Carbon Taxes & Credits - an Introduction
Carbon credits/offsets is a new kid on the block in the old trade of commodities. Despite its nascence, and recent tribulations (caused by?a journalistic exposé?which discredited Verra, the “Gold Standard” in carbon credits in the world), the opportunities are promising as carbn neutrality takes center stage in many governments and corporations.
This article is an introduction on the concepts of cabon taxes and credits to facilitate better understanding on the topic, and provides the foundation for The Guide on Carbon in Singapore, which will be published and released by The Green Bunny SG by the end of this month, February 2023.
Concepts — Carbon Tax v. Carbon Credits
Carbon tax is a policy instrument that aims to reduce greenhouse gas (“GHG”) emissions by placing a tax based on the carbon dioxide (and often other GHGs) emissions that are produced when the fossil fuel is burned, and is typically levied on coal, oil, and natural gas. The idea behind carbon tax is that by making fossil fuels more expensive, it will encourage businesses and individuals to switch to cleaner, low-carbon alternatives.
Carbon credits (also called carbon offsets), on the other hand, are rights to emit any GHG based on certified amounts of GHG emissions reduction, removal or avoidance. They can be purchased to satisfy regulatory or policy obligations arising from the emission of any GHG.
Both carbon tax and carbon credits are useful tools to induce financial incentives or disincentives, as the case may be, for organizations to reduce their green house gas emissions. In a way, they are two sides of a same coin — pricing carbon emissions.
The concepts are also closely relate to each other in practice — when an organization would like to offset its carbon emissions with the purchase of carbon credits instead of paying carbon taxes.
An Overview on Carbon Taxes in Singapore
Carbon taxes can be implemented in a number of different ways. Some countries, such as Canada and Finland, have implemented a carbon tax that applies to all sectors of the economy. In other countries, such as Sweden and Ireland, the carbon tax is applied only to certain sectors, such as industry or transportation.
Singapore has implemented carbon tax on large emitters of GHGs, including power stations and large industrial facilities. It is applied uniformly to all sectors including energy-intensive and trade-exposed sectors, without exemption. The carbon tax was introduced in 2019 through the?Singapore Carbon Pricing Act, and applies to facilities that emit 25,000 metric tons or more of GHGs per year (“Large Emitters”), with the goal of reducing Singapore’s greenhouse gas emissions by 36% below 2005 levels by 2030.
Under the carbon pricing scheme, Large Emitters are required to pay a tax on their emissions at a rate of SGD 5 (about USD 3.70) per metric ton of carbon dioxide equivalent. The tax is levied on the carbon dioxide emissions produced by the facility, as well as any emissions of other GHGs, such as methane and nitrous oxide, which are converted to carbon dioxide equivalent emissions.
The tax rate is expected to increase to SGD 25 in 2024 and 2025, and SGD 45 in 2026 to 2027, with a view to reaching SGD 50–80 by 2030.[1]?It is far below other countries such as Sweden (SGD 186) and Switzerland (SGD137.55) and below the global benchmark recommended for advanced economies.[2]
A transition framework will also be introduced to give existing emissions-intensive trade-exposed companies more time to adjust to a low-carbon economy. Further details will be announced in 2023.
Even though it seems like the carbon tax is only applicable to Large Emitters, it currently covers 80 percent of Singapore’s total GHG emissions from about 50 facilities from the manufacturing, power, waste, and water sectors. Facilities in other sectors would also indirectly face a carbon price on the electricity they consume as power generation companies are expected to pass on some degree of their own tax burden through increased electricity tariffs. In all, considering also fuel excise duties that incentivize reduction of transport emissions,?carbon taxes in Singapore covers about 90 percent of total GHG emissions.[3]?In other words, even though individual consumers may not be aware of any direct taxation on them, the 90% of productions and consumptions (assuming it translates proportionately to GHG emissions) are already taxed (and priced-in).
The carbon tax in Singapore is designed to be revenue-neutral. The government has announced that the revenue will be used to support decarbonization efforts and the transition to a green economy, and cushion the impact on businesses and households.[4]
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An Overview on Carbon Credits in Singapore
High quality carbon credits are issued and/or verified by government registries or independent standards or registries such as Verra, Gold Standard, Climate Action Reserve and American Carbon Registry. The Ministry of Sustainability and the Environment intends to publish a whitelist of acceptable credits highlighting eligible host countries, carbon crediting programmes and methodologies.[5]?The National Environment Agency (NEA), which oversees Singapore’s carbon tax regulations has recently signed agreements with Verra and Gold Standard, to pave the way for businesses in Singapore to offset their carbon tax bill (which currently only applies to Large Emitters). The Large Emitters should be able to, from 2024, buy carbon credits to offset up to 5 per cent of taxable emissions, in lieu of paying the tax.
For the voluntary carbon credits market, developments have been promising. Singapore’s first international carbon credit exchange, AirCarbon Exchange (ACX), was established in 2019 in collaboration with the Singapore Sustainable Energy Association, and is subsidised by Enterprise Singapore. ACX has since expanded internationally to Indonesia and UAE.[6]?More recently in 2021, SGX, through a joint venture with DBS, Standard Chartered and Temasek, is launching Climate Impact X (CIX), a Singapore-based global carbon exchange and marketplace that aims to scale the voluntary carbon market. CIX constitutes a centralized voluntary carbon exchange with standardized contracts and a marketplace facilitating direct purchases from specific projects.[7]
The Guide on Carbon in Singapore
There are much more details to be shared and discussed in The Guide on Carbon in Singapore, which will be published and released by The Green Bunny SG by the end of this month, February 2023.
Watch out for this space, LinkedIn and on the?The Green Bunny SG website?for the release of the Guide.???? Subscribe to the mailing list on the website to receive a copy delivered straight to your inbox. ??
[2]?https://www.ey.com/en_sg/climate-change-sustainability-services/what-the-rise-in-carbon-tax-means-for-companies
[5]?“Carbon credits to offset Singapore emissions tax are subject to eligibility criteria”, The Business Times, 8 November 2022
[6]?https://www.nomuraconnects.com/focused-thinking-posts/the-future-of-carbon-credit-trading-in-singapore/
Disclaimer: The content of this note is informational only. Nothing in this note shall constitute legal, investment or professional advice.
Read?The Green Bunny SG’s other publications on:
LinkedIn:?3 Reasons Why Every Business Should Incorporate Sustainability;?Master of None — Reflections on Tips to Becoming a Successgful Generalist;?The Fool-Proof Guide to Setting up an ESG Framework & Policy for Businesses, Investors and Investment Managers, Part 1 of 5;?Gone with the Red — Ep.1;?My footprints 2022;
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Sustainability & Climate Risk Solutions - BFSI
1 年Enjoyed reading your compressive information . According to the International Climate Action Partnership’s (ICAP) Status Report 2022 on Emissions Trading Worldwide, jurisdictions making up 55% of global GDP are using emissions trading, 17% of global greenhouse gas emissions are covered by an emission trading system (ETS), and eight countries, 19 provinces and states, one supranational (the EU), and six cities are implementing carbon markets. Learning from each of these can facilitate the creation of a robust national carbon market for many countries in time to come ....supported by?widening of mitigation options etc. Thanks.