During the budget speech on 18 February 2022, by Finance Minister Lawrence Wong, the future of Singapore’s carbon tax was announced – with other details covering decarbonization pathways for the country and how the Singapore Government will utilize green bonds for infrastructure projects. Here are 10 things you should know:
1 - History of the carbon tax
Back in 2018, the country introduced the Carbon Pricing Act – the legislative framework for the carbon tax. This Act covers registration as a reportable or taxable facility, reporting of emissions to the National Environment Agency (NEA) and payment of the carbon tax. This framework was the first to be introduced anywhere in South East Asia. The Carbon Pricing Act set the carbon tax at a flat rate of $5/t CO2-e (SGD) and crucially, there is no issuance of free permits – all covered emissions need to be reported and paid for.
2 - What’s a carbon tax or a carbon price?
A carbon tax or price is a tax levied on the carbon emissions produced by businesses and individuals. Carbon taxes are intended to make visible the "e;hidden"e; social costs of carbon emissions, that otherwise would have been conveniently labeled as 'negative externalities’ and not borne by anyone.
3- What’s a ‘business facility’?
The Carbon Pricing Act applies on a facility-by-facility basis with a ‘business facility’ being defined as a single site where a business activity, or activities, are carried out – activities that generate greenhouse gas emissions and form a single undertaking or enterprise. For the purposes of the Carbon Pricing Act, it is the company who has operational control of a facility that is the one that needs to register and ultimately be the one that is liable for paying the carbon tax for that facility. Operational control itself is also a defined term that refers to the company who has the greatest authority to introduce and implement operating, health and safety, and environment policies for that facility.
4- Reportable and taxable facilities - the difference
There are two thresholds that sit within the Carbon Pricing Act. The first, 2,000 t CO2-e/a of covered emissions triggers a requirement to register as a reportable facility to the NEA. The second, higher threshold of 25,000 t CO2-e/a of covered emissions means that a facility must register as a taxable facility.
Reportable facilities – i.e., covered emissions of 2,000 t CO2-e/a, just have to report emissions to the NEA each year – using the NEA’s Measurement and Reporting Guidelines to estimate emissions. These reportable facilities are generally medium-sized manufacturing facilities that use diesel, town gas and/or natural gas in equipment such as boilers, generators and other stationary applications (remember - transporting goods or people is excluded from the carbon price). Even larger food manufacturers that use town gas or natural gas for industrial cooking, may be captured as reportable facilities.
Taxable facilities- These facilities are generally high emitters in the country - power stations, oil refineries, chemical facilities and heavy industry, semiconductor manufacturers, etc. There are around 40-50 facilities that are taxable facilities.
5- What does the Carbon Pricing Act include and exclude?
The Carbon Pricing Act, like all compliance schemes, only covers direct emissions from a facility (called Scope 1 emissions). Under the Act, not all emissions are covered. Excluded emissions sources are:
- Nitrogen trifluoride emissions
- Sulphur hexafluoride from electrical equipment
- Carbon dioxide for blasting and purging
- Carbon dioxide from combustion of lubricants or paraffin wax
- Carbon dioxide from biofuels
- Hydrofluorocarbons from refrigeration or air-conditioning
- Perfluorocarbons from refrigeration or air-conditioning
- Emissions from fire protection equipment
- Fugitive emissions from oil and gas (except for flaring and venting)
- Emissions from transport of people or goods
- Emissions from fuels where an excise is payable
- Emissions from agriculture, forestry and land use
6- The six steps program of compliance
Although the carbon price in Singapore acts like a tax in that it's fixed price (as opposed to a market-based mechanism, where the price is set by the market), it does use a scheme whereby liable facilities need to acquire credits and surrender them to match the amount of covered emissions in a reporting year. For the first years of the carbon price, only the NEA sells these credits for $5/unit (SGD)
There hasn’t yet been any indication that the carbon pricing act could be broadened to include businesses that have reportable facilities but even the process of reporting emissions to the NEA may be daunting for some of these facilities that may not even know that they have this reporting obligation.
To provide a bit of perspective into what 2,000 t CO2-e/a actually is, it’s equivalent to 1,900 litres per day of diesel, 3,400 litres per day of LPG, 2 tonnes per day of LNG or 100 gigajoules per day of natural gas.
