The Energy Transition
Putting a price tag on carbon
With nobody bearing the costs of carbon emissions, these become “negative externalities.” But the world is moving to a stage where CO2, methane and nitrous oxide, the three main greenhouse gases, are measured, priced, and indirectly traded through carbon credits. Otherwise put, they are internalized. 23% of the world’s GHG emissions are currently priced via a carbon pricing mechanism, existent in more than 40 countries. More people than ever participate in carbon markets, not only compliance based (CCMs), but also voluntary carbon markets (VCMs), with no binding regulation. The VCM market hit US$1 billion in value in 2021, more than twice the 2020 value, according to South Pole.
Singapore is one of the latest countries to have firmly reinforced its commitment to carbon taxation. After introducing the Carbon Pricing Act and setting a flat carbon tax rate of S$5/t of CO2-e in 2018, early this year the government announced a fivefold tax increase by 2024-2025 and a dramatic increase of up to sixteen times by 2030. A carbon tax of up to S$80/t in the next eight years is sending a strong message to the oil and chemical industries, but also to the energy sector, which contributes to about 40% of the country’s emissions, according to the Energy Market Authority (EMA). The industry can either pay for increasingly more expensive GHG or invest in lower-carbon solutions. The tax is designed to prompt carbon-intensive industries to fast-track their energy transition, but some worry it will fall short of its intended purpose, ending up disfranchising the manufacturing industry.
“The introduction and gradual increase in the carbon tax value is an important initiative, but the challenge I see is the short-sighted look at CO2 reduction within one’s own backyard. CO2 does not take note of borders and affects the entire world. The result is that some manufacturers may choose a local solution over an international one, just to meet local carbon restrictions.”
Roger Marchioni, Asia Director, Chemicals and Polymers, Braskem
The biggest fear is that the tax will hurt Singapore’s attractiveness as a production hub and lead to offshoring. This might depend on whether other countries inevitably adopt similar policies, or, alternatively, do not, whereby emissions simply move elsewhere, defeating the purpose of the tax; Singapore alone becomes greener yet less competitive. To a large extent, the long-term success of Singapore’s carbon pricing will depend on the trajectory taken by other economies.
Singapore is certainly not the first, the only, or the last country to introduce such a policy. The first carbon tax was first implemented by Finland in 1990, and today, all developed economies except for the United States and Australia have a nationwide carbon pricing mechanism. Last year, China joined this league by launching its own model of an emissions trading system (ETS), after having piloted it since 2013 in its largest cities. China’s ETS is now the world’s largest carbon market, and the tax will first target coal and gas-fired energy plants, to be extended to the construction, oil, and chemicals industries.
Even though some form of carbon pricing is becoming the norm around the developed world, Singapore is the first country in Southeast Asia to have taken this path, which may put it at a disadvantage to lower-cost neighbours. Nevertheless, recent policy changes in the EU suggest that all countries will, eventually, be liable for the carbon emissions associated with their exports to the EU. Last year, the European Council approved the Carbon Border Adjustment Mechanism (CBAM) to avoid carbon leakage from non-EU exporters. From 2026 onwards, non-EU exporters of iron, steel, cement, fertilizer, aluminum, and electricity will pay a carbon border fee when goods arrive in Europe. This new regulation creates a positive framework for the Singaporean carbon tax: “That means that everyone will need to abide by the same rules, whether producing in Singapore or in other parts of Asia, in order to sell in the EU,” said John Hong, APAC sales director and Singapore country head at Infineum.
While a global carbon tax is difficult to implement in the near future given the gaps in the level of maturity in different systems, more countries will seek to synergize their carbon markets. COP26 delivered an important milestone in this sense, reaching an agreement on the global carbon market mechanism (GCMM) within Article 6 of the Paris Agreement that supports the transfer of emission reductions between countries. Meanwhile, more countries are looking at some form of carbon pricing. In ASEAN, Vietnam, Indonesia and Thailand are currently considering ETSs.
