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A Structural Shift in Carbon Governance
Malaysia’s climate transition has entered a decisive regulatory phase. The Government has announced that a carbon tax will be introduced beginning in 2026,[1] targeting energy-intensive sectors as part of broader fiscal and environmental reform. In tandem, the Parliament has passed the Carbon Capture, Utilisation and Storage Act 2025 (Act 870) (“CCUS Act”) in March 2025, establishing Malaysia’s first comprehensive statutory framework governing carbon capture, transportation and permanent storage.
These developments form part of a broader legislative trajectory that includes the proposed National Climate Change Bill (“NCCB”), which is intended to establish an overarching framework for national emissions reduction targets, reporting obligations and climate governance.[2]
For the maritime industry, these developments are not abstract policy shifts. They are immediate commercial realities. Shipping operates at the intersection of carbon taxation, offshore carbon logistics and decarbonisation obligations under the International Maritime Organization (“IMO”).[3] Carbon regulation now recalibrates risk allocation, reshapes contractual drafting and introduces new enforcement dynamics.
The implications are profound. Carbon regulation has broken free from compliance silos, it is now embedded in the core of maritime commerce. Charterparty negotiations, shipbuilding contracts, offshore service arrangements and dispute strategies all carry carbon risk as a defining feature.
Malaysia’s Carbon Tax: Commercial and Litigation Exposure in Maritime Operations
Regulatory Direction and Market Impact
Malaysia’s proposed carbon tax, expected to be phased in from 2026, will initially target sectors such as iron, steel and energy generation. While shipping is not expressly identified in the first phase, consequential impact is inevitable.
Shipping underpins the supply chains of carbon exposed industries. As cargo interests internalise carbon costs, freight structures will adjust. Bunker pricing dynamics may shift. Regulatory expansion may eventually encompass fuel combustion emissions or port related reporting obligations, particularly if Malaysia aligns with international monitoring standards.
For vessel operators, the question is not whether carbon pricing affects them, but how risk exposure crystallises and how it is contractually allocated.
Charterparty Risk Allocation: The New Fault Line
Carbon taxation immediately raises a central commercial question: who bears the cost?
Under time charter arrangements, charterers typically assume responsibility for bunkers; under voyage charters, fuel costs are embedded in freight. Whether carbon taxes are classified as taxes payable by charterers, operating expenses of owners, or regulatory charges requiring bespoke allocation will depend entirely on drafting precision. While currently there may be no statutory requirements dictating this allocation, any future laws or regulations could affect how such costs are treated, so contracts should be drafted with both present clarity and future flexibility in mind as well as in accordance with other current and applicable legal requirements.
The international market has already confronted parallel issues through emissions trading regimes such as the European Union Emissions Trading System (“EU ETS”). In response to the inclusion of shipping within that regime, the Baltic and International Maritime Council (“BIMCO”) published the Emissions Trading Scheme Allowances Clause for Time Charter Parties 2022[4], subsequently updated in 2023.
The BIMCO clause adopts a clear allocation structure. Charterers are made responsible for procuring and transferring the requisite emissions allowances corresponding to the vessel’s emissions during the charter period. Owners, in turn, retain responsibility for monitoring and reporting emissions in accordance with the applicable regulatory framework, consistent with their operational control and statutory obligations.
This allocation model is instructive in the Malaysian context. It reflects a market recognition that carbon exposure must be expressly addressed in contractual drafting. Absent such clarity, disputes are not hypothetical but probable.
Owners may argue that carbon levies constitute fuel related expenses, particularly where the tax is calculated by reference to bunker consumption. Charterers may contend that sovereign carbon taxation falls outside traditional bunker definitions and instead amounts to a fiscal imposition on the vessel owner. In long term charters concluded before the introduction of carbon pricing, disputes will likely centre on regulatory change clauses, taxation provisions and the construction of expense allocation wording.
Carbon risk must therefore be clearly defined, allocated and secured. Tailored carbon clauses, audit rights and appropriate security mechanisms are now essential components of maritime risk management in a carbon regulated environment.
