Ministry of Sustainability and the Environment Public Consultation on the Draft Carbon Pricing (Amendment) Bill

The Green Swan Initiative’s Response to the Ministry of Sustainability and the Environment Public Consultation on the Draft Carbon Pricing (Amendment) Bill

The Green Swan Initiative (GSI) thanks the Ministry of Sustainability and the Environment (MSE) for the public consultation on the upcoming Carbon Pricing (Amendment) Bill.

GSI welcomes efforts to raise the carbon tax from its current price of $5/tCO2e to $25/tCO2e in 2024 and $45/tCO2e in 2026.

This response will concern Division 1A - Allowances and Division 5 - International Carbon Credits.

Division 1A — Allowances

GSI notes that the inclusion of Division 1A represents a clear regression from the principle of no exemptions in the current carbon tax. This principle has been continually reaffirmed, including in the following examples:

• In the National Climate Change Secretariat webpage on the Carbon Tax, it states that "To maintain a transparent, fair, and consistent price signal across the economy, the carbon tax is applied uniformly to all sectors including energy-intensive and trade-exposed sectors, without exemption."¹

• Then Minister for the Environment and Water Resources (MEWR) Masagos Zulkifli in the Opening Address of the 2018 Asia-Pacific Climate Week, said that "Our carbon tax will apply uniformly to all sectors, without exemption. This will maintain a transparent, fair, and consistent carbon price across the economy."²

• Senior Minister Teo Chee Hean, in the preface to Singapore's Long-term Low Emissions Development Strategy, states that the carbon tax "applies uniformly to all sectors, without exemption... and sends a fair, uniform and transparent price signal to incentivise emissions reduction."³

• Senior Minister Teo Chee Hean, speaking again in the 2021 Motion To Accelerate And Deepen Efforts Against Climate Change, said that "In fact, the carbon tax in Singapore is one of the most comprehensive in the world. If one looks at it, you can see that we have chosen to apply the carbon tax at key nodes of carbon emissions in Singapore so that this tax will flow through evenly to the rest of the economy."⁴

• Minister for Sustainability and the Environment Grace Fu, at the 2020 GCNS Distinguished Dialogue, said "We have implemented a carbon tax that is applied uniformly to all sectors, without exemption."⁵

GSI fully supports this no-exemption principle and is of the view that our carbon tax must continue to abide by it. The introduction of Allowances into the Carbon Pricing Act therefore puts at risk the perception that our carbon tax maintains a "transparent, fair, and consistent" price signal across the economy, in particular as the recipients of such allowances are likely to be high emitters. If a perception that the costs of emitting greenhouse gases are unfairly distributed across the economy is allowed to develop, even the current society-wide political consensus on tackling climate change could be under threat. ⁶ 

Such a threat should not be underestimated. The experience of carbon taxes policies worldwide has demonstrated a general lack of popularity and effectiveness, in particular owing to distributional concerns and the tendency for carbon taxes to be regressive.⁷ A carbon tax that is seen to unfairly favour high polluters risks creating political constituencies among the population that are opposed to climate policy, or who otherwise see climate policies as a threat to their material interests. An adherence to a carbon tax that is seen to be "transparent, fair, and consistent" by upholding the principle of no-exemptions is therefore critical to ensuring the political viability of the policy.

As such, while GSI does not agree with the introduction of Division 1A, the following suggestions are recommended as ways to strengthen the implementation of Section 20. 

GSI recognises that the addition of these allowances, aimed in particular at EITE companies, are driven by concerns over competitiveness as a high carbon price may unduly burden these sectors in export markets, and may even lead to carbon leakage. GSI also notes that the allowances will be "transitory" and that the government will continue to "spur decarbonisation efforts and energy efficiency". 

GSI would like to point out that in such cases, the award of allowances must be justified on the basis of provable carbon leakage. In other words, it must be proven in the relevant export sector that either the major export competitors or export destinations are not covered by a carbon pricing scheme. For example, in the case of gas turbines, which made up 3.28% of Singapore’s exports in 2020,⁸ its main export competitors would have included the United Kingdom, France and Germany, all of whom are subject to emissions trading schemes, and therefore pay a price higher than Singapore for their emissions.⁹ In such a case, the award of allowances would have no basis, and may even lead to carbon leakage from jurisdictions with a carbon price to Singapore. This will increasingly be the case as more jurisdictions adopt and implement carbon pricing policies or carbon border adjustment mechanisms.

GSI would like stronger language in setting out the assurances that the facility is on a path towards decarbonisation than those set out in Sections 20E(2)(a)(ii) and 20E(2)(b)(ii). 

Assuming that 20E(2)(b)(i) amounts to a limit in the award of allowances to 50% of reckonable emissions, GSI would like to propose a tightening of these requirements to 33%. 

To ensure that recipient companies do not become economically dependent on allowances, and in the interest of fairness in administering the allowances, GSI proposes a clause preventing companies from receiving allowances for more than two years in succession. 

Finally, GSI proposes the creation of a public registry, maintained by the NCCS and publicly accessible on its website, that sets out the recipients of the allowances, the amount of the award of allowances, and the emissions years.

GSI therefore proposes the following amendments to Section 20 (amendments or additions in bold):

20D(1)(c) The taxable facility has not received allowances in more than one of the preceding three emission years.

20D(1)(d) The Minister determines that in the relevant sector of the registered person of the taxable facility, its main export competitors are not in jurisdictions which impose a carbon pricing mechanism, or that export destinations do not impose carbon border adjustment mechanisms.

