The Singapore carbon tax is coming - applicable to emissions from 2019 onwards
The price point by the Government is broadly aligned with a number of other schemes globally
Businesses should seek to understand the direct or indirect impact of the carbon tax on them and consider exploring scenarios where the level of ambition for Singapore emissions reductions is increased
Businesses can also consider what efficiency or alternative energy options might be available to them to reduce their exposure
It's no secret now that a carbon tax is coming in Singapore. As announced in the February budget, the level of the carbon tax is set at $5 (SGD) per tonne and will apply to large emitters. The carbon tax will apply for emissions from 2019, and payment for those will be due in 2020. The threshold to be a large emitter under the draft legislation is Scope 1 (i.e., direct from a facility) emissions of 25,000 t CO2-e per year. Using this metric, around 30-40 facilities will be directly affected though this includes the power generation facilities. Given that emissions intensive power generation such as natural gas will most likely pass the cost through to customers, all businesses and residences will be ultimately affected in some way.
At first glance, the carbon price being applied seems modest, it is a start however and provides a framework in which the price can be increased in future if necessary - particularly if national policies for emissions reductions are strengthened in future to meet the global targets that form the UN Framework Convention on Climate Change process. Setting a price of carbon, that is adequate enough to spur action is widely recognised as a key part of enabling emissions reductions. A price on carbon has the effect of pricing an externality (emissions) that has a social cost but not necessarily a financial cost. What is important from a contextual point of view is to look at Singapore's carbon price and explore how the scheme and the price level compares to other schemes around the world.
The World Bank releases an annual report on the State and Trends of Carbon Pricing. The latest version was released in November 2017. This report shows that, as of 2017, there are currently 42 national and 25 sub-national jurisdictions with a price on carbon. In total, there are 47 initiatives either implemented or scheduled for implementation. In addition, 81 national commitments made as part of the Paris Agreement refer to pricing of carbon explicitly as a way in which targets will be met. Given that Singapore is one of 47 initiatives - from a total of 195 countries, it can perhaps be referred to as a relatively early adopter; in the top quartile at least.
So how does Singapore's price compare? It's not surprising that the price level for carbon emissions varies widely around the world. The actual price point depends on a number of factors such as the type of scheme being employed (e.g., emissions trading vs. a tax), the emissions reduction ambitions of the country, the emissions the price applies to, structure of the economy and historical rates of decarbonisation. It's precisely these factors that mean that it's difficult to compare carbon prices across different schemes.
Currently, the largest carbon pricing mechanism - in terms of emissions units traded - is the EU Emissions Trading Scheme. This scheme is a cap and trade emissions trading scheme where the maximum number of permits is set centrally, aligned with emissions targets, and the market sets the price it's willing to pay for those permits via reverse auction. The current price (as of March 2018) for permits is ~10.20 Euro ($17 SGD).
The Chinese emissions trading scheme, set to be progressively introduced - starting with the power sector, will overtake the EU scheme as the biggest scheme in the world once introduced. No firm start date has been given though signs point toward the power sector pricing carbon in 2019 and a full emissions trading scheme covering other high emitting industries around 2020 - 21. Even limited to just the power industry, the pricing mechanism will still cover in excess of 3 billion tonnes of GHGs, well above the almost 2 billion tonnes in the EU ETS. As preparation for the national scheme, a number pilot schemes have been running in China since 2013. These schemes are in: Shenzhen, Shanghai, Beijing, Guangdong and Tianjin (all in 2013); Hubei and Chongqing (2014); and Fujian (2016). If the national scheme were to operate at the highest price point seen in these schemes, the price would be in line with the Beijing scheme which was approximately 51 CNY ($10.50 SGD) per tonne in January 2018.
Looking at pricing mechanisms that are straight taxes (a scheme where the price is set centrally to achieve an outcome - rather than the number of permits being set), many carbon taxes have price points set similar to that being introduced in Singapore. Examples include the carbon taxes in Mexico ($1 - $3 USD/t), Estonia and Japan ($3 USD/t), Chile, Colombia and Latvia ($5 USD/t) and Portugal ($8 USD/t). Other carbon taxes, particularly those in Europe are set comparatively high. For example Sweden's carbon tax, applied to emissions not covered by the EU ETS is set at 1,150 SEK ($183 SGD) per tonne in 2018. Other high EU carbon taxes include Switzerland (96 CHF/$133 SGD) and Finland (~56 Euro/$92 SGD).
According to the World Bank, approximately 75% of the total emissions covered by a pricing mechanism are subjected to prices of $10 USD/tonne and lower. This percentage will have changed slightly with the recent increase in prices in the EU scheme in the time since the World Bank report was published. So this puts Singapore in line with the majority of carbon pricing applied globally. What's important however is the ability to adjust the price point in line with ambition. It is largely expected that nations will increase their level of ambition with regard to emissions reductions in the future - in line with the 5 yearly review cycle of Nationally Determined Contributions (NDC) under the Paris Agreement. The $5/tonne carbon tax being applied in Singapore may be sufficient to catalyse action towards hitting the country's NDC target though annual monitoring of emissions, emissions intensity and the gap to the target trajectory are required to ensure this is the case. The High Level Commission on Carbon Prices in their report, published in May 2017, indicated that the carbon prices required (on all emissions, globally) to achieve the stated 2 degree goal of the Paris Agreement have to be $40-$80 USD/tonne by 2020 and $50-$100 USD/tonne by 2030. It's very clear that the majority of carbon prices in place globally are far from this point.
And what should businesses do? Firstly, although the Singapore carbon tax will only directly impact a small number of facilities, a much larger may be indirectly impacted through increases in electricity tariffs. Businesses need to understand this impact and its materiality - they can then explore ways to reduce the impact through efficiency programs or through purchase of offsets or alternative (emissions free) energy. Also, businesses should stress test against emissions reduction scenarios such as the 2 degree scenario. This is still the overall aim of the Governments of the world. Although the current NDCs are not in line with achieving this goal, the impact of such a scenario on businesses should be studied and, if it's a material risk, disclosed to the market. At the very least, scenarios studying the impact of different carbon tax levels should be explored.