Cutting carbon

“[Imposing] carbon taxes is a quick and easy fix to work on our carbon emissions,” says the 37-year-old, who is a member of the Singapore Youth for Climate Action Group. “Our current carbon tax value is too little and a mere slap on the wrist for the oil majors and large corporations.”

The concept of carbon pricing is straightforward. It raises the prices of certain carbon-intensive products so that people use less of them and businesses find cleaner ways to produce them. The mechanism is the first line of response favoured by most economists to tackle global warming. More than 40 nations have put a price on carbon dioxide (CO2) pollution today, ranging from less than US$1 ($1.35) to US$139 per tonne, either through a direct tax or emissions trading programmes, covering about one-fifth of global greenhouse gas emissions. However, economists caution against a tax so high that it impedes the efforts of export-driven countries to succeed economically.

This year, Singapore implemented its own carbon tax of $5 a tonne of emissions. The government will review the policy in 2023, and plans to increase it to between $10 and $15 a tonne by 2030 — a price some detractors argue to be still too low to spur a major switch to green technologies.

The Singapore carbon tax does not exempt any sector, but only industrial facilities that generate 25,000 tonnes of greenhouse gasses or more a year will be taxed. This translates roughly into between 30 and 40 companies, responsible for 80% of the country’s greenhouse gas emissions. These are mainly the petroleum refineries, semiconductor companies and power producers such as Singapore-listed Sembcorp Industries and Keppel Corp, as well as YTL PowerSeraya, which is owned by Malaysian-listed YTL PowerSeraya International.

Senoko Energy, the largest power station in Singapore, says the power generation sector is expected to pay $100 million in carbon taxes a year over the next five years. However, the costs to these companies are estimated to be relatively low, at least for now. In the case of Sembcorp, OCBC Investment Research projected that the impact on net profit would be less than $20 million. “This is less than 10% of the group’s net profit in 2017 and lower than 7% of our FY2018 net profit forecast,” it says in a February report.

The smaller energy retailers have said the carbon tax has very little impact on them. “Carbon tax is only levied on the high CO2 producers, and of course, while the price we pay has the carbon tax attached to it, the amount it adds on is relatively low,” says a spokesperson for Ohm Energy. “For us as a company, the prices have stayed the same, and we have not seen any specific change in the energy industry at all.”

Other retailers have indicated that they could bundle the carbon tax into their pricing. The government has said that the impact on households is an increase of about one percentage point in electricity and gas expenses on average. Some households will be eligible for rebates that will cover the additional electricity and gas expenses from the carbon tax.

Significantly, the carbon tax is projected to bring in about $1 billion in government revenue over the first five years, according to Deputy Prime Minister and Finance Minister Heng Swee Keat, and these funds will go to green projects through two government grants. But it may still be too early to tell the impact of Singapore’s carbon tax. In practice, carbon pricing has reduced emissions from the business-as-usual scenario, albeit to a varying degree of success. But researchers and analysts argue that carbon pricing in most countries is not yet at a level that can spur radical reduction of carbon emissions or a switch to a low-carbon economy. In most countries with a carbon tax, emissions reduction has been modest at best.

The United Nations suggests that governments will need to impose carbon prices of US$135 to US$5,500 per tonne of pollution by 2030 to halt global warming beyond 1.5º Celsuis. In 2018, the average carbon prices in 42 markets was around US$8 a tonne, according to a recent report by the Organisation for Economic Co-operation and Development. Some market watchers believe Singapore would eventually increase the price to match other developed countries, or would push for more low-carbon initiatives as pressure piles on governments to make concerted efforts to tackle climate change.

Subjective success

The Singapore government has said the initially low carbon tax is meant to give industries time to transition to more energy-efficient operations.

In any case, carbon programmes elsewhere so far have yielded mixed results. Among the 40-plus countries that have a price on pollution, it is hard to compare the various policies, let alone objectively measure which are better at reducing carbon emissions and spurring low-carbon innovation. For example, Canada’s carbon pricing, even though much higher than Singapore’s, exempts a number of industries that face trade competition. Singapore does not exempt any industry from its carbon policy.

