What to make of the carbon tax increase in Singapore?

As announced in Budget 2022, Singapore will raise its carbon tax rates progressively from 2024 with a view of reaching S$50 to S$80 per tonne of emissions by 2030. This is in line with Singapore’s new ambition to achieve net zero emissions by or around mid-century.

The announcement has won plaudits. According to the World Bank Carbon Pricing Dashboard, the bold hikes put Singapore ahead of its regional counterparts such as Japan, China and South Korea while lagging behind European pacesetters such as Switzerland and Sweden for carbon taxes per tonne of emissions.

IMPLICATIONS OF CARBON TAX

The carbon tax hike brings risks and opportunities alike for Singapore and Singaporeans. While being deemed aggressive by implicated industry members, the move provides businesses with a concrete, well-paced, timebound pathway to plan their transition towards a low-carbon future.

The implementation of the tax hike in 2024 will provide businesses ample time to map their carbon footprint and identify transitional risks associated with a low-carbon operational shift. It will be an opportune time to strategically reinvent themselves and explore green growth solutions.

Businesses, especially those in the utilities and petrochemical sectors, can use the lead time to build their case for investments in low-carbon technologies and strategise their entry into carbon markets to reduce payable carbon tax.

The Government will introduce a transition framework to give emissions-intensive trade-exposed (EITE) companies, such as those in the petrochemical and energy production sectors, additional time to shift to a low-carbon economy.

To maintain their business competitiveness in the short term and mitigate the risk of carbon leakage, companies in EITE sectors will receive transitory allowances for part of their emissions based on efficiency standards and their decarbonisation goals.

Other key stakeholders affected by the carbon tax hikes are electricity retailers and households.

Tax hikes will be passed on to households via an increase in electricity prices.

While the Government will be providing Goods and Services Tax vouchers and U-Save rebates to cushion the impact, households must also seek means where they can reduce their electricity consumption.

This would entail taking stock of their current array of household appliances and exploring more efficient ones for future purchases.

Private households might even want to consider the installation of solar panels to offset electricity use, especially for air conditioning.

After all, carbon taxes are meant to spur behavioural change among taxpayers towards the sustainable use of energy.

CARBON SERVICES & CAPACITY BUILDING

The carbon tax hikes are expected to lead a flurry of activities in the carbon services market.

The carbon services market comprises firms providing consulting and verification services as well as brokers who facilitate sale of carbon credits.

There are already about 30 firms here providing carbon consulting services. With Singapore being a regional hub for business and trade, we can expect a broader carbon services ecosystem to take flight here.

There will be a growing demand for carbon related advisory services among corporates that have taxable facilities under the Carbon Pricing Act.

Corporates which do not have strong in-house carbon expertise will be on the hunt for talent to drive their decarbonisation strategy and explore other strategic levers towards decarbonisation.

This would mean finding and developing talent proficient in low-carbon technological solutions and alternative energy solutions such as solar and carbon capture and storage.

For Singapore, it means building our carbon literacy among a greater pool of corporates and ordinary citizens in the carbon services space to future-proof and build self-resiliency around its decarbonisation ambition.

This will have to happen at all hierarchies of our society.

Education institutions at all levels will have to have subjects and modules around carbon emissions, measurement, verification and reporting.

Household education will also have to take place to get households socialised with the notion of carbon footprint and the ancillary aspects that come along with it.

This provides an opportunity for government agencies and, potentially, civil society to have greater stakeholder engagement with everyday Singaporeans and enable more household ownership over national decarbonisation efforts.

VOLUNTARY CARBON MARKETS

As part of the carbon tax hikes, it was also announced that businesses will be able to use “high-quality, international carbon credits” to offset up to 5 per cent of taxable emissions in lieu of paying carbon tax.

Businesses can obtain carbon credits from brokers who facilitate transactions between sellers and buyers. Carbon credits are generated from activities that reduce carbon emissions from our atmosphere.

Every tonne of emissions reduced results in the generation of one carbon credit. Organisations that generate these credits then sell them to companies looking to offset their carbon emissions via traders or brokers.

The carbon credits to be purchased would ideally be cheaper than the prevailing carbon tax level.

While a nascent carbon marketplace took off in Singapore last year, the hike in carbon tax levels will spur greater local demand for carbon credits and strategic implementation of a well-functioning and regulated carbon trading scheme

While the definition of “high-quality international credits” remains unclear, the key is that carbon credits must be verified to ascertain their credibility and transparency.

This would require a regulatory standards framework to be established and defined for Singapore. The process to establish this framework should be consultative. Industry players with taxable facilities, carbon service providers and other key stakeholders have to be engaged to build a contextually relevant regulatory standards framework. Mechanisms for recognition and verification must be established to create a wide-ranging pool of transboundary carbon credits for end buyers to choose from.

The carbon credits issued must also fulfil the other fundamental aspects of additionality, permanence, leakage avoidance and measurability.

This means that carbon emissions removed cannot be reintroduced to the atmosphere or result in an increase in carbon emissions in another part of the world. The carbon emissions reduction must also be solely generated by the incentive provided by the carbon credits.

There are numerous established carbon emissions trading schemes, such as those in Kazakhstan, New Zealand and the European Union, that uphold these principles which Singapore can draw lessons from its drive towards net zero emissions by or around mid-century.

A common thread among these schemes is that they create incentives to reduce emissions in a cost-effective manner.

These schemes are also regularly reviewed to include more eligible industry sectors and ensure there are no supply-demand imbalances.

ABOUT THE AUTHOR:

Kavickumar Muruganathan is a sustainability professional and part-time lecturer at National University of Singapore on environmental economics and sustainable development.