Singapore Carbon Tax - Much Ado About Nothing

The era of carbon tax is upon us, The French will have none of this and Parisians are taking to the streets to denounce it, telling their government their preference for wine women and songs. The US is fighting over a tax bill in Congress. The Canadians are planning on its implementation amidst much negative public sentiments. Nordic countries meanwhile, have long implemented it, and at very high rates (Swedish rate is US$126/m tonne of CO2 emissions).  A servile Singapore simply accepts what the smart government decides. There are no success metrics to go by. How do we even know exactly what we hope to achieve and quantify the outcome.

For starters, I am not a climate change denialist. I just want a clearer picture of what is hoped to be achieved with carbon tax in Singapore and whether it makes any sense.

The Paris Agreement is an agreement within the United Nations Framework for Climate Change Control. All signatory countries made certain commitments to implement actions to help mitigate global warming.  These commitments are voluntary in nature, of which carbon tax is one. Countries go about their carbon emission reduction programmes in one of two, or both ways - (a) cap and trade, or (b) carbon tax.

Cap and trade is known as a compliance regime. Emitters have their CO2 emissions capped at a certain quantity each year. If they needed more, they have to change technology to be more energy efficient, use green energy, or purchase carbon credits (thus trade in the carbon credits market). Failing which they are subject to heavy taxes on the excess CO2 emissions.

The carbon tax is known as a voluntary regime. The government imposes a carbon tax, leaving emitters to voluntarily seek ways to reduce green house gases. The carbon tax is collected to fund various projects or schemes aimed at CO2 emission reduction.

All of us are emitters, whether directly or indirectly. Scope 1 emitters are those who cause green house gas emissions directly by the use of their assets - eg power generators, a farmer doing a slash and burn cultivation method. Scope 2 emitters are indirect emission from consumption of goods -- an airline passenger is partly responsible for the fuel burnt by the plane.Scope 3 emitters are all users of electricity.

Carbon tax comes into effect in Singapore 1 Jan 2019. The government has imposed a carbon tax of S$5 per tonne of green house gas emitted. This will be further raised in 2023. For the electricity industry, the tax is applied on the gencos. Gencos in turn pass it on as a cost to consumers who ultimately foot the bill. The carbon tax in Singapore is thus a tax on consumers. I'm guessing that carbon tax is not tax-allowed for consumers, so the electricity bill will likely disclose the tax amount.

Now let's see how much a consumer has to pay each month. It is based on the actual meter reading for the month, ie on actual load consumed without including the transmission losses.  You would think simply take this quantity and multiply by a rate, simple as ABC, right? Wrong! Why of course such great systems must come with great mystical formulation. There is a word for this, it's called a Rube Golberg machine. It is a strange device, contraption or system intentionally designed to make a simple application terribly complicated.

To compute the tax amount the consumption in kWh has to be converted into CO2 equivalent tonnage. This requires a conversion factor called GEK-AOM (Grid Emission Factor - Average Operating Margin). No idea what this mumbo jumbo means but it is based on UNFCCC guidelines and published by EMA. For example, the GEK-EOM for 2018 was 0.4192 CO2 tonne/MmWh. So for a consumer with a consumption of 10,000 kWh in the month, the carbon tax is :

10,000 kWh x  0.4192/1,000 x S$5.00 = S$20.96

Per consumer, the carbon tax is negligible. But what about the national level, how much carbon tax will the government collect?. The aggregate consumption of electricity in Singapore is about 51 tetrawatts per annum currently. The carbon tax collected per year is about :

51,000,000,000 kWh x 0,4192/1,000 x S$5.00 = S$106,896,000.

S$107 million into the state coffers a year is no small change.  Courtesy of consumers. So then the question, what is all this for?

The carbon tax is meant to incentivise emitters to move into non-fossil fuel technologies and be more energy efficient. How will this be achieved in Singapore with the carbon tax and will it?

For gencos, this will be absolutely meaningless. Firstly, they are scope 1 emitters but don't bear the carbon tax cost which is passed through to consumers. Why should they be bothered?  Secondly, 95% of power generation is already from gas-fired turbines. Singapore has moved out of coal plants long ago.

For consumers, the tax quantum is so inconsequential, user inertia is guaranteed. Hardly anyone is going to go change lower energy bulbs, increase the aircon temperatures 2 degrees, change lifestyles, etc.

Solar energy uses no fuel so carbon tax does not apply. Those who install embeded solar pv systems are driven by environmental sustainability goals rather than seeking cost reductions. The risk-returns on solar pv is still some way off. For the grid-sourced solar energy, ie generators whose solar pv power is for the grid, the retail rates at the moment is quite close to grid-parity, meaning it is almost on par with the normal brown eletricity prices. The low carbon tax is insufficient to tip the scale in favour of solar. At the moment solar constitutes less than 4% of our electricity mix. A quantum leap in investments is required to achieve our goal of 25%. A more realistic way to achieve this is to solve the excess capacity at the moment which is pushing USEP (Uniform Singapore Energy Price) below the LRMC (long range merginal cost). Gencos have been operating at great losses in the past few years due to the huge excess capacity. Without the huge excess capacity, gencos will price themselves higher to be profitable, thus pushing the USEP up. At today's prices, my rough estimate of USEP moving closer to LRMC by $0.015 would have made grid-sourced solar on grid-parity with the other gencos at the retail level. This will drive more investments into solar pv power generation.

For the heavy emitters other than the gencos, there are only a handful in Singapore. This is the petrochemical industries and it is here that the impact will be greatest. This is a very price sensitive and critical export industry, a tiny increase in cost will hurt their competitiveness in the international market. When it comes to that, will the authorities bend to protect the very powerful and critical players. It will bear in mind neighbouring countries are trying to challenge local petrochemical industry and the fact that Singapore is the lone Asean country to implement carbon tax.

Finance Minister Heng Swee Keat said in his Budget speech last year that the tax will create a "price signal" to incentivise industries to reduce emissions.as well as create "new opportunities" in green growth industries such as clean energy. We can see that his statements are off the mark. It will have no such desired effects other than to make the petrochemical industries less competitive. 

Many companies have taken initiatives to implement various programmes to improve energy efficiency and in aggregate has made significant reductions to CO2 emission reductions. But these were not driven by 'price signals' of any kind. They were simply taking advantage of a whole host of subsidies or grants offered by various government agencies. Adding to these grants, we now have the revenue from this carbon tax of $107m per year to be used to fund future decarbonisation initiatives. There has been no clear indication of how the fund is to be managed, where it will go. We are talking of billions of $ at the disposal of businesses to avail of. In other words, Singapore's decarbonisation path is not driven by penalising the emitters, but by tax payers money. It is in reality, a massive massive transfer of wealth from taxpayers to investors.

This is not a dampener on Singapore's effort at decarbonisation, nor a suggestion to take to the streets like the French. It's to put the Rube Goldberg machine aside and face the reality that taxpayers are funding a substantial part of the cost of climate change mitigation.