Setting a price on carbon is a must in race towards net zero
IN the escalating climate crisis, many countries and large companies have vowed to achieve net-zero emissions by 2050. All eyes will be on COP26, the global climate summit which begins this weekend.
The conference has a number of objectives: to get countries to step up their "nationally determined contributions" (NDCs) which set out interim emission targets for 2030; to mobilise finance for emerging and developing countries; and to strengthen climate adaptation strategies. To date, the goal of raising US$100 billion a year in climate finance for developing countries, set in 2009, has not been met. So far the prognosis seems bleak.
The latest report by the United Nations Environment Programme states that new and updated NDCs reduce the predicted 2030 greenhouse gas (GHG) emissions by only 7.5 per cent. But the world needs a reduction of 55 per cent to be able to cap the global temperature rise at 1.5 degree Celsius, and 30 per cent for a cap of 2 degrees. At the current pace, the world is on track for a global temperature rise of at least 2.7 degrees in this century.
To spur the net-zero transition, it has become urgent that countries address the issue of carbon pricing. Setting a price on carbon quantifies the costs of emissions to economies and societies. It enables governments to penalise emitters and the tax collected may be used to fund climate adaptation needs. Singapore is one of around 40 nations and over 20 cities and states with a carbon tax, but its tax rate at S$5 per tonne is among the lowest in the world. A revised carbon tax for 2024 is expected to be announced in the next Budget. The International Monetary Fund has recommended a global average carbon price of US$75 per tonne, but a recent poll of climate economists by Reuters puts an even higher price of at least US$100 per tonne.
Carbon pricing mechanisms mainly take one of two forms: a direct carbon tax or an emissions trading system (ETS), also called cap-and-trade, which establishes a market price for emissions. To date, the World Bank estimates that 21.5 per cent of global GHG emissions are covered by carbon pricing instruments, compared to 15 per cent in 2020. Carbon prices set by the various jurisdictions vary widely from less than US$1 to as high as US$137 in Sweden. China, the world's largest emitter, launched its carbon market in July and prices have held steady at between US$7 and over US$8. But critics believe the system does not go far enough. Benchmark carbon prices in Europe breached 60 euros (S$94) in September and October.
To be sure, there are challenges in carbon pricing and taxation. An aggressive push for a green transition will penalise poorer countries disproportionately and raise the spectre of high inflation. Quite apart from the inflationary impact, voluntary carbon markets are also fragmented and the quality of carbon credits, as pointed out by S&P Global Platts, varies.
Singapore, which grapples with its own transition challenges, is stepping up to play a key role through the establishment of Temasek-backed Climate Impact X, a global carbon exchange and marketplace, later this year. CIX aims to bring transparency and confidence to carbon markets, using technology to ascertain the integrity of carbon credits. Carbon credits are arguably not a panacea for climate change. But Singapore's bid for a central role in carbon price discovery will surely be a helpful stepping stone towards decarbonisation.