In Sweden, Norway, Australia and the UK, as well as Canadian province British Columbia, carbon pricing has brought down emissions. British Columbia’s policy reduced residential natural gas consumption by up to 10.1% between 1990 and 2014. It currently has a carbon tax of US$30 a tonne. The UK’s coal demand plummeted significantly after the introduction of its carbon price floor of US$25 a tonne.

Chile, which has a carbon price close to Singapore’s of US$5 a tonne, found that there was no change to how businesses invest. But, promisingly, there are signs that companies are giving more priority to renewable and non-conventional energy sources.

However, other markets have not shared the same success. The European Union has a cap-and-trade system, which lets companies buy and sell carbon permits. But the glut of permits in the market after the financial crisis rendered the programme relatively ineffective to reduce pollution. The EU agreed to curb oversupply in 2017. In some states in the US, there are other climate policies to reduce emissions, and researchers found it hard to quantify how much carbon pricing played a part. Meanwhile, proposals to increase carbon prices in France and Australia were shelved after severe political backlash.

“At present, there is no conclusive evidence of exactly which carbon tax design features offer maximum emissions reductions with minimal impacts on stakeholders. This is largely due to variations in economic conditions, complementary low-carbon policy, overall tax mix and carbon tax design,” says Steven Geroe, a law lecturer at La Trobe University in Melbourne, in an article for the Journal of Environment and Development.

Demand from investors

Nevertheless, a national carbon tax policy is a strong signal for investors to invest in Singapore, say market watchers.

Global investors are aggressively eliminating fossil fuel-related entities from their portfolios as regulators around the world introduce tougher measures against polluters. A report by The Economist Intelligence Unit projected that private investors stand to lose up to US$13.8 trillion between now and the year 2100 if the rise in temperatures globally exceeds 6º Celsius. The climate threat to their portfolios has made major institutional investors around the world take a hard look at their investments. Many have taken drastic measures to cut out the biggest polluters from their slate. For instance, French insurance firm AXA divested US$3 billion of investments in companies that relied on coal. The Portfolio Decarbonization Coalition, which aims to get institutional investors to reduce carbon in their investments, has more than 30 investors and US$800 billion in assets under management. It includes major money managers such as Amundi Asset Management and BNP Paribas Investment Partners, as well as institutional investors such as Allianz and the New York State Common Retirement Fund.

“What we do know is that a country’s direction makes a big impact [for global investors]... When there is a signalling [of carbon pricing], you are likely to get more foreign investors to invest cross-border. When this happens, the market [becomes] more competitive and the cost [of funding low-carbon projects] will come down,” says Mikkel Larsen, the chief sustainability officer at DBS Bank.

Singapore’s carbon programme aims to encourage businesses to reduce emissions and find new opportunities in greener fields. And that is where investors see opportunities.

“Companies, especially those with a low carbon efficiency, should be relatively more inclined to explore ways to reduce the carbon intensity of their business. Owners of older shopping malls, for instance, might find [it] a good enough reason to push through that chiller retrofit capital expenditure plan that they have been talking about over the past few years,” says Jerry Goh, Asian equities investment manager at Aberdeen Standard Investments.

“Business opportunities, which include bike sharing, the development of floating solar farms, rooftop solar capabilities, production plant upgrades, chiller retrofits, responsible financing and green bonds, or even consulting services to help businesses rethink their energy and carbon efficiencies, would be aplenty,” he adds. “But the key is still financial viability. Those that are able to provide solutions or innovate their product offering would be better aligned to the new economy.”

Singapore’s challenges

There is concern that the carbon emissions pricing in Singapore is too low to spur a low-carbon transformation among businesses. According to Ponciano Manalo, principal research analyst for climate and carbon at IHS Markit, Singapore’s carbon tax is one-tenth of the price it needs to be in order to stimulate tangible changes in terms of behaviour and practices of consumers and businesses.

