Commentary: Why it pays for Singapore to be much more ambitious in raising carbon tax

SINGAPORE: Taxes will be high on the agenda this Budget 2022, as authorities and observers note the need to raise government revenue for greater social spending.

Beyond changes in the Goods and Services Tax and wealth tax, Singapore’s revised carbon tax rate for 2024 will be unveiled. It will likely be higher than the current 2019 to 2023 rate of S$5 per tonne of carbon dioxide equivalent.

But why hike carbon tax?

As one of the world's most trade-dependent nations, Singapore has a lot riding on the health of the world economy, which is threatened as growing carbon emissions fuel climate change. Singapore accounts for only 0.1 per cent of the global carbon footprint, but it has high carbon emissions per person – the 27th highest out of 142 countries, as of 2018.

An all-hands-on-deck approach is needed across all countries to decarbonise their economies. Being at the top of Asia’s per capita income scale, Singapore has the capacity to be a key driver in the region’s energy transformation.

But Singapore is still reliant on natural gas and has geographical limitations in switching to solar and wind. This is even more reason to scale up carbon tax to encourage energy producers to cut emissions and provide leadership in the region for pricing carbon emissions.

TWO WAYS TO PUT A PRICE ON CARBON

Carbon pricing is a tried way to put a price on – and thereby discourage – the damages from carbon discharges. One way to do this is to add to the price of a polluting product, say petroleum, by levying a carbon tax equivalent to the estimated damage of a tonne of discharge.

If the tax is big enough, producers would cut pollution to avoid paying the tax. But where this doesn’t happen, the tax revenue raised could support cleaner fuels.

More than 40 countries, including Singapore and several member countries of the European Union, have adopted carbon taxes, albeit at different stages of implementation and widely varying rates.

A second approach, followed by China, Japan and South Korea among others, is emissions trading, also known as cap and trade. Some 40 countries have such schemes, but at varying stages of implementation. Some have both a carbon tax and carbon trading, as many members of the EU do.

This specifies the maximum allowable emissions for companies, and then issues emission permits that add up to this level. These permits can be traded, from which a price of carbon emerges.

In the case of a carbon tax, the tax rate is known while the level of emissions can fluctuate. The Government can of course vary the tax rate, as is likely in the upcoming Budget. In carbon trading, on the other hand, the amount of total emissions is known, but carbon prices fluctuate according to the demand for emissions.

Carbon trading gives more certainty about the emission outcome and therefore the benefit and cost of the action, but a carbon tax gives greater certainty on the resulting energy price, raises government revenue and is easier to administer.

THE RIGHT PRICE FOR CARBON IN SINGAPORE

The effect of a tax on effluents depends both on the tax rate and its coverage. In 2019, Singapore set the carbon tax at S$5 per tonne.

This is at the low end of a range that spans Japan’s US$2.60 (S$3.50) per tonne to Sweden’s US$137 (S$184) per tonne. The United Kingdom charges US$25 per tonne, while the EU average is US$42 per tonne.

The United States does not have a carbon tax, although studies converge on a US$40 to US$47 per tonne rate. Also, a dozen US states use carbon trading.

Singapore’s carbon tax covers four-fifths of the country’s emissions compared with only one-third in the EU. This suggests that if Singapore increases its carbon tax rate significantly, a sizeable reduction in emissions should happen.

The Government had said it intends to raise carbon tax to between S$10 and S$15 by 2030 – but is this enough?

Some analysts consider US$30 to US$50 per tonne to be a level that covers the social damages of carbon emissions – but this is far too conservative. To achieve the Paris climate agreement’s goal of limiting warming to at least 2 degrees Celsius, the High-Level Commission On Carbon Prices recommended pricing carbon at US$40 to US$80 per tonne in 2020, then at US$50 to US$100 by 2030.

But less than 4 per cent of global emissions are currently covered by a US$40 to US$80 price. Relevant for Singapore, the International Monetary Fund considers that carbon prices of US$75, US$50 and US$25 per tonne for major high-, middle- and low-income emitters respectively will contribute towards a one-quarter cut in emissions by 2030. 

Another estimate is that a carbon tax of US$25 to US$50 per tonne would cut emissions in the United States by between 20 to 25 per cent.

A SOUND CASE FOR S$25 PER TONNE

A solid case can be made for Singapore to sharply raise its carbon tax to S$25 per tonne and to commit to increasing it further to S$50 per tonne by the mid-2020s. 

Although this trajectory is well below globally estimated social damages from emissions, it's progressive enough to allow for adjustments to take place. There's been threshold for such shifts too, British Columbia for example went from CA$10 (S$10.60) in 2008 to CA$30 in 2012.

The transition can also be softened with a tiered approach that differentiates big and small emitters, though the case for uniformity is strong for climate change because a tonne of emissions in the atmosphere does the same harm regardless of the origin.

For Singapore, as in many countries’ experiences, a higher carbon tax would likely elicit most response in power generation, which accounts for about 39 per cent of Singapore’s emissions. Industry is also expected to be responsive to a carbon tax over time, especially with the adoption of new technologies.

But the transportation sector may not be as responsive as higher fuel prices did not significantly change driving habits. Expansion of electric cars and changes in behaviour should alter this picture instead.

Complementing the carbon tax should be investments to make renewable energy, such as solar and wind, far more viable. Singapore plans to quadruple solar deployment by 2025, although this comes from a very low 2020 base.

Even so, the country has the world’s largest floating solar farms in the Tengeh Reservoir, covering 45 hectares – a sign that innovative paths are being sought.

This effort can be further complemented with imports of clean energy in place of natural gas, which currently makes up 95 per cent of consumption.

FALLOUT FROM A HIGH CARBON TAX?

A valid concern over increasing the carbon tax in Singapore is higher costs for producers, including small firms, and consumers. There is a direct cost for oil producers and an indirect cost for electricity usage.

These could be significant for specific industries, but modest or positive when economy-wide effects are counted. For example, a US$25 per tonne carbon tax in the United States was estimated to produce, on average, cost increases of 0.7 per cent for eight key industries combined, which varied from 0.3 per cent for wholesale and retail trade and 11.8 per cent for electric power.

In the case of Canada, a carbon tax of CA$50 per tonne was estimated to increase costs by 5 per cent on average for petroleum and coal, agricultural manufacturing, electric power, and chemical manufacturing, and 2.4 per cent for the economy.

Evidence from the EU indicates a zero or modest positive impact of carbon taxes when effects on economic growth and employment generation are counted.

In increasing its carbon tax, Singapore would consider competitiveness, consumer well-being and implications for fiscal sustainability. For Singapore, the motivation for increasing the carbon tax would be less about raising revenue for government spending and more about the ability to scale up green investments.

Receipts from a carbon tax could be substantial going by the experience of others. They are usable for green investments, social safety nets and worker retraining: A few EU nations, Switzerland and British Columbia, Canada, have all taken a package approach, with revenues supporting multiple objectives.

The crucial goal is to help the region reverse rising emissions, climate change and the resultant spike in disasters. Low-lying Singapore is in dire straits if temperatures and sea levels continue to rise.

A robust increase in the carbon tax would send a powerful signal on the Government’s intent to decarbonise the economy. It could help set the ball rolling in reducing emissions regionally, by encouraging countries to levy sufficiently high carbon taxes.

Vinod Thomas is Visiting Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.