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Carbon pricing - what's happening in China and Singapore?

August 21, 2017

 

In coming months, the world's biggest carbon market is planned to be launch. Current estimates suggest that China's national carbon trading scheme will be launched in November at the earliest, though the launch of the scheme has been delayed already from early 2017 to July 2017 and now to November. The model being proposed for China is a cap and trade emissions trading scheme. In this type of scheme, emitters are required to obtain and acquit permits for each tonne of emissions. Some permits may be issued free by the Government as allowances with the remainder being obtained from the market or self generated through implementation of offset projects. The Government sets the overall number of permits available (the cap), leaving the market to set the price - normally through a reverse auction process.

 

The bulk of the detail of the Chinese carbon market is still to be released, but this is an issue that needs thought now - particularly for companies that may be directly or indirectly exposed. This includes companies that supply raw materials to or purchase finished materials from industries that are participating in the emissions trading scheme. Suppliers of raw materials, particularly those supplying material to high emitting facilities, may find themselves with reduced ability to sell their product if the buyer in China faces increased emissions costs and their bottom line is at risk. 

 

In Singapore, a carbon tax is planned to be introduced in 2019. The announcement for this was made during the budget announcement in 2017 and it came as a surprise to many - particularly as there was no indication that a tax would be introduced so soon in Singapore's Paris Agreement targets. The details of the carbon tax are still to be worked out over coming months but it has been announced that all 6 greenhouse gases will be included and the threshold for inclusion in the scheme is annual emissions greater than 25,000 t/a of CO2-e. The operation of the carbon tax is different to that of a cap and trade scheme in that, with a carbon tax, it is the price that is set (rather than a cap) and companies merely need to pay a dollar amount for their emissions. In order that Singaporean companies remain competitive in a global marketplace however, there may be an issuance of allowances or free permits as well.

 

The Government will occasionally revise the carbon price depending on how national emissions are progressing compared to target. The driver for change being that, at some point, it will be cheaper to reduce emissions by completing abatement projects on a site (which has a cost for implementation) than paying the tax. To help prepare for the carbon tax, Singapore based companies should have a good understanding as to what abatement options are available to them and, using financial analysis, determine what the carbon price needs to be to achieve a project NPV of zero. If the breakeven carbon price is less than the actual (or reasonably forecast) carbon price, then that project has a business case.

 

During the public consultation on the carbon tax, the Singapore Government noted that there may be opportunity for linking to other schemes globally and use them as a source of low cost abatement. For example, it may be possible to take advantage of the forthcoming Chinese emissions trading scheme as a source of low cost permits that, if the Government allows it, can be used to offset carbon tax bills in Singapore. It would be appropriate to at start bilateral negotiations soon however, while the details of both schemes are being finalised.

 

An important preparatory step that should be taken with both of these soon to be introduced schemes is to improve the emissions reporting requirements for companies and facilities. Once financial values are associated with emissions, it's important that the emissions being reported are reliable. The central principles of the GHG Protocol provide a good guide to preparation of GHG datasets:

  • Relevance - the dataset appropriately reflects the emissions of a company and is appropriate to decision making needs

  • Completeness - all emissions sources within the corporate boundary are accounted for

  • Consistency - consistent rules are used year to year and between different companies to ensure datasets are comparable

  • Transparency - datasets are generated with a clear audit trail and all decisions and calculations are justified

  • Accuracy - emissions inventories are neither over nor underestimates of the true values

Also important is the fact that inventories are assured and audited to a reasonable level. In Singapore, the Government has indicated that there are plans to improve the robustness of the Energy Conservation Act (which specifies that emissions are to be reported) as a first step prior to the introduction of the carbon tax. China has announced something similar, saying that they will improve the measurement, reporting and verification of emissions. It has also been reported that MRV issues are one of the reasons the national carbon market has been delayed.

 

In both jurisdictions, it is important that companies are prepared for these policy changes as they will have an impact on the bottom line. This starts with determining what exposure a company has to these policies in the first instance. This financial exposure can then be compared to what abatement opportunities are available - both in the company boundaries (abatement) or from other companies, in other sectors or even other countries (offsets). 

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