Delivered in Parliament on 1 February 2021
Mr. Speaker,
Thank you for the opportunity to contribute to this debate. As a representative of a constituency with a comparatively younger demographic, many who are parents of young children—and as a father of a young daughter myself—I have a deep, enduring interest in the implications of climate change for the next generation. This is precisely why we should regard this issue as a climate emergency: not so much because of specific challenges we face today, but in terms of what we leave behind for our children tomorrow, who will bear the costs of any impending environmental disaster.
I wish to commiserate with this House about the importance of a well-functioning carbon tax system for delivering effective reductions in our nation’s carbon footprint. Importantly, I will argue in favor of such a tax, relative to other seemingly more efficient systems, such as cap-and-trade. But I will also suggest reasons why the current system, as it stands, is inadequate, as well as propose some practical refinements to the existing regime.
Why the current carbon tax system is inadequate
To be clear, there is an existing carbon tax, stipulated in the Carbon Pricing Act of 2018 (CPA), which came into force on January 2019. This was an important first step. As Lao Tzu reminds us, 千里之行，始於足下,[1] commonly translated as “a journey of thousand miles begins with a single step.”
But it is only a first step, and unfortunately, this step has been too tentative. The current rate is set at $5 per metric ton of greenhouse gas emissions, set to be increased to $10-$15 per ton by 2030.[2]
This figure falls far below recommended amounts by just about every credible source. The median estimate called for by the UN Intergovernmental Panel on Climate Change is $95.[3] Systematic reviews of academic estimates suggest a price closer to $77.[4] Our rate is even low compared to actual rates currently imposed worldwide. The OECD’s calculations indicate that the effective rate among 41 major economies amounts to $65.[5] And all these numbers are in U.S. dollars, not even local currency.
Moreover, the exiting carbon tax is limited to just the largest industrial facilities—those emitting in excess of 2,000 tons of CO2—and effectively covers just around 30 to 40 companies. Not only would this excessively conservative target fail to generate the sort of volume reductions required, it also concentrates the tax burden on a small set of firms. Even if these firms account for the vast majority of emissions,[6] the narrow coverage is inconsistent with public finance principles.
The merits of cap-and-trade are offset by its limitations
It is worth noting that there an attractive alternative to the carbon tax: a cap-and-trade system. As the name implies, cap-and-trade “caps” the total amount of emissions according to some target, before subsequently allowing the trading of each firm’s allocated emissions amount. The idea behind this is straightforward: firms that are better at reducing their carbon footprints stand to gain by selling their share to other, less-efficient firms. Meanwhile, those with less carbon-reduction capacity can obtain reprieve by purchasing offsets from these more-efficient firms.
In theory, it is possible to arrive at the same final outcome—of reductions in environmentally-harmful emissions—with either carbon taxes or cap-and-trade. But there are a number of reasons to favor taxes as a preferred instrument.
Why a carbon tax is both certain and credible
The carbon tax is more robust to uncertainty. Cap-and-trade systems—while offering greater clarity over the ultimate amount of emissions that would result—tend to fall prey to uncertainty in terms of compliance costs. In a post-recession economic climate—where uncertainty over impending costs is especially pernicious for the functioning of business—it makes more sense to allow uncertainty to fall on the total emissions front.
Furthermore, carbon taxes are less likely to be gamed by participants. The experience of countries that have sought to introduce quantity restrictions on pollutants is that they are difficult to ensure compliance. Cap-and-trade also encourages front-loading of investments in dirty technologies, since those with greater polluting potential are more likely to be granted higher initial caps. Even after implementation, permit trading can ironically encourage more pollution than otherwise, as firms tradeoff gains in market share against environmental penalties.[7]
In comparison, a carbon tax, based as it is on a price mechanism, is straightforward, easily observed and monitored, and hence more likely to be enforced successfully.
Why a carbon tax is ensures that rents do not dissipate to firms
Another principle of public finance has to do with to whom the rents from the imposition of a tax (or quota) accrues. Because taxes are directly collected by the government, taxes generate revenue that flow directly into the public fisc. In contrast, if permits are simply assigned to firms, firms will capture the quota rents.
