What the rise in carbon tax means for companies
Singapore’s raised net zero ambition and increased carbon price provide the financial impetus for companies to accelerate decarbonisation.
When Singapore announced the introduction of a carbon tax from 2019 in Budget 2018, it was the first Southeast Asian nation to do so. While the tax rate of S$5 per tonne of greenhouse gas emissions was not high, the coverage was broad, capturing about 80% of national emissions. This allowed the Singapore Government to ring the bell and inform businesses that the country is serious about reducing emissions across all sectors and has its sights locked on transiting to a low-carbon economy.1
On 18 February 2022, Singapore Minister for Finance, Lawrence Wong, announced that the Government plans to further raise the carbon tax significantly to S$25 per tonne in 2024, then to S$45 per tonne in 2026, with a view to arrive at S$50–S$80 per tonne in 2030. This is expected to increase electricity costs by approximately 2%–3%, 4%–7% and 8%–12% in 2024, 2026 and 2030 respectively, assuming companies continue to consume fossil fuel-based electricity.
Some are surprised by the quantum of the increase beyond the widely anticipated S$10-S$15 per tonne. Yet this is a necessity. It sends a strong message and provides the financial impetus for businesses to reduce their carbon emissions to enable Singapore to achieve its raised national climate goal of net zero emissions by or around 2050.
How Singapore compares with other nations
Based on information from the United Nations, 130 countries have now set or are considering a target of reducing emissions to net zero by 2050. The adoption of carbon pricing as a key economic lever to reduce emissions is expected to be a global norm in time.
As for the right price of carbon to allow countries to achieve enough reduction to keep the global increase in temperature below 2 degrees Celsius, the International Monetary Fund recommends a 2030 carbon price floor of US$75 for advanced economies, about US$50 for high-income emerging markets such as China and US$25 for lower-income emerging markets such as India. The announced increase in Singapore’s carbon tax is therefore in the right direction.
Riding on the back of the passage of Article 6 of the Paris Agreement, the trading of carbon credits on a global scale is set to grow and will likely drive a steady growth in carbon markets. Hence, the announcement that companies will be given the option to use high-quality international carbon credits to offset up to 5% of taxable emissions in 2024 is a leading one, putting Singapore among jurisdictions that have implemented similar mechanisms, such as Japan and the European Union. Indeed, this announcement is a strategic and welcomed move — one that will position Singapore well to become a carbon services and trading hub.
But will the use of carbon offsets help companies manage the cost of carbon tax?
The price of carbon offsets is a function of multiple factors — mainly project types and the country of origin — and is expected to increase given demands from the private sector to become net zero or carbon-neutral. Given the range of projects available in the market, some more credible than others, the specific mention of high-quality carbon credits such as offsets from nature-based climate solutions is noteworthy. The Singapore Government has yet to provide details on what would qualify as high-quality carbon offsets. However, this option can potentially cushion the impact of the hike in carbon tax if companies can successfully invest in such qualifying carbon credits or secure them in advance and at prices below the increased carbon tax.
Impetus to decarbonise
Today, companies are exposed to multiple emerging drivers that will require them to manage climate change holistically. Increasing regulations such as a higher carbon tax, enhanced climate reporting for Singapore Exchange-listed companies, evolving expectations from institutional investors focusing on a net-zero portfolio as well as consumer demands for high-quality, environmentally friendly products and services have been the main drivers for decarbonisation.
In general, a business should look into four key elements when developing its emission pathway to net zero: optimizing the energy mix, exploring electrification opportunities, reducing process emissions by investing in new technologies and focusing on R&D to innovate product offerings. Each of these will have its own set of challenges and nuances.
The world is heading toward a low-carbon future that is powered by renewables and sustainably financed. Considering the climate emergency that we are in today, there is a price to pay for continued carbon emissions at the same rate or a growing one. We can pay this price via the ambitious carbon tax or through the cost of inaction in the form of climate calamities and financial instability. For businesses that look at the long term, the choice is clear.
The co-authors of this article are Simon Yeo, EY Asean Climate Change and Sustainability Services Leader; Praveen Tekchandani, Partner, Climate Change and Sustainability Services from Ernst & Young LLP; and Sanjeev Gupta, EY Asia-Pacific Oil & Gas Leader.
This article was first published in The Business Times on 21 February 2022.
