Putting a price on carbon is so crucial to the fight against climate change that it has been dubbed by some as a “silver bullet” in the global push to decarbonisation Announced in 2017, Singapore’s carbon tax then was the first carbon pricing policy (CPP) in Southeast Asia, hailed as progressive in so far as the region is concerned.Designed to target large emitters of greenhouse gas (GHG) rather than individual users, it serves as a price signal for industries and the nation.
Commentators, however, have suggested that the initial price of S$5 per tonne of GHG emissions (to be maintained from 2019 to 2023) is too low to meet global emissions targets..With calls for a higher carbon price, both domestically and alongside international trends, then Minister for Finance Lawrence Wong made two major announcements that sought to advance Singapore’s transition to a more low-carbon economy in February 2022. In his Budget 2022 speech, he announced that Singapore’s carbon tax will increase from S$ 5 per ton of carbon dioxide equivalent (tCO2e) to S$ 25 / tCO2e from 2024 and 2025, S$ 45 / tCO2e from 2026 to 2027, and within the range of S$ 50 to 80 / tCO2e by 2030. He also said the Government will raise its climate ambition to achieve net-zero emissions “by or around mid-century”, a step forward from an earlier commitment to achieve the same target “as soon as possible”.
Nonetheless, some businesses and parliamentarians have also cautioned that this may impact Singapore’s competitiveness. What is the socially and economically optimal carbon price, given Singapore’s constraints and capabilities? This article considers the issue of carbon taxes from the perspectives of various stakeholders—businesses, environmental groups, policymakers, and consumers—to identify points of agreement and trade-offs for the way forward.
Singapore’s Climate Ambition
Singapore’s Carbon Pricing Act (CPA) was announced in 2017, the first within the Southeast Asia region. The then Minister for Finance, Heng Swee Kiat, proposed the Act during Singapore’s annual budget that year in parliament as the “most economically efficient and fair way” to reduce GHG emissions among many of Singapore’s existing climate policies.
Singapore’s carbon tax is implemented as part of Singapore’s regulatory arsenal to meet its obligations in the Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC). The carbon tax is one of two main carbon pricing instruments – the other being a GHG emissions trading system (ETS). With a tax, the government sets the tax rate and specifies the sources subject to the tax. The emission reduction achieved depends upon the response of the affected sources to the imposition of the tax. With an ETS the government sets a limit on GHG emissions by specified sources and distributes allowances approximately equal to the limit. Singapore’s carbon tax operates through a Fixed Price Credit Based (FPCB) system. For the past two years, companies have had to pay the carbon tax by surrendering fixed-price carbon credits that they buy from the Government, and that are non-tradable. The carbon tax is part of a range of mitigation measures in Singapore. Its role is to provide a price signal to incentivise decarbonisation.
Such a price signal coheres with the island-state’s involvement in global climate change efforts, from the UNFCCC to the Kyoto Protocol in 2006, the Paris Agreement in 2015, and at the recent COP26. Nonetheless, global interests in establishing Singapore as a carbon trading hub and a country that prioritises “green growth” has to be considered alongside potential public and industry interests.
Balancing Cost and Environmental Concerns
Given the five-fold increase in carbon price, one of the major concerns highlighted was the increased costs for businesses and consumers. This is especially acute given the sharp increase in energy commodity prices caused by the Russia-Ukraine war and tight supply conditions in 2022. Moreover, a uniformly-applied carbon tax adversely impacts lower-income households more than higher-income households as the former spends a greater proportion of their income on electricity. This corroborates with the current situation in Singapore where it was reported that those in the lowest income bracket spent the highest proportion of their income on housing and utilities.However, current government transfers like GST vouchers and U-save rebates do help to mitigate these impacts.
From a business perspective, the carbon tax hike significantly increases the costs of polluting and, thus, incentivises firms to invest in abatement efforts instead. An implementation date set in 2024 allows for this by providing businesses with the time needed to identify where processes could be improved and invest in the low-carbon technologies and processes needed to mitigate the costs of a higher carbon tax.While a transition framework helps to mitigate the cost effects, industry concerns raised during NCCS’s 2020 public consultation exercise still remain amidst the shift towards new technologies.This includes high upfront capital costs and the challenges of ensuring reliability and precision control. Support for small and medium enterprises (SMEs) to decarbonise and invest in energy-efficient equipment and solutions is especially important in this regard.
Singapore, as a low-lying island state, remains vulnerable to the effects of climate change. The implementation of its carbon tax, though a bold and commendable first move in the region, remains a single step in a journey of a thousand miles in the fight against climate change. The price, design, revenue, and accompanying policies of the carbon tax will no doubt have a profound impact on global actors, the public, and industries in the years to come. In balancing the interests and ideations among these actors, it is crucial to recognise sustainability not as a trade-off among actors or vis-à-vis the economy, but as “second nature” within the island-state’s Anthropocene. Only then can Singapore bite the “silver bullet”, to realise the hard targets to keep the nation going.
Read the case study Putting a Price on Carbon: Hard Targets to Keep Singapore Going written by Tan Xin Yi and Tan Jing Ling, which was awarded the Merit Prize in the Case Writing Competition 2021/22 at the Lee Kuan Yew School of Public Policy.
Access more case studies from the Lee Kuan Yew School of Public Policy.