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The Malaysian Effluent Charge System, instituted with the passage of the Environmental Quality Act of 1974, included provisions for using economic incentives and disincentives in the form of effluent charges, in support, rather than replacement, of regulations on discharges. The Act requires that all dischargers pay a fee to obtain a license to discharge waste into public water bodies. The fee varies according to one or more of the following factors: (i) the class of the premises; (ii) the location of the premises; (iii) the quantity of wastes discharged; and (iv) the existing level of pollution.

In 1977, the effluent charge system under the Act was combined with the discharge standards. The first discharge fees were collected in 1978. As the quantity of waste discharged increased, the standards became more stringent and the discharge fees also increased. The results of the combination of the standards with the charges were very encouraging. Despite a 50% increase in the number of palm oil mills between 1978 and 1982 and a steady increase in palm oil production, the total biochemical oxygen demand (BOD) load released in public water bodies dropped steadily from 22 tons per day in 1978 to 5 tons in 1984.

In a review of the Malaysian effluent standard-charge system, a number of problems have been identified:

• The system is considered not to be economically efficient because the charge was not set on the basis of marginal environmental damage costs but rather on the cost of capital for pollution abatement.
• The charge is based on BOD rather than on the volume of waste discharged, thus there may be an incentive for some firms to dilute their effluent in order to avoid paying the charge.
• In addition to charges for water disposal, there are also charges for land disposal that are based on volume and not concentration. The charges for land disposal are higher than those for water disposal and therefore there is an incentive for firms to shift disposal from land to water.
• The surcharge for effluents above the standard is so low that it does not act as a sufficient deterrent. Some mills find it cheaper to pay the fine than treat their effluent sufficiently to meet the standard.

Experts have concluded that despite its effectiveness in controlling palm oil pollution, the system is not economically efficient. However, despite its weaknesses, the Malaysian mixed MBI-CAC system provides valuable lessons for developing countries that are planning to introduce market-based instruments to support environmental legislation.