“According to our research, US$40 to US$80 [per tonne] is the price level to [incentivise] behaviour. And while slapping a price on carbon puts Singapore ahead of other countries that do not have a carbon tax, it’s highly unlikely to cause any real change,” Manalo tells The Edge Singapore.

Even with plans to hike the carbon tax, Singapore is still raising prices at a slower rate than a few other countries. Canada’s nationwide carbon tax, introduced earlier this year, would see a tax of US$15 a tonne of emissions — and that would rise to US$38 a tonne by 2022, in three short years. British Columbia will increase its carbon tax of US$30 a tonne to US$39 in 2021.

The main concern is that a low price may not incentivise innovation among businesses, but only result in the buck being passed to consumers instead. Aniq Ahsan, a former A*STAR research engineer who is doing a doctoral research on decarbonisation at Oxford University, says even with the utilisation of every available space in Singapore to generate solar generation, it will produce only 20% of the energy the country needs. That makes finding alternative technologies to generate power while reducing emissions a very costly and long-drawn-out effort for businesses.

“Ultimately, it will be the consumers who will be faced with the choice of consuming less, but the ones who really need to change their behaviours are the emitters. And a carbon tax or credit is unlikely to address the root cause of the issue,” he says. “Even if 100% of the carbon tax is forwarded to residential consumers, it will cause only a 1% increase in electricity prices — this is insufficient to motivate a tangible change in technology.”

Indeed, one of the biggest challenges Singapore faces is moving away from fossil fuels. According to the Energy Market Authority, more than 95% of the electricity generated here uses natural gas as a fuel source. To be sure, petroleum products accounted for only 0.55% of the fuel mix on average in 2018, according to statistics from EMA. This is a marked improvement from a decade ago, when petroleum products accounted for 17.2% of the fuel mix and natural gas made up 80%. Still, even as natural gas is cleaner in emissions compared with coal and oil, it is still a fossil fuel.

In 2016, the energy and chemical sector in Singapore accounted for $68.7 billion in economic output and employed more than 25,000 people. The chemicals industry, another major carbon polluter, accounted for $1.3 billion in fixed asset investment in 2016 and contributed $400 million to Singapore’s GDP. The energy and chemicals sectors combined generated over $81 billion in Singapore’s total output, about a third of the country’s manufacturing strength in 2015. The manufacturing sector contributed 22% to GDP in 2018.

There are also obstacles within industries themselves that make innovation in renewable energy sources tough. Take the power industry, for instance. “We are quite small in terms of [the size of the] power grid. The problem with being small is that the newest technologies tend to be much larger in size. Most of our current [generators have the] capacity of 300mw to 400mw. But the newer technologies, which have higher efficiencies, are 20% larger. So, we are still using F-class gas turbines that other markets have phased out,” says Cheng Zhi Wei, head of product and strategy at Electrify, a marketplace for retail energy. “There is a good reason for this — that is, our energy security as a country. You don’t want a single generation unit to represent a significant percentage of total supply.”

One banker who works with big carbon emitters to reduce their emissions says it could take decades before the industry could transition to low-carbon technologies. For one, some green technologies still cannot be scaled economically in land-scarce Singapore.

An industry player says solar energy companies are also not keen to sell electricity to the grid because it is more profitable to sell directly to the facilities at which they operate the solar panels. In addition, a player in the solar space says it is incredibly difficult to work with some major energy generators in the country, as they refuse to share data with them.

To be sure, the power industry is extremely capital-intensive. “The possible improvements on the supply side are relatively limited, given that almost 100% of Singapore’s electricity is generated from combined-cycle gas turbines using, by and large, the most efficient technology, and these are huge and long term investments of typically at least 25 years,” says Bernard Esselinckx, president and CEO of Senoko Energy. “We believe there is potential to improve energy efficiency on the demand side through methods such as energy management practices and district cooling.”

