Carbon tax not a cop-out

 

We all know that the world needs to urgently reduce our use of fossil fuels (coal, oil and gas) and move to more renewable sources of energy. While governments, cities, businesses and global institutions have pledged to reduce greenhouse gas emissions, not all strategies will get us there. Let’s not forget that some are, frankly, thinly disguised money-making ventures which clearly allow polluters to remain recalcitrant polluters, as they buy their way out from the less polluting companies. The end result is that this doesn’t help the global scenario of meeting Net Zero emissions, and everybody loses in the long run.

With increasing global pressure, governments are working on their respective climate action policies – to varying degrees. The issue, however, is that countries that impose more stringent climate policies will become less competitive in the short term. Companies will then move their carbon intensive production to other countries that have more lenient carbon policies. This, of course, results in “carbon leakage” and defeats the goal of reducing the overall global carbon emissions target.

We have analysed the proposed International Carbon Price Floor (ICPF), which is designed by the International Monetary Fund (IMF) to address the issue of carbon leakage. ICPF is the minimum price to be charged for a ton of CO2 emissions in the respective countries. The proposed ICPF rates are as follows:

• US$25 per ton of carbon for low-income countries
• US$50 per ton of carbon for middle-income countries
• US$75 per ton of carbon for high-income countries

Our view is that the ICPF is not a practical mechanism, and in order for this to work, there will have to be an enormous amount of coordination and cooperation between the diverse countries and jurisdictions. This is where global initiatives like these often fail, as they do not take into account each individual country’s unique circumstances.

An example we looked at was Singapore, with the constraints of its land size and lack of natural resources. Due to its own environment and circumstances, Singapore is unable to tap on:

• Wind power
• Hydro power
• Wave power
• Geothermal power
• Nuclear power

Sitting on the equator, Singapore, of course, enjoys a lot of sunshine throughout the year. However, based on current technology, 32 acres of flat land is required in order to harness sufficient solar energy to generate 1 gigawatt hour (GWh) of electricity. Given Singapore’s overall electricity consumption is 53.5 terawatt-hour (TWh), what land area would be required to meet their current needs?

Researching Singapore’s current electricity consumption and current land area required, we came to the conclusion that this low carbon energy option would be a massive challenge for them, as a land area of almost nine-and-a-half times the size of Singapore would be needed for the city state to depend on solar energy.

This is just one example of why securing cooperation and consensus on the ICPF is going to be difficult.

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We agree with the view that Carbon Pricing has been criticised as failing to recognise the political reality that influences the development of a carbon market based on policies and strategies. We are all well aware that entrenched business interests, when threatened, would exercise considerable influence to counter and erode carbon pricing standards, regulations and quotas. The ineffectiveness of Carbon Pricing includes the following:

• Negative effects of inflation on lower income households
• The challenge posed by Carbon Leakage
• The reality of politics in forming, maintaining and enforcing market-based policies and regulations
• Limiting innovations, for example, optimising existing systems rather than transforming them

In its October 2022 publication, the IMF stated that, “lack of ambition and failing implementation characterise the history of climate policy …Governments announce carbon reducing policies but have incentives to renege on them to try and to maximise output or employment or safeguard particular interests during their terms.”

In order to achieve the goals of the 2015 Paris Agreement, the IMF has urged for a huge increase in Carbon Tax, regulations on emissions and large investments in low-carbon technologies. We do agree with this three-pronged approach.

Sweden was one of the early adopters of a carbon tax. In 1991, it introduced a carbon tax on top of its prevailing energy tax. Sweden has reported the following results over a 30-year implementation of the carbon tax: its GDP grew 83%, while GHG emissions fell by 35%. Analysing the data, however, we can see that the carbon tax is not the sole reason that the emissions in Sweden have fallen. There have been other factors that have contributed to the drop in GHG emissions, such as the advancement in the technology of renewables, making them cheaper and more efficient, plus additional environmental pollution rules and regulations. However, the Swedish government has estimated that the Carbon Tax played a significant role (about 50% of GHG reduction).

A carbon tax was introduced in Singapore in January 1, 2019, and is regulated by the Carbon Pricing Act 2018.

The carbon tax in Singapore is applied to all industries. Persons operating business facilities with direct emissions of 25,000 tonnes of reckonable GHG in a calendar year have to pay the tax. Non reckonable GHG and excluded GHG emissions are not subjected to the tax.

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The carbon tax rates are already in place:

• Year 2019 to 2023 is S$5 per tCO2e
• Year 2024 to 2025 at S$25 per tCO2e
• Year 2026 to 2027 at S$45 per tCO2e
• By Year 2030 – S$50 to S$80 per tCO2e

In our view, the implementation of a carbon tax is a sensible approach to tackling the very complex issue of climate action, and needs to be tied in with investments in advancing green technology as well as enforcement of emissions regulations. The carbon tax will also widen Singapore’s tax collection revenues (which always pleases rating agencies), and will be the push for companies to quickly begin adopting low carbon business models. Incentives can be awarded along the way as countries balance these issues of adopting a low carbon strategy, and widening the tax collection net.

Ultimately, we need to be prepared to adopt a global citizen approach to Net Zero emissions, without trying to sell carbon credits to the polluters. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.