Enforcement, Security and Vessel Arrest Risk
Carbon taxation introduces enforcement considerations that are especially pronounced in maritime practice. Once carbon-related levies become recoverable as statutory dues, non-payment can trigger enforcement action. In the Malaysian context, admiralty jurisdiction allows certain statutory claims to be pursued in rem against a vessel[5], providing a powerful mechanism to secure payment.
Although the precise legal classification of carbon tax liabilities will ultimately depend on the implementing legislation, disputes between owners and charterers over indemnity or reimbursement are likely to escalate. In such scenarios, vessel arrest can serve as an immediate and commercially effective tool to protect claims, particularly where the sums involved are material or contested.
In practice, vessel arrest is more than a procedural remedy. It is a negotiation lever, a risk mitigant and, in volatile freight markets, a strategic instrument that can shape the dynamics of commercial resolution. Carbon-related disputes, therefore, are not merely regulatory matters; they intersect squarely with maritime litigation and commercial leverage.
Multi-party contribution claims are also foreseeable. Technical managers, operators and fuel suppliers may face exposure if reporting inaccuracies or compliance failures lead to penalties. In this emerging carbon regulatory landscape, the allocation of liability across the vessel’s operational chain will become a key consideration for both owners and service providers.
The CCUS Act: Maritime Implications of Offshore Carbon Storage
The CCUS Act establishes a statutory framework governing licensing, monitoring and long-term stewardship of carbon capture and storage activities. Malaysia’s ambition to become a regional hub for carbon storage inherently depends on offshore carbon storage projects. These projects require the safe and reliable marine transport of liquefied carbon dioxide (“CO₂”), installation and operation of offshore injection infrastructure, and ongoing maritime logistical support.
Transporting CO₂ at sea is not a conventional shipping operation. It carries distinct technical and legal risks, including containment integrity, temperature control, contamination management and emergency response obligations. From a commercial perspective, these risks cannot be left to general maritime or charterparty clauses. Charterparties and offshore service contracts must clearly define custody transfer points, allocate risk during transit and establish comprehensive indemnity frameworks to address potential leakage or operational incidents.
The introduction of these responsibilities into maritime operations illustrates how the CCUS Act intersects with shipping law, admiralty principles and environmental liability. Owners, charterers and service providers will need to carefully negotiate contractual arrangements to allocate risk, define compliance obligations, and ensure enforceable remedies in the event of operational failures. Nonetheless, it is noteworthy that, while contracts can clarify responsibilities and remedies, they cannot override statutory requirements and any applicable legal requirements; hence, proactive legal planning in these areas is critical to safeguarding commercial and reputational interests in this emerging sector.
Statutory Liability and Maritime Interface
The CCUS Act 2025 imposes regulatory oversight and establishes liability structures in respect of carbon storage operations. A critical question for maritime stakeholders is the demarcation of liability between maritime transit and offshore injection phases.
If leakage occurs during maritime carriage, claims may be framed under environmental legislation, maritime tort principles, or contractual indemnities. If the incident occurs post-injection, statutory liability under the CCUS regime may apply.
The interaction between admiralty jurisdiction, environmental regulation, and CCUS statutory liability introduces complex litigation dynamics. Jurisdictional strategy, limitation rights, and insurance coverage will all be central considerations.
Marine insurance programmes must therefore be reviewed with particular care. Traditional protection and indemnity (P&I) cover may not automatically respond to novel carbon-related exposures without careful structuring.
Maritime Disputes in the Carbon Era
The introduction of carbon regulation has created a new frontier of maritime disputes, where environmental obligations intersect with commercial and operational risk. For shipping stakeholders, these disputes are no longer theoretical; they are an immediate feature of daily operations. Our firm’s experience across admiralty, maritime tort, environmental regulation, and offshore project advisory positions us to provide practical and strategic guidance in this evolving landscape.
(i) Vessel Arrest and Security Claims
Vessel arrest remains one of the most powerful enforcement tools under Malaysian admiralty law. The introduction of carbon taxation has created scenarios where non-payment of carbon-related levies may give rise to arrest proceedings. Similarly, disputes over offshore storage fees or service charges could see parties invoking maritime liens to secure payment. In practice, the combination of statutory obligations, contractual indemnities and in rem remedies introduces complex considerations for owners, charterers and financiers. Effective pre-arrest risk management and security arrangements are therefore essential.