How to get to a low-carbon economy

Industry players have made a commitment to reduce carbon emissions and increase the use of renewables. Senoko Energy, for instance, says it has reduced carbon emissions per kilowatt hour of electricity by 42% since 2000. As a group, Sembcorp’s direct CO2 emissions have increased from 15.1 million tonnes in 2016 to 23.6 million tonnes in 2018, mainly due to its business in India, where it operates a coal-fired power plant. But it has also increased its renewable energy generation from 1,720mw to 2,589mw during that period. Sembcorp does not break down its carbon emissions for Singapore, but analysts say it would be in the range of 10% to 15% of its total emissions.

Keppel, which has a property development unit in addition to its shipbuilding business, saw its direct carbon emissions in Singapore decrease from one million tonnes to 0.8 million tonnes in the last three years. Globally, its emissions fell from 1.2 million tonnes to one million tonnes. Keppel plans to reduce carbon emissions by 90,000 tonnes annually once all its environmentally friendly buildings are completed.

All three companies have also pledged to continue cutting emissions intensity — measured by emissions reduction to economic output — which would help make their operations more energy-efficient. However, an argument can be made that cutting absolute carbon emission — much like other industries in developed countries — should be just as important. After all, lowering carbon emissions is an effort that requires cross-border cooperation, and different standards of carbon emissions across markets only make it harder to hold companies accountable for emissions.

To drive changes, other climate policies are needed to complement carbon programmes. “Renewable energy incentives or restrictions on conventional vehicles may actually have higher effective carbon prices [or have a bigger impact than intended]. The longer governments delay putting in place carbon [policies] at these levels, the higher carbon prices will have to be set to avoid a climate crisis,” says Murray Birt, senior ESG (environmental, social and governance) strategist at DWS, Deutsche Bank’s asset management arm.

Other industry watchers argue that more incentives are needed to radically transition businesses towards lower emissions. “There needs to be a shift in focus on the part of the government, in terms of addressing resource efficiency instead of energy efficiency. The former can be passed on to consumers, while the latter tackles the emitters directly,” says Peter Godfrey, managing director of the Energy Institute of Singapore.

Godfrey acknowledges that Singapore is in a better place than most other countries in terms of environmentally efficient methods. But industry incentives such as carbon offsetting and higher rebates could be used alongside a carbon tax to push companies to invest in green technologies.

Meanwhile, the Singapore government is studying the feasibility of an emissions trading scheme. It currently has a fixed-price credit-based system where companies can buy credits from the National Environmental Agency.

Environmental advocate Ng thinks an emissions trading scheme will help get more companies onboard. “These organisations [will want] to stay in Singapore, as they have a new avenue of revenue generation via the ETS,” he says. “During my interactions with the European trading markets, most European countries would prefer to purchase credits from reliable and verified sources. And Singapore is a great place to do that, especially when we are already well-known in the financial sector, respected in our auditing and certification processes.”

“I think it is important to give more information and transparency to the end-users,” says Electrify’s Cheng. “The current approach has some flexibility in how the carbon tax is paid by consumers. They can choose to absorb it via a bundled price or show it explicitly as a separate-line item. Most of them seem to be leaning towards a bundled approach to keep things simple for consumers. But that means, as a consumer who wants to find out, I won’t know how much I consume [or am paying].”

Indeed, transparency in how carbon tax revenue is used would also help consumers get behind the push towards a low-carbon economy. Geroe in his report recommends that a carbon tax should compensate consumers, incentivising low-emission businesses and shifting the cost to high polluters. Some countries are involving consumers, indirectly, in the endeavour by distributing the carbon tax revenue. Norway uses it to finance pension funds, while Switzerland gives it back to taxpayers. Singapore buffers the carbon tax for households with additional utilities rebates. Ultimately, successful carbon programmes require public buy-in. One way to do so is through the Carbon Credit Projects under the United Nations framework, where anyone can trade credits and reduce emissions through community projects. Ng suggests: “For Singapore to step up its game, we need to raise climate literacy among the general public, by getting the man in the street involved day to day in climate-related activities.”