Is Singapore's Carbon Tax Effective?

In 2019, Singapore implemented a carbon tax. Carbon tax refers to a tax per unit of carbon emissions of fossil fuels. Carbon tax has to be implemented since global warming due to burning fossil fuels has to be dealt with. If carbon is emitted at the current rate, there will be an overuse of common pool resources. The aim of the carbon tax is to encourage firms to switch to alternative sources of cleaner energy due to the increase production costs associated with using fossil fuels.

Singapore was the first ASEAN member to set a carbon tax at $5 per tonne of emissions until 2023 with rates to be revised from 2024. This was done to gauge the effectiveness of the tax and by how much it should be increased after 2024. Many climate change activists argue that the tax is too low and when it is too low, the desired impact isn’t achieved as firms will continue to pay the tax and emit greenhouse gases, missing the objective of the tax.

Canada’s carbon tax is 10x the amount of Singapore’s at $50 per tonne of emissions. Like Singapore, Canada also implemented the tax in 2019 albeit at a much higher rate of $20 per tonne with the tax increased yearly by $10 till 2022 and $15 yearly till 2030 making the final rate at $170 per tonne of emissions.

Singapore government has stated that it is prepared to spend more than the $1 billion collected in tax revenue from 2019 to 2024 on projects that promote the usage of green and low-carbon energy. If Singapore follows Canada in raising the tax yearly, it will be able to collect more revenue and direct the tax monies to these projects. Raising the tax yearly would cause the firms to increase their decarbonisation efforts so as to be in line with the timeline set by the government in order to not incur increasing costs. At the same time, the increased revenue could potentially mean that cleaner energies are developed quicker so firms would naturally be inclined to switch to using them.

Many argue that Singapore shouldn’t have had a $5 per tonne tax to begin with, however, Singapore being the only member in ASEAN to have the tax has to keep the rate low. If the rate is too high, firms would shift their operations elsewhere and continue to pollute. This would be a double whammy since Singapore would lose the economic output from those firms and the firms would continue to pollute.

In conclusion, Singapore government is going in the right direction by raising the tax in 2024 while investing in cleaner sources of energy. This gives firms enough time to restructure their operations so that they don’t emit as much carbon and don’t overuse common pool resources.

Vedant Sachin Kanthale

References

Tan, A., 2022. $1b in carbon tax for S'pore expected from first 5 years of scheme. The Straits Times, [online] Available at: https://www.straitstimes.com/singapore/environment/1b-in-carbon-tax-expected-from-first-5-years-of-scheme [Accessed 8 January 2022].