BUDGET 2022 with the theme of “Keluarga Malaysia, Makmur Sejahtera” has three main focus areas: the rakyat’s well-being, resilient business and a prosperous and sustainable economy.

When presenting the initiative of implementing low-carbon practices (under the sustainability agenda), the finance minister indicated that the government is committed to becoming a carbon-neutral country through reforms so that growth remains sustainable and competitive in the global market.

To meet the carbon-neutral target, the government sees the potential of electric vehicles (EV) with energy efficient vehicle (EEV) features as a means to minimise vehicle emissions pollution in the atmosphere.

To support the development of the local EV industry, the government proposes to provide exemption on import duty, excise duty, sales tax on EVs and road tax exemption of up to 100% to EV owners.

On top of that, individual income tax relief of up to RM2,500 will be given for the rental, hire-purchase, purchase and installation of EV charging facilities, and payment of EV charging facility subscription fees.

Although the incentive of proposed tax exemption and relief looks progressive and inviting for consumers’ behavioural substitution towards EV, is the incentive efficient for Malaysia as a whole?

In approaching this question from an economic perspective, it is imperative to first understand what Pareto efficiency in the context of this incentive is: the welfare of an individual who receives the tax exemption cannot be improved without reducing the welfare of another member of society.

From this definition alone, Pareto efficiency is not attainable because Malaysians who did not benefit from the incentives will have a reduction of welfare due to the government’s opportunity cost in terms of loss of potential tax gained.

The potential tax gained can be used to provide public goods or subsidies to Malaysians.

If we were to look at the same perspective using a different tool, the Kaldor-Hicks efficiency test says that a policy is efficient if those who gain can in principle compensate those that have been “harmed” and still be better off.

If the government can guarantee that Malaysians who do not benefit from the tax exemption can have better air quality and improved health, they are considered compensated, thus making the tax exemption of EVs to be efficient in theory.

Posner, the father of the economic approach to law, asserts that an economic approach is different from Aristotle’s principle of corrective justice. Aristotle says that if somebody injures another, be it emotionally or physically, the injury caused must be rectified and the injured party restored to his/her previous position before the injury is afflicted.

Posner’s approach on this matter is that if the policy made is making someone worse off, injustice is deemed to be happening. This view is more straightforward and applies to Malaysians who will gain negatively from tax exemption such as loss of subsidies and public goods.

By using Posner’s approach, the government would have to make sure that not a single person is worse off in proving that the policy is just.

In principle, the government’s decision to provide tax exemption to EV owners is justified, according to the Kaldor-Hicks Efficiency test. This incentive, however, has to be researched in-depth to see the practicality of such policy in improving the welfare of all Malaysians.

If the improvement of the welfare of Malaysians does not improve nor is it proportionate to those who benefit from tax exemption, this incentive is deemed inefficient.

An alternative policy should then be proposed in making Malaysia a carbon-neutral country by 2050. – December 10, 2021.

* Aizat Nizam Shah and Shahrul Mizan Ismail read The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.