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'Daunting' and 'significant': analysts react to Singapore's carbon tax rate hike

"As power generators, Sembcorp Industries and Keppel Corp may be negatively affected via higher taxation on carbon."

Singapore is taking its green agenda “to a new level” with carbon tax hikes in the coming years, writes DBS Group Research senior economist Irvin Seah.

In a Feb 21 note on Budget 2022, Seah says Singapore’s current carbon tax rate of $5/tonne of carbon emission “pales in comparison to many other economies at similar stage of economic development”.

Sweden, for example, has set its rate at US$119/tonne. while Switzerland levies US$99/tonne. France charges US$45/tonne, while South Korea has set their carbon tax rate at US$33/tonne, writes Seah.

Finance Minister Lawrence Wong announced on Feb 18 that Singapore’s carbon tax rate will be raised in phases to between $50 and $80 per tonne of emissions by 2030.

“While this will place Singapore closer to many developed economies, the impact on the economy will be significant,” writes Seah. “Industries with high carbon emission, such as power generation, manufacturing, aviation and land transport sectors will be most impacted, which in turn will likely be passed on to consumers as higher prices.”

The absolute increase in carbon tax was “far greater than expected”, writes Barnabas Gan, economist at UOB Global Economics & Markets Research.

The research house had called for an increase to between $10 and $15 per tonne in 2024. Instead, Singapore is set to raise carbon tax to $25/tonne in 2024 and 2025.

Howie Lee, economist at OCBC Treasury Research, admits the hike “exceeded way above what we expected”.

“The aim of $50-$80/tonne will be consistent with the carbon price corridor proposed by the World Bank’s 2017 High-Level Commission of US$40-$80/tonne ($54-$108/tonne),” writes Lee.

Last June, the International Monetary Fund (IMF) proposed an international carbon price floor, divided into three tiers. To address such inconsistencies, each tonne of emissions should, by 2030, cost a minimum of US$75, US$50 or US$25, depending on whether the emission is in an advanced, high- or low-income market, says the IMF.

Impact on Sembcorp and Keppel

While the percentage increase in carbon taxes appears daunting, UOB Kay Hian Research believes shipyard and industrial companies should be able to manage.

The government will implement a transition framework to assist companies in adapting to this increase. From 2024, the government will allow businesses to use “high-quality, international carbon credits” to offset up to 5% of their taxable emissions.

As power generators, Sembcorp Industries and Keppel Corp may be negatively affected via higher taxation on carbon, notes UOB Kay Hian Research.

That said, both companies should continue to be competitive in the Singapore energy sector, adds the analysts. “We do note that both companies have been focusing on an early push into reducing their respective carbon and greenhouse gas (GHG) emissions. In addition, both companies have highly efficient combined cycle gas turbine cogeneration plants which emit less CO2 than conventional thermal coal and oil plants, which are less efficient.”

In 2020, Sembcorp Industries, Sembcorp Marine and Keppel Corp’s Scope 1 and 2 emissions were 26,525, 125 and 172 kilotonnes of carbon dioxide equivalent (ktCO2e) respectively. However, both companies have plans to reduce this in the medium to long term, notes UOB Kay Hian Research.

Keppel Corp has targeted 86ktCO2e by 2030. Beyond 2030, Keppel Corp aims to achieve net zero Scope 1 and 2 carbon emissions by 2050.

Sembcorp Industries aims to reduce its GHG intensity to 0.40 tonnes of carbon dioxide equivalent per megawatt hour (tCO2e/MWh) by 2025, down from 0.54 tCO2e/MWh in 2020.

Its Climate Action Plan 2021 aims to halve its GHG emissions by 2030 and hit net zero by 2050, while committing itself to no new coal-fired energy asset investments.

Others to follow

Meanwhile, HSBC analysts in Hong Kong praise the move, calling it Singapore's response to the call to strengthen climate pledges made by all countries at COP26 last year.

HSBC’s Chan Wai-Shin, head of ESG Research; Yun Liu, economist; and Polo Heung, associate of ESG Research, believe the hike will “up the ante” for other countries to reconsider climate change measures ahead of COP27 in November 2022.

“We consider the bringing forward and the level of increases highlights Singapore’s ambitions to be a key player in a global net zero economy, especially as a number of jurisdictions have announced potential carbon tariffs for cross-border trade,” write the HSBC analysts.

“We expect various forms of carbon pricing to play a growing role, as more economies strengthen their climate pledges,” they add.

Header photo: Bloomberg

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