(ii) Shipbuilding and Retrofit Disputes
The transition to low-carbon shipping is generating a new category of shipbuilding and retrofit disputes. Obligations to install alternative fuel systems or to retrofit vessels to comply with decarbonisation standards can lead to delays, cost overruns or performance warranty claims. Resolving these disputes often requires a nuanced understanding of both technical obligations and the contractual matrix, including standard shipbuilding contracts, retrofit agreements and force majeure or regulatory change clauses. Strategic dispute avoidance through clear drafting, phased milestone enforcement and performance monitoring is a critical value-add for maritime clients navigating green transition requirements.
(iii) Collision, Loss and Environmental Claims
The carriage of CO₂ and other carbon products introduces unique operational risks. In the event of incidents involving CO₂ transport vessels, parties may face claims for collision, loss or environmental damage. Liability may arise under admiralty principles, statutory environmental obligations or contractual indemnities. The overlay of CCUS statutory liability complicates these claims further, particularly where leakage occurs during transport or offshore injection. Our approach combines careful assessment of admiralty jurisdiction, environmental law obligations, and contractual liability to minimise exposure and protect clients’ interests.
(iv) Contractual Risk Allocation Litigation
Even with robust contracts, disputes inevitably arise over the allocation of carbon-related risks. Indemnity enforcement, contribution claims among joint venture partners and claims under regulatory change or force majeure provisions are likely to feature prominently in the next wave of maritime litigation. Proactive review of contractual clauses, documentation of operational compliance and strategic positioning for potential claims are all essential steps to safeguard commercial outcomes.
Strategic Risk Management: From Reactive to Proactive
Navigating Malaysia’s evolving carbon regime requires more than regulatory awareness; it demands a proactive, commercially grounded strategy that integrates contractual, operational and dispute preparedness considerations.
(i) Contractual Safeguards
Clear and precise contract drafting is the first line of defence against carbon-related disputes. Carbon cost allocation clauses should explicitly delineate responsibility for taxation, emissions allowances, and associated operational costs. Regulatory change provisions must anticipate adjustments in statutory obligations, including carbon tax implementation and CCUS Act compliance. Equally, insurance programmes should be reviewed and extended to ensure coverage of novel carbon-related exposures, whether arising from vessel operations, offshore storage or transport of CO₂. Well-structured contractual safeguards reduce ambiguity, provide clarity in liability allocation, and serve as the foundation for enforceable rights in the event of dispute.
(ii) Compliance and Operational Readiness
Operational preparedness is essential. Emissions reporting systems must be implemented and regularly audited to meet both statutory requirements and commercial expectations. Licences and approvals under the CCUS Act must be obtained and maintained, ensuring that all offshore carbon transport and storage activities operate within the regulatory framework. Risk mitigation protocols, including vessel safety procedures, contingency planning and offshore operational checks, are critical to minimise incidents that could trigger liability or operational disruption.
(iii) Dispute Preparedness
Even with robust contracts and operational systems, disputes may arise. Early risk mapping allows industry participants to anticipate potential areas of conflict, such as charterparty disagreements, indemnity claims, or multi-party liability scenarios. Security strategies, including the potential use of vessel arrest or escrow arrangements, should be planned in advance. Cross-border enforcement considerations, particularly where claims involve foreign owners, operators or offshore jurisdictions, must also be factored into dispute response strategies. Proactive preparedness transforms reactive litigation into a structured, strategic approach to risk management, safeguarding both commercial and reputational interests.
Conclusion
Malaysia’s 2026 carbon tax and the enactment of the CCUS Act mark a fundamental evolution in the regulatory landscape affecting maritime commerce. The intersection of fiscal policy, environmental regulation and admiralty law introduces new exposure points across charterparties, shipbuilding contracts and offshore operations.
From vessel arrests arising out of carbon levy disputes to complex liability claims involving offshore CO₂ transport and storage, maritime stakeholders must anticipate a more carbon-regulated litigation environment.
The effective management of these risks demands integrated expertise, spanning regulatory advisory, contractual structuring and maritime dispute resolution. In the carbon era, preparedness is not optional; it is a commercial imperative.
For further information, please contact:
Farah Mohamed Said, Partner, ZUL RAFIQUE & partners
farah@zulrafique.com.my
