Singapore announces larger-than-expected carbon tax to fund long-term decarbonization

Singapore will raise its carbon tax to S$25/mt ($18.60) of CO2 equivalent in 2024 and 2025, from S$5/mtCO2e ($3.7), to finance its decarbonization efforts, create a regional carbon marketplace and bring forward its net zero emissions deadline, the government said Feb. 18.

The move represents one of the largest government-mandated carbon taxes and comes after the United Nations' COP26 climate summit in 2021 set a new trajectory for governments to pursue net zero policies.

Singapore's carbon policy is needed to fund high-cost decarbonization technologies that require high carbon prices to break even, and the setting up of a regional carbon trading hub will help the hybrid development of compliance and voluntary carbon credits.

The city-state will progressively increase its carbon tax to S$45/mtCO2e in 2026 and 2027, and S$50 to S$80/mtCO2e by 2030, Finance Minister Lawrence Wong said in his speech outlining the Singapore Budget 2022.

"It is a strong message of intent and it completely blew away even the highest of my expectations. This puts Singapore with one of the highest carbon taxes in Asia and is a strong nudge for all businesses to think about decarbonization," Howie Lee, Singapore-based economist with OCBC Bank, said.

"Climate prioritization is here to stay and the earlier businesses start thinking of how to decarbonize, the more beneficial it would be for them," Lee added.

Putting price on carbon

The government does not expect to derive additional revenue from carbon taxes in this decade, and the income will be used to cushion the impact of decarbonization on businesses and households, Singapore's National Climate Change Secretariat, under the Strategy Group of the Prime Minister's Office, said in a statement.

It said the carbon tax will "provide a strong price signal and impetus for businesses and individuals to reduce their carbon footprint in line with national climate goals."

Singapore will maintain the carbon tax level at S$5/mtCO2e till 2023 to give businesses time to adjust, the NCCS said. "The carbon tax will continue to be applied on facilities that directly emit at least 25,000 mtCO2e of greenhouse gas (GHG) emissions annually. This will cover about 80% of our national GHG emissions," it said.

It said emissions-intensive companies will be given time to adjust to a low-carbon economy and given support to remain competitive and mitigate the risk of carbon leakage, through allowances to offset part of their emissions.

The NCCS said companies will be allowed to surrender high quality international carbon credits to offset up to 5% of their taxable emissions from 2024 as some companies can source carbon credits in a cost-effective manner.

"This will also help to create local demand for high-quality carbon credits and catalyze the development of well-functioning and regulated carbon markets," the NCCS said. It said consultations were being held with stakeholders on the framework for the use of carbon credits and details will be shared in 2023, ahead of the implementation of the revised carbon tax framework in 2024.

Wong told lawmakers that households will mainly feel the impact of the S$25 carbon tax through an increase in utility bills of about S$4 per month for an average 4-room household, but measures will be taken to cushion the impact.

Tighter emissions target

Singapore has committed to peak emissions around 2030, halve emissions from peak levels by 2050, and achieve net zero emissions as soon as viable in the second half of the century, under its Long-Term Low-Emissions Development Strategy, or LEDS.

"We are on track to achieving our 2030 target. We have since reviewed our longer-term plans. With advances in technology and new opportunities for international collaboration in areas like carbon markets, we believe we can bring forward our net zero timeline," Wong told lawmakers in a speech.

"We will therefore raise our ambition to achieve net zero emissions by or around mid-century. We will consult closely with industry and citizen stakeholder groups to firm up and finalize our plans before making a formal revision of our LEDS later this year," the minister said.

Wong said Singapore plans to become a hub for carbon credit markets, and sustainable aviation and marine fuels, and will issue up to $35 billion in green bonds by 2030 to fund public sector green infrastructure projects.

He said Singapore will aim to be a "car-lite city" with a clean public transport network, and be the only city in the world to maintain zero growth rate for private vehicles. For existing vehicles, it plans to phase out internal combustion engine vehicles by 2040 and the share of electric vehicles in new car registrations has already jumped from just 0.2% in 2020 to around 4% in 2021.