This is not simply a theoretical contrivance; it also carries enormous practical implications. Although the end objective—a reduction in total emissions—may be equivalently achieved via either method, carbon taxes raised can be directed toward other, important, social objectives. If instead quota permits are either simply issued or sold at an inappropriate discount to corporations, there is no guarantee that the excess value will subsequently be redirected toward the most optimal societal needs.
A properly calibrated carbon tax can promote structural shifts in the economy
Mr Speaker, a properly calibrated carbon tax can also offer a more decisive push toward climate-friendly structural reform of our domestic economy. At the moment, our energy and fuel sources—not to mention our export basket—remains heavily inflected toward fossil fuels.
For instance, in late October 2020, the government announced that it would import electricity from Malaysia under a two-year trial.[8] I accept that part of the underlying premise of the effort is to spur a regional green electricity market.[9] Even so, the contours of the deal, as reported by the press, strike me as incomplete. After all, energy is fungible; if Malaysia sells us clean energy, only to undo our emissions gains with producing more dirty energy elsewhere, the planet will suffer a net emissions increase. The deal is also symptomatic of how we tend to postpone the difficult act of passing costs through to the end consumer, some of which would ultimately be necessary to institute a behavioral shift toward a greater reliance on renewables.
As another example, the number of hybrid and electric vehicles in Singapore remain tiny: around 1,400 electric vehicles and 52,000 hybrids, out of our 950,000-strong fleet (a mere 6 percent).[10] While Minister Heng did announce last year that internal combustion engine vehicles would be phased out by 2040,[11] and Minister Ong has stated that we could be “more ambitious” in our move to low-emissions vehicles,[12] it is difficult to envision this occurring without a clearer commitment, at least in the medium run, toward carbon taxes applied to petrol, as well as diesel.[13],[14]
The petrochemicals industry currently contributes a nontrivial share to Singapore’s national output—around $81 billion (or 3 percent)—and our nation is currently the world’s 7th largest exporter of chemicals and industry.[15] What have we done to reduce this sector’s footprint in our local economy, and to transition toward more climate-friendly production? In this regard, it is worth noting that China, despite its relatively lower per capita income, has recognized the enormous potential that green technology offers, and has embraced it in earnest. It has, in doing so, taken an important lead in developing such technologies. While we may not have certain built-in advantages in every dimension of green tech, we could find comparative advantage in certain niche areas, as my colleague, the Member from Aljunied Leon Perera, will share in his speech.
A higher carbon tax, applied more broadly across the economy, will help usher in the necessary shifts in by embedding the costs of carbon emissions directly into input prices. It also ensures that all segments of society—business, workers, government, and civil society—internalize the costs and consequences of climate change.
Refining the existing carbon tax
So how should we move forward?
Mr. Speaker, I have made the case that the carbon tax—even the upper limit of $15 suggested by the CPA for 2030—is too low. Even if we wish to proceed carefully, we run the risk of our efforts being wholly unproductive altogether, if we remain excessively cautious. In such a case, we end up with the worse of both worlds; we introduce a friction on business operation, but we fail to gain the benefits of effective climate change mitigation.
While the specific price is certainly up for debate and should, ideally, be deliberated by a panel of experts with representatives from business, environmental civil society groups, policymakers from the NEA and MSE, and academics, a starting point of around $58 (USD 44) would at least place Singapore at the midpoint among industrialized economies, even if it remains below that which would be necessary for decisive climate-change mitigation. Another useful benchmark is $133 (USD 100), which is the average cost of carbon capture and sequestration (CCS) activities.[16] A figure within this range would be a very useful start for the panel and our civil service to deliberate. And if I may turn the question posed by Minister Fu around: how did the government arrive at the $15 number? Was this based on the latest, credible scientific evidence of the amount that would be necessary for Singapore to achieve its climate change goals?
I would also suggest significantly expanding the coverage of the tax. The Government has already accepted that there should be no exemptions to firms liable for the tax. Yet it has chosen to limit the scope to the 30 or so major emitters. This runs against a standard principle of public finance: that taxes should, ideally, be small and broad, to minimize their distortionary effects.
Moreover, there is little reason to retain the existing uniform tax across sectors. The firms currently affected by the tax are in distinct industries—petroleum, chemical, and semiconductors—and should the scope of coverage be further expanded, they would include firms in even more disparate sectors. Accordingly, sector-specific taxes would offer more room to ensure that targets are met, given the varied propensity for emissions in different industries.