7- Budget 2022; getting the carbon price to $80/t
It was always the case that the carbon price in Singapore would start off relatively low, at $5/t CO2-e, to give Singaporean businesses the time to get used to the concept of a carbon price and build the systems and processes needed to support reporting to the NEA. The recent budget speech now provides the roadmap for increases in the carbon price in coming years.
The Singapore Government had previously flagged an increase to $10-$15/t CO2-e as the next step, but this new announcement exceeds that – increasing to $25/t CO2-e as the first step in 2024 – and potentially going as high as $80/t CO2-e in 2030. This would bring the carbon price in Singapore closer to the sort of carbon price that underpins net-zero by 2050 scenarios – such as that developed by the International Energy Agency, which uses a carbon price of $90/t CO2-e (USD) in major emerging economies and $130/t CO2-e (USD) in advanced economies in 2030. Similarly, the International Monetary Fund recommends a minimum carbon price of $50/t CO2-e (USD) in major emerging economies and $75/t CO2-e (USD) in advanced economies in 2030 – these are framed as a carbon price floor.
This increase in carbon price, which should certainly be commended, also means that Singapore’s commitments to net-zero may also be brought forward from “as soon as practical in the second half of the century” to “by or around mid-century” as mentioned in the budget speech. A firm commitment to target net-zero emissions by 2050 will bring Singapore into line with other countries and could even be considered for inclusion in the updated targets under the Paris Agreement to be brought to COP27 in Egypt later in 2022.
8- Carbon offsets and flexible compliance
The budget speech also outlined that companies will be able to use carbon offsets for a small portion of their carbon tax liability from 2024. Singaporean businesses that are taxable facilities will be able to use internationally sourced carbon credits that are high-quality to offset up to 5% of their taxable emissions. This should act to reduce compliance costs as offsets are currently trading at up to $10/t CO2-e (USD). Prices do vary widely however depending on the registry and project being used. This allowance of high-quality offsets will support both lower cost compliance for Singaporean businesses but also will support the further development of Singapore as a carbon services hub for the region – a subject that has been of interest to the Singaporean government in the last two years.
9- What Should I Do ? - Measurement is the first step
Businesses should certainly be thinking about what the increase in carbon price will mean to them. From a purely economically rational point of view, there comes a point where the explicit carbon price exceeds the cost of completing an emissions reduction project and actually reducing emissions – which is of course the overall aim of a carbon price, to reduce emissions! Businesses in Singapore should be mapping out emissions reduction solutions, considering how much decarbonization will cost and how these fit into future budgets.
Although the carbon price only explicitly impacts the 40-50 taxable facilities in the country, all businesses will be impacted via their supply chains. Smaller businesses, or those that have a large reliance on electricity will see electricity costs increased as a result of the carbon price. For example, if carbon prices reach $80/t CO2-e in 2030, electricity prices will be 13% higher than current. Businesses reliant on electricity should seek to understand their indirect emissions as a result of this electricity consumption and consider budgeting for increases in the tariff and examining solutions to reduce energy and emissions.
Key to understanding the impacts of this increasing carbon price is having visibility on emissions inventories for your business. What do your emissions look like, how will they change in future and what are your options to reduce? Having this information at your fingertips on a regular basis will allow robust business strategies to be developed and decarbonization pathways to be formulated. This can then inform your own emissions reduction targets – ensuring that they (as a minimum) align with Singapore’s target of net-zero emissions in 2050. Singapore will have much more success in hitting targets if all Singaporean businesses are aligned and work to achieve the same decarbonization.
10- Unravel Carbon’s Final Thoughts
Overall, this is certainly a great step by the Singapore Government. Having clarity for Singaporean businesses is crucial for business planning and this clear roadmap provides that. Regionally – and even extending through Asia-Pacific more broadly – Singapore’s actions are leading the way. The proposed plan to increase the level of the carbon tax to (potentially) 16 times its current rate within the next 8 years is definitely ahead of the pack across Asia-Pacific and opening up to international offset markets will be welcomed by those businesses in the carbon services industry. Singapore is cementing its place as a leader in this area across the region and we’re already seeing the knock-on effects in terms of discussion on carbon pricing schemes in Indonesia and Malaysia.
It is critical that businesses (as a minimum) understand their own emissions footprints and use this information to examine the impacts of higher carbon prices and national decarbonization plans. This is where the potential for automated solutions for emissions calculations and solution identification really comes to the fore.