Singapore firms waiting for more details on China's carbon trading scheme

Singapore

CHINA's national carbon trading scheme - set to be rolled out in the second half of this year - has been three years in the making. But with few details released so far, Singapore companies with a sizeable presence in the country are taking a wait-and-see approach.

Still, with the idea of carbon pricing gaining favour with governments around the world, a handful of Singapore companies are already planning to adopt an internal carbon price, even if they may not currently operate in jurisdictions that impose a carbon price.

China announced in 2015 that it will start a national emissions trading scheme by the second half of this year. In preparation for this, the country has started seven local pilots in the cities of Beijing and Shanghai and the provinces of Guangdong, Tianjin, Shenzhen, Hubei and Chongqing.

Under emissions trading schemes, also known as cap-and-trade, the government allocates emissions quota to companies, and firms that pollute above their quota buy credits from those that pollute less. This encourages companies to reduce their emissions in order to sell their excess quotas.

With China's cap-and-trade regime set to be the largest in the world, companies across the globe - including Singapore firms - are expected to be affected.

"The way a cap-and-trade system works, it doesn't matter where your headquarters is," said Alexander Rau, founder and director of carbon management advisory group Climate Wedge in San Francisco. "It's where your factories are."

For companies with a large presence in China, the new requirements could either increase the cost of operations - and therefore erode the bottom line - or even increase profits if a firm can sell excess quotas, said Mr Rau. "It depends on the industry and the nature of the (government) targets. If you have operations on the mainland, you'll have to understand that you'll likely have additional compliance obligations, in addition to all your environmental obligations."

DBS Group, Global Logistics Properties, CapitaLand Retail China Trust, Sembcorp Industries and Delong Holdings, a steel producer, have the largest asset bases in China among the companies listed in Singapore, Bloomberg data shows.

Sembcorp owns a combined-cycle gas turbine cogeneration power plant in Shanghai and two coal-fired plants in Chongqing. One of the Chongqing plants, which just started full commercial operations last month, uses supercritical technology, which makes it more efficient.

"Considering our commitment to use cleaner and higher efficiency technology, the impact of the national carbon cap and trade market on our thermal energy assets will be minimal," said its CEO Tang Kin Fei, who also noted that the group has a balanced portfolio of both thermal and renewable energy assets in China.

The impact will be greater on subcritical coal-fired power plants which have low efficiency, he added. These plants, which make up a fifth of China's total thermal installed capacity, are being progressively taken out.

DBS told The Business Times that it is still monitoring the programme. "It is too early to ascertain the impact on customers or the bank," said a spokesman.

The Chinese government has so far only said that the market will at first be restricted to eight industrial sectors: petrochemicals, chemicals, building materials, steel, ferrous metals, paper-making, power-generation and aviation.

Companies in these sectors using more than 10,000 tonnes of standard coal equivalent (TCE) of energy a year must participate in the market; more than 7,000 such firms - accounting for about half of China's total emissions - have been identified, according to London-based non-profit environmental news portal chinadialogue.

The allocation of carbon allowances will be completed in the first half of this year, chinadialogue reported Jiang Zhaoli, deputy head of the climate change department at National Development and Reform Commission, as saying. Full implementation of the programme for the entire economy is widely expected to take place by 2020.

Meanwhile, a few Singapore-listed companies have also moved to adopt an internal carbon price ahead of such requirements in the country.

BT last Friday reported that the Singapore government is planning to adopt a carbon price and is currently evaluating how and when best to implement it.

Six companies already plan to use an internal carbon price within the next two years, according to a report released in September last year by London-based CDP, formerly known as the Carbon Disclosure Project. Olam International, City Developments Limited (CDL), Singtel and Elec & Eltek Co are the names it can publicly disclose.

Olam said that it recognises it has a clear responsibility, as a leading global agri-business, to combat the causes and impact of climate change, which also pose risks to global food security.

Its CEO Sunny Verghese in December 2015 called on industry leaders and policymakers at the Paris summit to commit to a global carbon tax. The group's Spices & Vegetable Ingredients business in California is also already involved in carbon trading, in line with local regulations.

Olam is now studying which of three forms of carbon pricing to adopt: using a range of potential carbon prices to test the viability of potential projects; assigning a fixed carbon price to each tonne of emissions which will be incorporated into profit and loss statements; or levying internal taxes on business units for their direct operational emissions so as to support investment in clean technologies.

"The results of this work are expected by the end of 2017 with an implementation plan to be developed thereafter," its vice-president for corporate responsibility and sustainability Chris Brown told BT.

For property developer CDL, the decision to adopt an internal carbon price was compelled by what it felt was a need to proactively manage climate-related risks. These risks, in its view, comprise both physical risks to buildings and potential financial risks such as carbon pricing and taxation.

"Adopting an internal carbon price allows CDL to stress-test our business operations and connect climate exposures to financial value," said its chief sustainability officer Esther An. "This will enable us to mitigate the potential risks that climate change may have on our financial performance."