Budget 2022: What the rise in carbon tax means for companies

WHEN Singapore announced in Budget 2018 the introduction of a carbon tax from 2019, it was the first South-east Asian nation to do so. While the tax rate of S$5 per tonne of greenhouse gas emissions was not high, the coverage was broad - capturing about 80 per cent of national emissions.

This allowed the Singapore government to sound the bell and inform businesses that the country was serious about reducing emissions across all sectors and has its sights locked on transitioning to a low-carbon economy.On Friday (Feb 18), Singapore's Minister for Finance Lawrence Wong announced that the country intends to raise its carbon tax significantly to S$25 per tonne in 2024, then to S$45 per tonne in 2026, with a view to arriving at between S$50 and S$80 per tonne in 2030.

This is expected to increase electricity costs by approximately 2 to 3 per cent in 2024, 4 to 7 per cent in 2026, and 8 to 12 per cent in 2030, assuming companies continue to consume fossil fuel-based electricity.

Some are surprised by the quantum of the increase, as it is beyond the widely anticipated S$10-15 per tonne. Yet, this is a necessity: it sends a strong message and provides the financial impetus for businesses to reduce their carbon emissions, so as to enable Singapore to achieve its raised national climate goal of net zero emissions by or around 2050.

How Singapore compares

Based on information from the United Nations, 130 countries have now set or are considering a target of reducing emissions to net zero by 2050. The adoption of carbon pricing, as a key economic lever to reduce emissions, is expected to be a global norm in time. According to a World Bank report, in 2020, carbon pricing-related initiatives around the world continued to grow, generating US$53 billion in revenue and covering 21.7 per cent of global greenhouse gas emissions.

As for the right price of carbon - to allow countries to achieve enough reduction to keep the global increase in temperature below 2 degree celsius - the International Monetary Fund (IMF) has recommended a 2030 carbon price floor of US$75 for advanced economies, about US$50 for high-income emerging markets such as China, and US$25 for lower-income emerging markets such as India.

As such, the announced increase in Singapore's carbon tax is in the right direction.

Riding on the back of the passage of Article 6 of the Paris Agreement, the trading of carbon credits on a global scale is set to grow and would likely drive a steady growth in carbon markets. Hence, the announcement that companies would be given the option to use high-quality international carbon credits to offset up to 5 per cent of taxable emissions in 2024 puts Singapore among jurisdictions that have implemented similar mechanisms, such as Japan and the European Union.

Indeed, this announcement is a strategic and welcomed move - one that would position Singapore well to become a carbon services and trading hub.

But will the use of carbon offsets help companies manage the cost of carbon tax?

The price of carbon offsets is a function of multiple factors, mainly project types and country of origin, and is expected to increase, given demands from the private sector to become net zero or carbon-neutral.

Given the range of projects available in the market, some more credible than others, the specific mention of high-quality carbon credits such as offsets from nature-based climate solutions, is noteworthy. While the Singapore government has yet to provide details on what would qualify as high-quality carbon offsets, this option can potentially cushion the impact of the hike in carbon tax, if companies can successfully invest in or secure such qualifying carbon credits in advance and at prices below the increased carbon tax.

The impetus to decarbonise

Today, companies are exposed to multiple emerging drivers that will require them to manage climate change holistically. Increasing regulations such as a rising carbon tax and enhanced climate reporting for Singapore Exchange-listed companies, along with evolving expectations from institutional investors focusing on net-zero portfolio and consumer demands for high quality and environmentally friendly products and services, have been the main drivers for decarbonisation.

In general, a business should look into four key elements when developing its net zero emissions pathway: optimising the energy mix; exploring electrification opportunities; reducing process emissions by investing in new technologies; and focusing on R&D (research and development) to innovate their product offerings. Each of these will have its own set of challenges and nuances.

The world is heading towards a low-carbon future that is powered by renewables and is sustainably financed. Considering the climate emergency we are in today, there is a price to pay for continuing to emit carbon at the same or growing rate. We can pay this price - via the ambitious carbon tax, or through the cost of inaction in the form of climate calamities and financial instability.

For businesses who look at the long term, the choice is clear.

• Simon Yeo is EY Asean Climate Change and Sustainability Services leader and an Assurance partner at Ernst & Young LLP. Praveen Tekchandani is a partner for Climate Change and Sustainability Services at Ernst & Young LLP. Sanjeev Gupta is EY Asia-Pacific Oil & Gas leader and EY Asean Energy leader.