20D(2)(a) The Minister must notify the public body, who will maintain a public registry of all companies who have received allowances, the amount of the award of allowances and the relevant emissions year(s).

20E(2)(a)(ii) such other matter as the Minister considers appropriate for the purpose of incentivising the continued reduction in the GHG emissions of the taxable facility and ensuring that the taxable facility is on a pathway to reach net zero emissions; and

20E(2)(b)(i) by prescribing that the tax chargeable in respect of the total amount of reckonable GHG emissions of the taxable facility for the emissions year less the allowance for the emissions year, must be more than double the amount specified by the Minister in the award, when calculated using 

20E(2)(b)(ii) in any other manner as the Minister considers appropriate to incentivise the continued reduction in GHG emissions towards net zero emissions of the taxable facility.

Division 5 - International Carbon Credits

GSI notes the introduction of International Carbon Credits (ICCs) as ways for taxable facilities to offset their carbon tax burdens. 

GSI is of the view that this inclusion may be premature at this stage given the lack of progress globally on carbon credits, in particular in voluntary markets. 

GSI also notes that the Amendment Bill does not specify the prescribed criteria, nor the prescribed limits, in Sections 33A(i) and 33B respectively, on the use of ICCs. However, GSI notes that the Government has stated elsewhere that the limit would be 5%, and hopes that this limit will not be raised in the future. GSI seeks further clarifications on the prescribed criteria and limits on ICCs. 

GSI is of the view that in setting out the prescribed criteria, strict standards should be maintained to ensure that ICCs comply with Article 6 of the Paris Agreement. Accordingly, the use of ICCs from voluntary carbon markets should be discouraged to the furthest extent possible.

GSI opposes the addition of Section 33B(ii), and believes that the prescribed limit should apply equally and fairly to all taxable facilities. GSI believes that at the very minimum, if Ministerial discretion is invoked to permit the use of ICCs above the prescribed limit, there should be a prescribed upper limit of 10% that Ministerial discretion is allowed to permit.

footnotes

¹ National Climate Change Secretariat, Carbon Tax, nccs.gov.sg/singapores-climate-action/carbon-tax/

² National Climate Change Secretariat "Opening Address by Minister for the Environment and Water Resources Masagos Zulkifli at the Opening Ceremony of the Asia-Pacific Climate Week", https://www.nccs.gov.sg/media/speeches/opening-address-by-mr-masagos-zulkifli-minister-for-the-environment-and-water-resources-at-the-opening-ceremony-of-the-asia-pacific-climate-week-11-july-2018

³ National Climate Change Secretariat "Charting Singapore's Low-Carbon and Climate Resilient Future", strategygroup.gov.sg/files/media-centre/publications/nccsleds.pdf

⁴ Prime Minister's Office "Response by Senior Minister Teo Chee Hean on carbon tax in Singapore", pmo.gov.sg/Newsroom/SM-Teo-Chee-Hean-carbon-tax-parliament

⁵ Ministry of Sustainability and the Environment, "GCNS Distinguished Dialogue On 23 November 2020 - Ms Grace Fu", mse.gov.sg/resource-room/category/2020-11-23-opening-remarks-at-the-gcns-distinguished-dialogue

⁶ As acknowledged by Minister Grace Fu at the 2022 Motion To Advance Towards an Inclusive Low-Carbon Society, https://www.youtube.com/watch?t=32120&v=kuIkvYvNeCU&feature=youtu.be

⁷ A paper by Julius Andersson and Giles Atkinson of the LSE Grantham Institute (2020) finds that "To mitigate climate change, a price on carbon needs to be put on those consumption goods that are responsible for the majority of emissions: transport fuel, food, heating, and electricity. These goods are, however, typically necessities and the distributional effect of carbon taxation will hence likely be regressive, more so the more unequal the distribution of income... if growing income inequality increases the regressiveness of carbon taxation, this adds to the difficulties of reaching political cooperation and consensus also within countries." An IMF paper by Alonso & Kilpatrick (2022) notes that "Part of the challenge resides in the distributional implications of a carbon tax and a belief that it tends to be regressive. Even when not regressive, poor households could be hurt by a carbon tax, particularly in countries that rely heavily on carbon-intensive energy sources". Carattini et al (2018) identifies as one source for the public resistance to carbon taxes that "many voters object to the regressive nature of carbon taxes. They perceive, rightly, that without counterbalancing measures carbon taxes may have a disproportionate negative impact on low-income households." Jenkins (2019) notes that oftentimes "carbon pricing policies are viewed as “regressive” taxes that fall disproportionately on poorer households." Full citations for these papers are provided in the bibliography.

⁸ Observatory of Economic Complexity "Singapore", oec.world/en/profile/country/sgp

⁹ Observatory of Economic Complexity "Gas Turbines", oec.world/en/profile/hs/gas-turbines

bibliography

Alonso, Cristian, and Joey Kilpatrick. "The Distributional Impact of a Carbon Tax in Asia and the Pacific." (2022).

Andersson, Julius, and Giles Atkinson. The distributional effects of a carbon tax: The role of income inequality. Grantham Research Institute on Climate Change and the Environment, 2020.

Carattini, Stefano, Maria Carvalho, and Sam Fankhauser. "Overcoming public resistance to carbon taxes." Wiley Interdisciplinary Reviews: Climate Change 9, no. 5 (2018): e531.

Jenkins, Jesse. "Why carbon pricing falls short." Kleinman Center for Energy Policy (2019).