Carbon taxes are the most logical and rational way to incentivise companies to act on reducing their emissions, but countries have been slow to introduce them because they are politically unpopular, says Senior Minister Tharman Shanmugaratnam.
Thus, carbon taxes have to be “significantly higher” than where they are today, adds Tharman, and he does not see them “coming in time” to meet global net-zero targets.
“When you look at it globally, when you look at it across Asia, when you look at the large parts of economies which have been exempted from carbon taxes, even in many of the advanced economies, it’s just not coming. The political economy doesn’t encourage it,” says Tharman in his keynote address at the inaugural Financing Asia’s Transition (FAST) Conference on June 8.
“We also need some stick”, says Tharman on the third and final day of Temasek’s Ecosperity Week conference. “If we don’t have carbon taxes rising to adequate levels globally, without lots of free-riders, [then] we need financial regulation as a major public policy tool and we have to use it, otherwise the markets are going to be too slow.”
Tharman takes this “quite seriously”, warning that this lever will require “shifting mindsets” about the role of central banks and financial regulators. Here, both roles are played by the Monetary Authority of Singapore (MAS), where Tharman has been chairman since 2011.
“We have thought of financial supervision and regulation within a very strict and disciplined framework, where you have independent central banks [and] independent financial regulators somewhat buffered from the politics of the day, and buffered from the rest of government,” says Tharman.
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While this is an “extremely important system”, financial regulation and supervision must be part of the public policy arsenal to bring forward actions to avoid climate-related catastrophe, says Tharman, and not merely tools to deal with risks on “today’s balance sheets in today’s financial institutions”.
He adds: “There’s no point saying, 20 or 30 years from now: ‘Yes, the world got fried, but we stuck to the independence of financial regulation and supervision.’ There’s no point saying that.”
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Virtuous cycle
Many of our banks are taking an enlightened, forward-looking view, says Tharman, but there is “a lot of unevenness”. “The leading banks and financial institutions have to be provided clear guidance, so none of them has to move ahead of the rest and feel [a] competitive disadvantage. That’s why we need guidance across the board.”
Financial regulation and supervision can accelerate the pace of adjustment in economies, he adds, by using financing as a tool.
Creating a “virtuous cycle” requires outlining credible transition pathways and unleashing blended finance, says Tharman, starting with “what we’ve traditionally looked at as the mainstay of financial regulation”.
He cites bodies like the Basel Committee on Banking Supervision, the Financial Stability Board, the International Association of Insurance Supervisors and the International Organization of Securities Commissions. “In each of these areas, they’ve got to mainstream climate change considerations into their core activities,” he adds. “We do need the financial supervisor in each jurisdiction to start thinking long term about how we incentivise financial institutions and their customers to bring forward the actions that the market would otherwise leave to later.”
Catalysing blended finance
The government is exploring how to develop a new vehicle to catalyse blended finance in Asia by working with partners around the region, says Tharman.
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This ranges from collaborating with government agencies to Singapore-based infrastructure financing vehicles like Clifford Capital and Pentagreen Capital, as well as commercial banks and multilateral development banks like the Asian Infrastructure Investment Bank (AIIB), the Asian Development Bank (ADB) and the World Bank, he adds.
Tharman sees a “major opportunity” in this area of blended finance. “We are in discussions now to see how we can create the right vehicles to catalyse a much larger scale of blended finance in Asia.”
MAS, along with Singapore’s financial industry, is establishing the Singapore Sustainable Finance Association with the Association of Banks in Singapore (ABS) in the lead, says Tharman. This association brings together different players to tie together public and private action, he adds, and is aimed at developing the voluntary carbon markets, transition finance and blended finance.
MAS is expected to release further details later today.
