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Carbon taxation is quite a controversial regulatory measure enacted by governments around the world, ostensibly to reduce CO2 emissions.

Published 2021-03-02 10:55:34
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Carbon taxation is quite a controversial regulatory measure enacted by governments around the world, ostensibly to force reduction of carbon dioxide (CO2) emissions.

Some has even compared it to taxes on consumption of alcohol or cigarettes, as examples of how government-applied levies can change human behaviour for the “better”.

However, the problem is not as clear-cut as it is with, let’s say, smoking tobacco (zero benefits to society, and potentially very harmful to personal health and national healthcare).

We use energy for everything in our lives — working, moving, cooling, heating, preparing meals, entertainment, sports, industrial manufacturing et cetera — and it only takes one blackout to realise that we can’t function as efficiently without it.

Why Carbon Tax Is Imposed In The First Place

The conversation about carbon taxation has recently reached Singapore, but it is lacking proper context, with the “environmentally-friendly” side arguing in favour of it as some magical remedy that will transform the economy.

Nobody seems to be asking this very simple question: What is the use of such taxation? What are the reasons it could be introduced?

There is not one, but at least three answers to this question (as with most taxes):

  1. Generate additional revenue to the budget (strictly fiscal motivation).
  2. Penalise and discourage undesirable behaviours, forcing change (behavioural motivation). 
  3. Provide additional resources for the government to promote desirable solutions (mixed motivation).

It shouldn’t take long for you to notice that the second point is typically the most common argument — that carbon taxes are meant to price bad polluters out of the market, and force companies to adopt more environmentally-friendly technologies.

Upon closer examination, it’s clear that it could only work if there are viable alternatives.

carbon tax
Image Credit: Moneycrashers

If you’re going to punish companies for emitting CO2, they have to have access to better solutions. Otherwise, it’s just a tax that’s going to raise costs across the board without changing anything.

In the West, carbon taxes are often used to facilitate transition to other sources of electricity, as energy generation is the biggest source of carbon dioxide.

Side-stepping the discussion on whether it makes sense to, for instance, close down nuclear reactors or gas-fired plants in exchange for unreliable and unstable wind and solar power, the fact is that most countries have the ability to undertake such a transition.

They have the necessary space and often the right conditions for at least some of these technologies to be implemented in a sufficiently large scale (e.g. thousands of wind turbines).

Singapore, on the other hand, does not. We don’t have enough land, water, wind, sunshine to reliably depend on other energy sources than natural gas.

You could set carbon tax at S$1,000 per tonne (instead of the current S$5), and it still wouldn’t make a difference in a place which has no conditions for mass deployment of windmills or solar panels, and is too small and exposed to consider nuclear power at this point.

It cannot rely on imported electricity either, as it would create a strategic vulnerability by dependence on its neighbours (and we know how well that works with e.g. importing water from Malaysia). 

In other words, it doesn’t matter how high the carbon taxes are set here, it cannot change the fact that Singapore currently is forced to rely on natural gas for electricity generation.

The country’s main CO2 emitter is the industrial sector, which accounts for 60 per cent of all emissions — 75 per cent of it (or around 45 per cent of the total) come from the petrochemical industry.

You may think that these culprits can be squeezed into submission through taxation so they adopt more environmentally-friendly practices, until you realise that they already largely have or are working on it.

Singapore is home to some of the most sophisticated petrochemical facilities and most efficient oil refineries, and the authorities are working hand-in-hand with major petrochemical companies to implement solutions that would allow to improve their performance.

For instance, by capturing and storing excess CO2, reducing emissions from this sector while allowing it to work for the benefit of the Singaporean economy, rather than killing it.

If the financial burdens applied on these companies are too heavy, they’re not going to cower in fear and cough up the money.

They’re just going to leave a few miles across the border to Malaysia or Indonesia, and set up their new operations there with minimal disruptions to their business.

In fact, most of them would enjoy much better conditions even in Europe, as what you’re not being told about carbon taxes there is that they feature broad exemptions for many industries.

Less Is More (And Better)

Essentially, what good is a tax if few pay it?

It is one element conspicuously missing from the narrative of carbon tax supporters — not a word about tax coverage.

These taxes may be quite high in Europe, but they often cover less than 50 per cent of the total greenhouse gas emissions due to many exemptions in the law.

In record-setting Sweden (with a rate of around S$160 per tonne of CO2) carbon taxation only covers 40 per cent of GHGs, shielding selected heavy industries or electricity providers due to fears of their collapse or retreat from the country (something that Singapore may very well worry major petrochemical companies would do if it taxes them too much).

In Switzerland, another country with sky-high rates at close to US$100 per tonne, only 30 per cent of emissions are under pressure from the tax, as the law doesn’t cover motor fuels and allows many avenues to seek exemptions, adding to bureaucracy.

Image Credit: World Bank

Across the entire EU, this coverage is still only around 50 per cent with a few percent more expected to be added in the coming years.

So what is the carbon tax coverage in business-friendly Singapore? It’s 80%.

In other words, Singapore may be using a much lower rate, but it covers far more of its emissions than you would find anywhere in the West, other than California (85 per cent). 

By doing so, the city-state chose simplicity over bureaucratic complexity. Instead of multiple rates and exemptions, the country levies a flat tax on most of its emission sources, which is easy to calculate and pay.

What Is The Role Of Carbon Tax In S’pore?

carbon tax
Image Credit: Moneycrashers

Using my earlier characterisation, Singapore’s motivations for implementing carbon tax are of mixed nature. 

  • Firstly, they’re political, signalling commitment of the country to the Paris Agreement through enactment of policies already in use elsewhere. 
  • Secondly, they’re fiscal. As the tax is going to provide gradually increasing revenues — currently estimated at around S$200 million to S$250 million per year (around S$1 billion is expected to have been collected after the first five years). With a review expected to raise the rate to S$10 or S$15 by 2030, what would provide close to S$1 billion annually by the end of the decade.
  • Thirdly, the tax helps promotional and developmental efforts, allowing the government to promote or invest in development of environmentally-friendly solutions, which could lower or capture excess emissions, in cooperation with businesses rather than by punitive measures.
  • Finally, they’re behavioural, but in a different way than in the West. Unlike in Europe or several American states, where progressive idealist authoritarians tend to hold a belief that the Utopian future can be forced into being by punitive taxation and strict legislation, Singapore has engaged in its trademark balanced policymaking, which is achieving multiple goals in and out of the country without threatening the prosperous status quo.

Introduction of the tax in this form and scale signals Singapore’s concerns about the environment to both local and international audiences.

At the same time, it shows businesses that the government is ready to use fiscal tools if necessary, but would rather work with them to mitigate the problems with emissions through cooperation rather than conflict.

Featured Image Credit: Moneycrashers

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