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Singapore’s carbon tax: how does it work?

Under its Carbon Pricing Act (CPA), Singapore became the first Southeast Asian country to officially implement a carbon tax on the 1st of January 2019. Singapore’s carbon tax, which is a price set on greenhouse gas (GHG) emissions, is part of the country’s initial efforts in achieving net zero emissions. Its Low Emissions Development Strategy (LEDS) (submitted in 2020) aims to cut emissions by half from their peak in 2030 to 33 metric tonnes of carbon dioxide equivalent (MtCO2e) emissions by 2050.

Although Singapore showcases its commitment by being among the first signatories of the Paris Agreement in 2016, the country is also a significant Asian petrochemical and oil refining export hub. In 2019, approximately 56% of the country’s total primary CO2e emissions came from the industry sector, with petrochemical and oil refining activities being the main source. In the same year, it was ranked as the world’s 8th largest exporter of chemicals

How, then, can Singapore’s carbon tax work to ensure that such “energy-intensive and trade-exposed” (EITE) companies adhere to the country’s climate commitments, while also keeping them relatively competitive in the global market?

The tax: rate, scope and sectors

The carbon tax was officially imposed at a rate of SGD 5 per tonne of CO2e emissions (tCO2e) in 2019. However, in the recent Budget 2022 statement, the Minister of Finance Lawrence Wong revised for the current rate to only be applicable until 2023. The carbon tax will gradually be raised to SGD 25 per tCO2e in 2024-2025, and then to SGD 45 per tCO2e in 2026-2027. The rate will also be aimed to reach between SGD 50 and SGD 80 per tCO2e by 2030.

According to the National Environment Agency of Singapore, all industrial facilities with direct GHG emissions greater than or equal to 2,000 tCO2e per year are subject to reporting their annual emissions. In addition, those that directly emit 25,000 tCO2e or more per year are obligated to submit an annual monitoring plan as well as register as a taxable facility and pay the carbon tax accordingly.

The carbon tax in Singapore puts a price on six main GHGs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6). This additional price on GHG emissions therefore encourages emitters to be more mindful of their activities and adapt new low-emission technologies as that will save them from paying the tax.The carbon tax currently applies to all sectors in Singapore without exception. This includes its EITE sectors, such as (but not limited to) the petrochemical, electronics, and biomedical manufacturing sectors.

A page that shows carbon emission statistics next to a pen.
The Singapore carbon tax currently applies to all sectors in Singapore without exception.

Transitional Period

Some experts have expressed that the current carbon tax rate in Singapore is comparatively low at the global level, and therefore may be ineffective in meeting the country’s emission targets in the near future. The government explained that this introductory rate was set with the consideration that emitting companies would need time to transition and adjust, since the carbon tax is viewed as an additional cost to businesses.

This transitional period may help avoid possible unintended economic consequences such as reduction in business competitiveness, inflation, and job losses, especially in industries heavily affected by the carbon tax. 

The signal on carbon tax rise would also inform emitting companies to economically prepare ahead of the increase by giving them time to invest in the appropriate low-carbon technologies and activities.

Furthermore, a “transition framework” specifically for EITE industries is also currently being developed, and it is planned to be introduced in 2023. The National Climate Change Secretariat of Singapore (NCCS) perceives that EITE sectors may be prone to “carbon leakage”. This happens when industries react to higher carbon prices by relocating some of their operations to places or jurisdictions with less strict climate policies or lower carbon tax rates. 

Therefore, to lower the chances of carbon leakage as well as to keep these businesses competitive, the Singaporean government will put in place “transitory allowances” for a portion of the EITE companies’ emissions, which is to be determined before the carbon tax increase in 2024. It is important to note that this framework will only apply to existing EITE companies and new ones will not be eligible. 

Carbon Offset

The government has also indicated that starting from 2024, it will also allow companies in Singapore to offset at most 5% of their taxable emissions by purchasing “high quality, international carbon credits”. 

Quality carbon credits are generated from credible climate action projects that not only avoid, remove, or reduce GHG emissions, but also have a positive impact on other aspects such as the local community. They should also be verified by recognised international carbon offset standards such as the Verified Carbon Standard (VCS) and Gold Standard (GS).

The Singaporean government has capped the permitted amount to be offset at a low 5% of taxable emissions to stress on the importance of first attempting to reduce in-house emissions where possible. Nevertheless, this arrangement would provide a cost-effective alternative for companies or sectors in Singapore that may find it difficult to significantly reduce their emissions in the short run.

Furthermore, the government’s recognition of carbon credits could also continue to stimulate their demand locally and present an opportunity for carbon markets to expand in Singapore. For instance, AirCarbon Exchange (ACX), which is headquartered in Singapore, is an internationally known digital carbon exchange platform that uses blockchain architecture in its exchange operations. 

Moreover, within the past year, the Singapore Exchange (SGX) with DBS Bank, Standard Chartered, and Temasek have established the Climate Impact X (CIX), a Singapore-based global carbon exchange and marketplace for high-quality voluntary carbon credits from nature and technology-based projects. Following Singapore’s Budget 2022 statement, CIX’s first digital hub, Project Marketplace, was recently launched in March 2022. It aims to serve as a platform for not only Singapore-based enterprises and carbon project suppliers, but also those with global recognition to trade voluntary carbon credits. More variations of CIX’s platforms, such as the CIX Auctions and CIX Exchange are expected to follow.

In short

Since the Singaporean authorities are still continuously consulting with the public and related stakeholders regarding the future of its carbon tax scheme and transition framework, further developments in the country’s climate action and their outcomes are worth keeping an eye on.

Though a much higher tax rate and additional efforts are clearly still needed to reach its ambitious climate targets, from Singapore’s case we can see that implementing a carbon tax must also be paired with a clear plan of appropriate policies that ensure a sustainable transition not only for the environment, but also for its people and its economy. 

At ALLCOT Trading, our mission is to promote additional sustainable impact with every transaction. If you want to achieve this in a fair, transparent and win-win scenario, contact us and together we will make it happen.

For more information about the carbon tax system in Singapore, please contact Fatharani Nadhira:

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