Aerial view of hundreds of solar energy panels

What the rise in carbon tax means for companies

Authors

4 minute read 25 Feb 2022
Related topics
Climate change and sustainability services
Sustainable Impact Hub
Sustainable development goals
Sustainability

Singapore’s raised net zero ambition and increased carbon price provide the financial impetus for companies to accelerate decarbonization.

In brief

  • The extent of Singapore’s carbon tax hike is necessary to help the country achieve its raised national climate goal of net zero emissions by or around 2050.
  • High-quality carbon offsets can potentially cushion the impact of the carbon tax hike although the Government has yet to provide details on this option.
  • Companies should consider several key elements when developing their emission pathways to net zero.

When Singapore announced the introduction of a carbon tax from 2019 in Budget 2018, it was the first Southeast Asian nation to do so. While the tax rate of S$5 per ton of greenhouse gas emissions was not high, the coverage was broad, capturing about 80% of national emissions. This allowed the Singapore Government to ring the bell and inform businesses that the country is serious about reducing emissions across all sectors and has its sights locked on transiting to a low-carbon economy.1

On 18 February 2022, Singapore Minister for Finance, Lawrence Wong, announced that the Government plans to further raise the carbon tax significantly to S$25 per ton in 2024, then to S$45 per ton in 2026, with a view to arrive at S$50–S$80 per ton in 2030. This is expected to increase electricity costs by approximately 2%–3%, 4%–7% and 8%–12% in 2024, 2026 and 2030 respectively, assuming companies continue to consume fossil fuel-based electricity.

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

How EY can Help

How Singapore compares with other nations

 

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.

 

As for the right price of carbon to allow countries to achieve enough reduction to keep the global increase in temperature below 2 degrees Celsius, the International Monetary Fund recommends 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. The announced increase in Singapore’s carbon tax is therefore 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 will likely drive a steady growth in carbon markets. Hence, the announcement that companies will be given the option to use high-quality international carbon credits to offset up to 5% of taxable emissions in 2024 is a leading one, putting 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 will 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 the 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. The Singapore Government has yet to provide details on what would qualify as high-quality carbon offsets. However, this option can potentially cushion the impact of the hike in carbon tax if companies can successfully invest in such qualifying carbon credits or secure them in advance and at prices below the increased carbon tax.

High-quality carbon offsets have the potential to reduce the impact of the carbon tax hike.

Impetus to decarbonize

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

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

The world is heading toward a low-carbon future that is powered by renewables and sustainably financed. Considering the climate emergency that we are in today, there is a price to pay for continued carbon emissions at the same rate or a growing one. 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 that look at the long term, the choice is clear.


Summary

Singapore’s greater-than-expected increase in its carbon tax provides the financial impetus for companies to lower their carbon emissions. While the Government has yet to provide details on what would qualify as high-quality carbon offsets, this option can potentially cushion the impact of the carbon tax hike.

When developing their emission pathways to net zero, companies should consider optimizing the energy mix, exploring electrification opportunities, reducing process emissions by investing in new technologies and focusing on R&D to innovate product offerings.

Related articles (Read More)

When formulating ESG strategy, remember to leverage your tax department

The tax department should be involved in defining and shaping company ESG approaches and reporting.

How businesses can best navigate the global carbon tax maze

Carbon tax is a key tool in the global drive to meet climate targets. For the tax function, it presents opportunities as well as challenges. Read more here.

EY Global

    About this article

    Authors

    Related topics
    Climate change and sustainability services
    Sustainable Impact Hub
    Sustainable development goals
    Sustainability

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.