1. Who pays the bill for carbon tax?
Carbon and other environmental taxes are generally put in place to change the behaviour of taxpayers and encourage them to switch to more environmentally friendly energy sources. However, to be a genuine driver of change, the carbon tax needs to be set at a level which makes it more cost effective for taxpayers to redirect funding and resources towards greener solutions.
Up until now, Singapore’s carbon tax has impacted a small number of very large carbon emitters and was deliberately set at an introductory rate to give taxpayers time to adapt. With Singapore committed to meeting ambitious climate targets over the next decade, the Government has acknowledged that more needs to be done. One of the measures that will be considered in Budget 2022 is an increase in the current carbon tax rate and a broadening of the scope of the taxation to cover a larger number of facilities.
Carbon taxes are often passed onto consumers through increasing commodity prices, such as electricity, fuel and transport, as seen in many countries. This has the potential dual impact of (i) disproportionately impacting consumers, particularly those from lower income households, and (ii) failing to sufficiently incentivise businesses to switch to lower carbon alternatives, as the easier option would be to pass the costs on to the consumer.
A suite of complementary measures could be considered to counter these potential impacts, including subsidies for lower income households to offset rising electricity costs and incentives for businesses to redirect investments to projects focused on reducing emissions.
2. Is Singapore’s carbon tax rate of $5 per tonne enough to change behaviour?
The general consensus among the scientific community is that carbon prices and carbon tax rates are currently far too low. These rates will need to be significantly increased if the world is to reach net-zero emissions by 2050.
Singapore’s carbon tax rate of S$5/tonne of CO2 equivalent (“tCO2e”) is at the lower end of the range. To put this into context, Sweden has the highest rate in the world at around US$130, whereas the current EU carbon price is currently hovering around US$90.
A sharp increase in Singapore’s carbon tax rate could be counter-productive in the short term and may even hinder broader economic progress, given the increased costs for both businesses and consumers that it would bring. A gradual rise is therefore more likely though taxation alone is unlikely to bring about a big enough reduction in emissions. Where Singapore can look to differentiate itself from other countries is through combining increased carbon taxes with incentives and support for businesses that invest in environmental, social and governance (ESG) initiatives and switch to greener alternatives. These three Initiatives can be considered in Budget 2022:
(a) enhanced tax deductions and incentives for property owners to encourage them to make their buildings more energy efficient. This could include a partial tax exemption on taxable gains derived from green property sales and allowances on capital investments
(b) grants or enhanced tax deductions for companies who undertake environmental studies to assess their overall carbon footprint or explore ways in which they can become more efficient.
(c) incentives for financial institutions to encourage more “green lending”, such as reduced tax rates on interest income on loans used for development of green properties, or tax exemptions for investors on income derived from bonds where funds are used for green investments.
3. What might happen if there are revisions to the carbon tax rate or scope?
Currently, the power industry is the sector most affected by the carbon tax in Singapore although the introductory rate of S$5/tCO2e means that the overall impact has been limited. Further increases in the carbon tax rate may translate to higher prices of electricity for consumption, though such price changes would likely be carefully monitored by authorities.
Carbon tax currently does not apply to land transport fuels as such fuels are already subject to excise duties. As any additional taxes are expected be passed onto the consumer in the form of more expensive vehicle fuel rates, we do not anticipate the carbon tax being expanded to cover this. Instead, the authorities will likely continue to encourage the use of electric vehicles and ramp up the related infrastructure.
One area to watch is how much the government will adjust the emissions threshold for carbon tax purpose. The emissions threshold is currently set at 25,000 tCO2e per year — which is a level that only affects larger facilities. If this threshold is reduced, many smaller manufacturing facilities (including those producing essential goods) could come under the scope of carbon taxes, and there may be a knock-on effect on the price of everyday products.
Singapore will be mindful of the fact that many countries in Asia have not yet introduced carbon taxes or carbon pricing measures, and hence a significant increase could impact its regional competitiveness. However, the global movement to address climate change as an urgent priority means that all companies will eventually need to switch to low or no-carbon solutions, irrespective of where they are located. A mass exodus of manufacturing activities from Singapore in the short-term is therefore unlikely.
4. Carbon tax vs carbon trading — what’s the difference?
Both carbon taxes and the emissions trading systems (ETS) are used as a means of bringing down emissions and driving investments into cleaner energy options. But is there a reason why Singapore has adopted the former?
Carbon tax sets a price on carbon by defining a specific rate on either greenhouse gas emissions or on the actual carbon content of such emissions. This pre-defines the price of carbon but typically does not set a cap on total emissions. An ETS, as seen in the EU, is usually in the form of a cap-and-trade system. This sets a cap on the total greenhouse gas emissions and allows the trading of allowances, or “carbon credits”, between emitters. It effectively allows the market to determine the price of carbon emissions.
In May last year, Singapore introduced a private sector-led carbon exchange, Climate Impact X. This differs from an ETS in that it does not have the ability to cap emissions. Instead, it facilitates the trading of “high quality” carbon credits derived from conservation projects in various parts of the world. For example, companies that have made net-zero pledges are able to purchase the credits to offset their emissions. The exchange is good news for Singapore companies looking to reduce their net emissions. However, it is unlikely to have a material impact on total emissions in Singapore.
5. Does an increase in carbon tax mean that Singapore will lower other taxes?
Environmental taxes are generally introduced as a mechanism to change the behaviour of taxpayers, rather than with specific revenue collection targets in mind. This coupled with the fact that the Government will need to start to recoup some of its pandemic-related expenditure, means we are unlikely to see a lowering of other taxes to offset the impact of increasing carbon taxes. The ultimate hope is that the carbon tax rate will eventually reach a point where it becomes more cost effective for emitters to switch to more energy efficient solutions.
That said, to cushion the impact on consumers in the short-term, the Government may look at introducing subsidies for lower income households to cope with increasing electricity prices. Authorities could also introduce vouchers or incentives that make it more affordable for families to purchase energy efficient appliances.
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Associate Director, Marketing & Communications
KPMG in Singapore
KPMG in Singapore
Associate Communications Manager
KPMG in Singapore