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Singapore Budget 2018: An olive branch in lower-than-expected carbon tax

No differentiated benchmarks, but firms will have ample lead time to adapt

The Singapore government surprised many on Monday when the price for carbon tax was finally unveiled: S$5 for each tonne of carbon emissions in the first five years - far lower than the potential S$10-20 range announced last year.

THE Singapore government surprised many on Monday when the price for carbon tax was finally unveiled: S$5 for each tonne of carbon emissions in the first five years - far lower than the potential S$10-20 range announced last year.

The lower-than-expected carbon tax from 2019 to 2023 could be seen as an olive branch extended by the government to affected industries, even as it rejects their request for the tax to be varied depending on industry benchmarks.

The guidance given for the carbon tax after that - it is expected to be raised to S$10-15 a tonne by 2030 - also gives these industries, all capital-intensive ones that often plan investments to last for decades, more lead time to shift gears.

The carbon tax is expected to affect some 40 companies in the power generation, petrochemical and semiconductor sectors. They account for about 80 per cent of Singapore's national greenhouse gas emissions.

When the carbon tax proposal was first put forth last year, these companies were cautiously supportive.

After all, global sentiment towards climate change, and the action required to mitigate its effects, has changed significantly since the Paris Agreement made in end-2015, with many global oil companies also voicing support for a carbon price.

Their reactions to Monday's announcement of the price and the way it will be imposed were, however, less positive.

So what changed? While industries are supportive of a carbon tax, the devil is in the details.

Companies across various sectors had suggested that the government consider using industry benchmark targets, with companies which are more energy efficient than these benchmarks paying less or no tax, and those less efficient paying a heavier tax.

In spite of this, Mr Heng, in his Budget speech on Monday, said the tax will be imposed uniformly on every unit of carbon emission.

The National Climate Change Secretariat (NCCS) explained that determining the level of benchmarks for each sector and ensuring that they are equitable across sectors will be a "highly complicated and contentious" process, going by the experience of other jurisdictions.

Industry observers generally agree that benchmarking is a complicated and controversial process. Though practised in jurisdictions such as South Korea and Europe, these places have economies far larger than Singapore's that might also make such processes more feasible.

Melissa Low, research fellow at the Energy Studies Institute at National University of Singapore, noted that there are currently very few internationally established benchmarks, especially for downstream specialty chemical sectors.

Developing and implementing these benchmarks will be extremely data-intensive and imposes additional reporting and verification requirements on companies.

Concurring, Subodh Mhaisalkar, executive director of the Energy Research Institute at the Nanyang Technological University, said every company has different preferences and suggestions on how to establish such a benchmark, depending on their efficiency.

The diverse range of industries and processes in Singapore would also require a large number of benchmarks, said Edwin Khew, chairman of Sustainable Energy Association of Singapore.

Mr Mhaisalkar pointed out that the uniform carbon tax is similar to how Singapore has approached the goods and services tax. "The simplicity of the tax will undoubtedly be a virtue in its implementation and also in assessing its efficacy," he said.

The burden of the tax will fall differently on power generation companies, compared to those that manufacture for exports such as petrochemical and semiconductor firms.

Power generation companies have said they will pass on the additional costs to consumers. Firms producing petrochemicals and semiconductors - which made up 53 of Singapore's manufacturing output in 2017 - however, don't have this option.

For refineries, which contribute to 11 per cent of the country's manufacturing output, the S$5-a-tonne carbon tax will impose additional cost of 10-15 US cents for each barrel of crude oil processed, said Wood Mackenzie senior manager Suresh Sivanandam.

By his estimate, this would reduce their profit margin by 3 per cent in 2020 - the first year that companies are required to pay the taxes. Coming at a time when refining margins are expected to be stronger, thanks to a sulphur cap imposed by the International Marine Organisation on marine fuel from 2020, the impact on refineries will be marginal.

The eventual price of S$10-15 will, however, probably affect the competitiveness of Singapore's refineries, he added.

Notably, the country's economic competitiveness, however, is one factor - alongside others like international climate change developments and the progress of emissions mitigation efforts - which Mr Heng said the government will take into account when conducting a review of the tax in 2023.

With the government having given some five to six years of lead time on the future carbon price, the onus is now on companies to undertake the necessary spending to improve their energy efficiency and lower their carbon emissions, or pay a higher amount of carbon tax.

In sum, the low starting rate for Singapore's carbon tax has given companies more time to adjust to a world with higher carbon prices - an inevitable reality that all around the world will face.

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