Revised carbon pricing to be announced in next Budget, as current level is ‘too low’: Lawrence Wong

• The current carbon price is S$5 per tonne until 2023 and it was last announced that the price will rise to between S$10 and S$15 per tonne by 2030
• But this is still too low, Finance Minister Lawrence Wong said
• The Government is also studying the import of green electricity, or energy produced from renewable sources
• It is investing heavily in research on alternative energy sources to give Singapore options
• Mr Wong outlined other prongs of Singapore’s fiscal strategy, which is also shaped by inequality and demographic factors

SINGAPORE — Singapore's carbon prices today are "too low", Finance Minister Lawrence Wong said on Friday (Oct 15) as he gave more details on the country's ongoing review of the level and trajectory of its carbon tax policy.

A revised carbon tax rate for 2024 will be announced in next year’s Budget to reflect the cost of carbon emissions and how such pricing can effectively influence investment decisions, he said.

The Government will also give businesses an indication on the rates they can expect up to 2030 so that they have time to adjust, Mr Wong said in his opening remarks at the Singapore Economic Roundtable organised by the Institute of Policy Studies (IPS), where he outlined the country's approach to taxes.

“Climate change will be a costly affair for Singapore. But it is a cost we cannot afford to skimp on, for it affects our very survival and the Singapore that our children will live in,” he said. 

The Government is thus prepared to make “bold moves to transition and future-proof” the economy and way of life, he added.

Singapore implemented its effective carbon tax rate of S$5 per tonne from 2019 to 2023, with a view to raise the tax to between S$10 and S$15 per tonne by 2030, as announced in Budget 2018. The current S$5 rate is one of the lowest in the world, data from the World Bank showed.

Since 2018, however, Singapore has increased its international obligations, such as the 2030 nationally determined contribution and the 2050 long-term low emissions development strategy under the Paris Agreement.

In a dialogue with Mr Vikram Khanna from The Straits Times following his speech, Mr Wong said that he is less concerned about how Singapore’s existing fossil fuel industry can react to these changes — which they will internalise on their own — than he is about how the country can decarbonise its energy consumption.

This is an “extremely challenging issue” because Singapore cannot scale up renewable power locally given its lack of land space and natural resources, he added.

The most promising options of green hydrogen and carbon capture are likely only available post-2030, he pointed out.

Importing green electricity from other countries is one option, but Singapore cannot rely solely on that for its energy needs, given issues in security and other technical problems. Another solution is to buy carbon credits to offset its carbon emissions.

Responding to his speech, panellists in a separate IPS panel, composed of tax leaders and governance academics, noted that there are studies primarily from Europe that show the higher carbon pricing is not detrimental to growth, but is really associated with higher degree of carbon-efficient economic outcomes.

One of the panellists, who cannot be named as the session was held under Chatham House rules, said: “This makes it a best practice for a country like Singapore to start considering higher-than-nominal carbon taxes without worrying that that would be detrimental to growth, or detrimental to economic efficiency.”

Chatham House rules dictate that when a meeting is bonded by the rules, participants are free to use the information received but cannot reveal the identity of the speaker.

AGEING DEMOGRAPHIC AND INEQUALITY

In his speech on Friday, Mr Wong said that the level of Singapore’s carbon emissions is what determines the trajectory of its fiscal strategy, alongside the level of inequality and its aging population.

Singapore’s Gini coefficient, which measures inequality, has been on a steady decline since 2007, especially after taking the Government’s redistributive policies and transfers into account, he added.

“It is not just about redistribution. Fundamentally, we want every Singaporean, regardless of background, to have the opportunity to progress and succeed based on his or her own effort and talents.” 

A 2015 study by the Ministry of Finance, which looked at children born from 1978 to 1982, found that 14.3 per cent of children born to the bottom one-fifth of income earners later moved on in life to become the top-fifth income earners among their peers in their 30s.

Although the figure has dropped slightly to 14 per cent for those born from 1985 to 1989, Mr Wong pointed out that this proportion is better than many other countries.

To this end, Singapore has invested heavily on education, and rolled out social policies such as SkillsFuture and the Workfare Income Supplement scheme. The latter works as a negative income tax since it hands out cash supplements to workers whose incomes are below a certain threshold.

These programmes require recurrent funding, which are borne by taxes that apply to the current generation who benefit from such policies.

In terms of demographics, Singapore also expects to become a “super-aged society” like Japan and some European nations by 2030, when 25 per cent of Singaporeans could be aged 65 and above, Mr Wong said.

This means that healthcare spending will also likely rise from 2.2 per cent now to 3 per cent of Singapore’s economic output by 2030, and will require more recurrent funding from taxes, which is the only “sustainable and responsible” way to fund recurrent expenditures, he added.

CONSUMPTION AND WEALTH TAXES

Mr Wong said that the upcoming Goods and Services Tax (GST) hike to 9 per cent, which will happen between 2022 and 2025, will “probably happen sooner rather than later”.

One concern is the trend of rising inflation, which was flagged by the Singapore central bank on Thursday in its latest monetary policy statement.

“I’m watching it very carefully,” Mr Wong said on the outlook of Singapore’s inflation rate, which measures the rise in the prices of consumer goods and services.

However, he stressed that the Government has also committed to an assurance package that will effectively delay the impact of the GST hike for most Singaporeans by five years, and a decade for lower-income earners.

What is key to Singapore’s fiscal strategy is for it to uphold a fair and progressive tax system, Mr Wong said.

Today, households in the bottom 20 per cent of income earners receive about S$4 in benefits for every dollar of tax paid. For middle-income households, it is S$2, and for those in the top 20 per cent of income, it is 30 cents.

“Indeed, those who are more affluent should pay their fair share of taxes,” Mr Wong said.

Singapore taxes wealth through property taxes, stamp duties and registration fees on motor vehicles and the Government is also continuing to study how to expand its system of wealth taxes that would not undermine the country’s competitiveness, he said.

Considerations include how to make such tax policies effective since the wealthy can easily move their wealth around to avoid these taxes.

GLOBAL PRESSURE ON CORPORATE TAXES

Mr Wong also noted global trends to address tax avoidance policies, such as the international Base Erosion and Profit Shifting project.

Earlier this month, 136 countries who are part of the project by the Organisation for Economic Co-operation and Development, including Singapore, have agreed to set a 15 per cent minimum multinational corporate tax rate from 2023.

“Ideally, every country should be free to set its own tax rate. But with mobility of capital and talent, taxes are no longer purely domestic issues,” Mr Wong said.

When asked how the project will affect Singapore’s tax incentives for multinational corporations, the minister stressed that businesses invest here because of many other non-tax factors such as the ease of doing business, the rule of law and the quality of its workforce.

These non-tax factors are what Singapore wants to strengthen to ensure its competitiveness, he added.