With the carbon tax, a new chapter in Singapore's economy opens

FIRST, a two-step hike in the water price in July this year and July 2018. And then a carbon tax from 2019, which would most likely mean higher electricity prices.

The combined effect will raise utilities bills for companies across Singapore. But it is on resource-intensive industries that the blow will land hardest - the refineries and the makers of petrochemicals and semiconductors, which make up the cornerstone of Singapore's manufacturing sector.

It is no surprise that ExxonMobil and Shell, which own two of the three refineries in the city-state and also large petrochemical complexes, have flagged concerns over Singapore's cost competitiveness after Monday's announcement of the tax on greenhouse gas emissions.

The impact of the carbon tax is equivalent to an increase in the cost of crude oil by US$3.50 to US$7 a barrel, or as much as 12 per cent of current crude oil prices, the government has said.

Meanwhile, the Singapore Semiconductor Industry Association is expecting its utilities bills to be only minimally hit, because the industry has adopted energy-efficiency initiatives for many years now, its president C K Tan told The Business Times.

Together, the refineries and the petrochemical and semiconductor industries accounted for nearly half (45.7 per cent) of Singapore's total manufacturing output last year, going by preliminary data from the Ministry of Trade and Industry.

The Committee on the Future Economy (CFE) has recommended keeping the manufacturing sector's share of the country's gross domestic product (GDP) - now at 19.6 per cent - at about 20 per cent in the medium term.

Concerns over reduced competitiveness are bound to surface in any jurisdiction introducing a carbon price, and such fears run deep for an economy as reliant on trade as Singapore's. Closely intertwined with this is Singapore's appeal as an investment destination - especially as investment commitments last year were at their lowest since 2005.

In this, the experience from other economies that have adopted a carbon tax might prove instructive.

In California, which has implemented a carbon price through a cap-and-trade programme, the dire predictions about companies moving out of the state have not come true.

Alex Jackson, legal director of the California Climate Project at non-profit environmental advocacy group Natural Resources Defense Council, told BT: "If anything, the evidence has been the opposite.

"California's leadership has attracted green energy companies that see the state as an unquestionable leader on clean energy. A lot of companies which have relocated to California cite our policies as their reason for doing so."

He added that what helped in California's case was the allocation of free emissions allowances and government assistance to particular sectors that were most likely to move elsewhere.

Here in Singapore, it is still too early to evaluate the impact of the carbon tax on the bottom line of its industries. The government has also promised support, by channelling revenue from the tax to fund measures that reduce industrial emissions. This could amount to between S$400 million and S$800 million, BT's back-of-the-envelope calculations, using 2012 emissions data, show.

But what is clear is that the manufacturing sector - even as the city-state works at expanding it again - will have to change in its shape and form.

Manufacturing shrinking

The manufacturing sector used to make up 20-25 per cent of GDP, but has shrunk in the past couple of years, partly because of the global economic slowdown. The CFE has said that the sector remains important to Singapore because it anchors high-value and complex activities that provide jobs for Singaporeans, and because it builds its technical and engineering capability and diversifies its products and export markets.

Still, economists have said the face of the sector will be have to be markedly different in future: manufacturers will have to move away from producing goods on the factory floor towards producing ideas in research and development (R&D) labs.

Indeed, Singapore is already moving in this direction, with its focus on advanced manufacturing, smart and sustainable urban solutions and applied health sciences, among others.

One sector that would benefit more than any other would be clean energy, which Singapore has been grooming through years of government-led investment in R&D; the aim is to build capabilities not just to serve the country's domestic needs, but also to export to the region.

Within Singapore itself, solar-energy producers stand to reap higher profit margins, said independent energy consultant Martin J van der Lugt. This is because electricity prices are set to rise if power-generation companies pass on the additional costs of the carbon tax, as they say they will; the costs for solar producers remain the same.

Viewed in this context, the announcement of the carbon tax shows - even more clearly than before - Singapore's pivot towards its future, greener, economy.