refining (Exhibit 3). By 2035, clean hydrogen’s revenue pool is anticipated to be $6 billion, at a hydrogen price of $5 per ton of hydrogen.46Global Energy Perspective 2022, McKinsey, April 2022. Beyond 2035, the demand is expected to increase meaningfully in new sectors, driven by green H2 cost decline and supply chain scale-up. The road transport sector, especially heavy-duty trucks, will likely see a strong uptake in Malaysia once hydrogen fuel cells reach total-cost-of-ownership (TCO) parity with diesel and battery.

Hydrogen demand is expected to increase significantly in Malaysia between 2019 and 2050.

Green steel, which uses hydrogen in production, is also expected to approach TCO parity with basic oxygen furnace (BF-BOF) after 2030.47

Both Japan and South Korea, two of Malaysia’s key energy trading partners, are investing considerable resources into clean hydrogen.48 Malaysia could supply this at competitive prices either as blue hydrogen—where natural gas is used to produce hydrogen with the associated carbon stored—or green hydrogen, using renewable electricity sources.49

Currently, Malaysia is actively engaging with stakeholders—such as government-linked corporations, state promotion agencies, and think tanks—to attract and facilitate clean hydrogen projects, starting with hydrogen for chemicals, then for use in industry, and lastly for use in transport.50 Multiple players have already announced plans to use resources from Sarawak (one of Malaysian’s states), especially hydropower, to produce green hydrogen.

While these are important first steps to start developing the hydrogen ecosystem, Malaysia could take a number of additional actions to unlock the long-term opportunity for hydrogen.

Provide regulatory support to produce and consume hydrogen: As seen in other markets such as Europe and the United States, regulatory support is crucial to kick-start the hydrogen industry, given its infancy. In the United States, the Inflation Reduction Act is expected to provide a tax credit up to $3 per kilogram ($3/kg) hydrogen for ten years for hydrogen projects.51 This is likely to make the United States the cheapest region to produce hydrogen and bring forward the TCO parity for multiple applications such as ammonia, trucks, and power generation by three to 12 years.52 Malaysia could consider similar policies to become a regional leader in hydrogen production, leveraging its advantageous position on blue hydrogen from gas and green hydrogen from hydropower in Sarawak.

Attract foreign investments: As Japan and South Korea are looking for partners to help them produce hydrogen, Malaysia could attract foreign investments to spur the industry, similarly to what it has done in the past, such as for the semiconductor industry.53 This could be active in the hydrogen production or the electrolyzer production value chain; for the latter, a partnership with alkaline electrolyzer manufacturers could help Malaysia lower costs.

A case for green business building in Malaysia

There is a compelling case for sustainably related business building in Malaysia, however, the six themes highlighted in this article will require large investments. Businesses could either decide to make big bets to secure the first-mover advantage or choose to build a scalable position—for example, through pilot projects. This depends on market developments and the key control points across each of the value chains. Either way, by moving early into these high-potential areas, businesses have a significant opportunity to be part of Malaysia’s green economy and its sustainable future.

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