Carbon taxation has proven effective in other countries. GHG emissions in the UK have fallen to their lowest since 1890, according to Carbon Brief; at the same time, however, UK’s carbon tax meant the end of the country’s coal industry. Carbon taxation is challenging for carbon-intensive industries, which is why in countries like Canada provincial governments offer big exemptions to a number of sectors, including chemicals. The effectiveness of Singapore’s carbon tax begs two questions: Is it the right pricing mechanism and is it the right price?
Is it the right mechanism?
Singapore opted for a carbon tax versus a cap-and-trade mechanism like the EU’s emission trading system (ETS). Unlike an ETS, which allows emitters to trade emission units established by the market, a carbon tax has a fixed price protected from external forces. But the feature that makes the Singaporean carbon price mechanism unique is that it also gives large emitters the flexibility to buy independently certified international credits to offset up to 5% of their taxable emissions. This hybrid model has been praised for giving eligible carbon emitters more flexibility, and for creating new opportunities for Singapore: “The potential of Singapore as a domestic carbon market is quite small, currently at around 55 million t/y of emissions, but there is an opportunity for Singapore to get credits from offset projects in other markets, like Indonesia or Malaysia, something that the EDB is looking at,” said Marc Allen, co-founder of Unravel Carbon.
Last year, Enterprise Singapore, together with the EDB, jointly commissioned a study to assess the role that Singapore could play as a service hub for carbon management services. Singapore’s advantages, including its established role as a trading and financial hub, its close connectivity to Southeast Asia, but also its commitment to carbon mitigation, recommend the country for the job. According to the study, the projected gross could add up to S$7.6 billion to Singapore’s economy by 2050.
Lee Pak Sing, assistant chief executive at Enterprise Singapore (ESG), sees Singapore as the ideal carbon hub in Asia: “Singapore has a growing carbon services ecosystem today, with over 70 carbon service companies that include carbon advisory firms such as South Pole, and carbon marketplaces such as AirCarbon Exchange and Climate Impact X. The World Bank has also announced its collaboration with Singapore on the Climate Warehouse initiative to coordinate multiple carbon registries. This initiative will enhance transparency and mitigate double-counting of carbon credits.”
Is it the right price?
Governments choosing a carbon tax mechanism are always faced with the question of what is a fair price that will lead to meaningful change. The proof that the price works is when investments in carbon abatement, renewables and improved efficiencies become cheaper and more appealing than paying for carbon credits, while also making sure the tax does not burn the industry. Singapore started with a low carbon rate of S$5/t to get the industry used to the new system and give it time to adjust. At the two extremes, Sweden levies the highest carbon tax at S$119/t, while Poland has a tax rate under S$1. According to the IMF, a carbon price floor at US$75/ton for advanced economies, US$50/t for higher income emerging countries, and US$25/t for lower-income emerging countries would help to bring emissions in line with 2030 goals. Singapore’s proposed price falls well within that range: “At a cost of US$80/ton of emissions in 2030, many abatement or emission reduction projects become viable,” said Marc Allen, co-founder of Unravel Carbon.
Though it is only directly applicable to 50 taxable facilities in the country, according to Unravel Carbon, the tax will indirectly affect all businesses because of their consumption of electricity; the same source estimates that electricity costs will go up by 13% in 2030 at a carbon tax of S$80/t. This should incentivize businesses in Singapore to invest in decarbonization technologies themselves, or buy carbon removal credits which go to finance the development of breakthrough technologies.
Image courtesy of Advario
CONCLUDING THOUGHT
“Carbon reduction initiatives come with the challenge of quantifying and analyzing carbon-related data, and it is in this space that AI and IoT-enabled software can help drive important improvements to cut emissions and increase productivity. The availability of smart wireless sensors marks a steady foundation from which we can derive analytics and translate these into meaningful data for the user. Done correctly, the use of autonomous operations allows plants to operate remotely.”
William Tan, General Manager, Emerson Automation Solutions