Singapore’s path to net-zero far from straightforward

Jordan McGillis and Bryan Cheang

In February, the Singapore government announced a new carbon tax schedule as the centrepiece of its net-zero emissions plan. The carbon tax, now set at S$5 a tonne of carbon dioxide equivalent (tCO₂e), will be raised to S$25/tCO₂e in 2024 and 2025, and S$45/tCO₂e in 2026 and 2027, with a view to reaching S$50 to S$80/tCO₂e by 2030. In March, the Energy Market Authority further articulated Singapore’s plan to achieving net zero by 2050. 

Economics and public policy analyses provide important insights on whether the carbon tax and the larger goal of net-zero emissions are truly intelligent choices for Singapore, which has always needed to balance sustainability against its growth imperative. Specifically, a carbon tax approach is sound in economic theory, but practically, things are more complicated. 

Ideally, a carbon tax is a tool to account for the externalities of greenhouse gas emissions through the incentives of the price system. With the addition of the carbon tax to existing prices, energy users are apt to adjust emitting behaviours downward, either by reducing use of existing energy sources or opting for alternative sources. In the words of the National Climate Change Secretariat, “this will provide a strong price signal and impetus for businesses and individuals to reduce their carbon footprint in line with national climate goals”. At the macro level, this looks like firms investing in different technologies to deliver lower-emitting energy. At the micro level, it looks like turning out the lights when leaving a room or opting for an electric vehicle. In both instances, the new cost imposed by a carbon tax motivates a behavioural change in line with a set target.

If economic theory is true, the Pigouvian tax method—sometimes called “market-based”—is an effective and proper way to mitigate an environmental or social harm. While the means of a carbon tax is likely to lower Singapore’s greenhouse gas emissions, its deployment towards the government’s net-zero target merits scrutiny and a careful weighing of costs and benefits.

There are practical downsides that Singapore needs to be wary of, especially considering the uncertain economic climate of the future. Arguably, raising the cost of Singapore’s leading electricity source—natural gas—will reduce the competitiveness of its economy and prompt businesses to flee to lower-cost countries. As an energy company spokesperson told the Reuters news service in February, “Singapore exports most of its energy and chemical products, and has to compete with other exporter countries that either do not have a carbon price policy, or have sophisticated mechanisms to help their trade-exposed industries remain competitive, if they do".

As is well recognised, Singapore has the capacity to be a key driver in the region’s energy transformation. But it also runs the risk of suffering from carbon leakage—the phenomenon in which emissions are not lowered, but rather are displaced to other jurisdictions. With a multitude of nearby options for businesses to relocate, a carbon tax might nominally lower Singapore’s emissions without securing any cumulative global emissions decrease.

Moreover, while the government is to be commended for showing regional leadership, because of Singapore’s trivial emissions totals when viewed on the global scale, that leadership will yield no measurable benefit. Though Singapore famously “punches above its weight” in international affairs, its cumulative emissions are lower than those of any large Chinese or American city. China and America today emit nearly 40 per cent of global greenhouse gases. China, though it has instituted a nominal form of carbon pricing, intends to increase its greenhouse gas emissions until at least 2029. The United States, while it has a multitude of sub-national carbon strategies, has no unified policy and faces political headwinds against forming one. In the background looms India, a country whose development depends on energy deployment in all forms.

What benefits, then, will this policy deliver to Singapore? Environmentally, the only measurable upgrade could be the “co-benefit” of lowered local air pollution that could accompany a reduction in climate-altering greenhouse gas emissions. Reducing local air pollution is a worthy goal, but should not be confused with the climate agenda.

More plausibly, the real benefit of the carbon tax plan would be to get ahead of global political trends and position Singapore as a carbon market hub. If the government is reading global political signals with clairvoyance, the Singapore carbon tax could position the country for competitive success amid global policy cooperation. 

But once again, practical developments mean such ideal scenarios may not bear out. Recent developments give us cause for concern.

The ongoing competition between China and the United States is one such example. Despite the 2021 joint statement issued at the Glasgow climate conference, neither country appears willing to conform with international guidance if it means the other might surge ahead economically. The global commodities challenge spurred by Russia’s war in Ukraine is another example. After becoming dependent on Russian natural gas, Germany now finds itself returning to a higher-emitting fuel source. “If we want to be more independent,” a German state energy minister explained in March, “we will have to operate with coal”. Geopolitical shocks upend the best-laid plans and there is little reason to believe they will abate over time. 

Singapore’s use of a carbon tax as a means to its net-zero end must be understood not as entirely a pursuit of environmental quality —remember, local air pollution is a distinct issue from climate —but rather as a political calculation. The policy is a gambit that entails significant risk, and our policymakers need to focus on the practical constraints of tools that look ideal on the surface. Instead of leading the way to a global carbon pricing system, Singapore could leave itself as a political island, warding away key enterprises while reaping no gains.  

 Jordan McGillis is deputy director of policy at the Institute for Energy Research.  Bryan Cheang is an academic political economist and founder of the Adam Smith Center, an independent research institute in Singapore.