Perhaps most crucially, the revenues from our carbon tax can then be used to offset other taxes, to ease the transition and ensure progressivity. Such tax-for-tax offsets—which we may call “raise and rebate”—are not unprecedented, and have been exercised by the government in the past.[17] The government can do the same this time, as a “Green Dividend.”
Alternatively, carbon taxes can be directed toward a “Green Fund,” to be used toward investments that would further advance environmental objectives, such as solar panels or recycling operations—that serve to decarbonize the economy. My colleague, Member for Aljunied Gerald Giam, has developed these ideas in greater detail in his speech.
The bottom line is that we can ensure that the tax is revenue-neutral, which can go a long way toward mitigating the negative effects of higher costs, and focus instead on shifting the structure of our economy.
The way forward
Mr Speaker, I am aware that I find myself in the somewhat unusual circumstance of defending the merits of an existing government program, against an alternative that has been proposed by, among others, the PAP youth wing, who sit on the opposite side of the aisle. That said, other Members, such as Mr Don Wee and Mr Henry Kwek, make the case for retaining and raising the carbon tax, albeit with differing details (it must be the shared rarified air we breathe up here).
That said, I have taken this position because I believe that a carbon tax is not only more credible, but it also embeds preferable distributional outcomes, relative to schemes that may be more attractive—from an efficiency standpoint—on paper, but ultimately fall short in real-world conditions.
Perhaps ironically, economists have also moved toward this new consensus position despite being the ones to initially champion a cap-and-trade system.[18] This shift occurred after increasing evidence emerged in favor of a tax relative to cap-and-trade. And when the facts change, we should be willing to change our minds.
Singapore has the fortune of already being a technologically-advanced, services-oriented economy, and hence inherently better positioned to embrace more decisive moves toward addressing environmental issues and, in particular, the threat of climate change. Climate change is an emergency, which calls for drastic measures. We should not allow this opportunity to pass, victim to a lackadaisical policy position and undue timidity. Perhaps just as importantly, we cannot relinquish our chance to be global leaders by our signal of how a decisive move away from business-as-usual is, truly, a moral imperative.
With that parting thought, I express my support for the Motion, as amended by the Member from Hougang, Mr Dennis Tan.
[1] Lao Tzu, Dao De Jing, Ch, 64.
[2] See NEA (2020), “Carbon Tax,” available at: https://www.nea.gov.sg/our-services/climate-change-energy-efficiency/climate-change/carbon-tax.
[3] The range for the higher 2-degree pathway calls for a price of USD 10–200 by 2030, while that of the below 1.5-degree pathway is USD 135–5500. Source: Rogelj et al. (2018), “Mitigation Pathways Compatible with 1.5˚C in the Context of Sustainable Development,” IPCC SR1.5, p. 78.
[4] Poelhekke, S. (2019), “How Expensive Should CO2 Be? Fuel for the Political Debate on Optimal Climate Policy,” Heliyon 5(11): e02936.
[5] The range is EUR 0–105, based on 41 major emerging and industrialized economies that account for 80 percent of global emissions. In practice, the charge within the EU averages around EUR 30 per ton. Source: OECD (2016), Effective Carbon Rates on Energy, Paris: Organization for Economic Cooperation and Development.
[6] The estimated amount if 80 percent. Source: https://www.straitstimes.com/singapore/singapore-budget-2018-carbon-tax-of-5-per-tonne-of-greenhouse-gas-emissions-to-be-levied.
[7] Barrett, S. (1994), “Strategic Environmental Policy and International Trade,” Journal of Public Economics 54: 325–38; Lapan, H. & S. Sikdar (2011), “Strategic Environmental Policy Under Free Trade with Transboundary Pollution,” Review of Development Economics 15: 1–18.
[8] Source: https://www.channelnewsasia.com/news/singapore/singapore-import-electricity-malaysia-two-year-trial-energy-13373336
[9] Source: https://www.straitstimes.com/business/economy/sp-group-eyes-more-links-with-region-to-tap-clean-power.
[10] Data are from 2019. Source: https://www.lta.gov.sg/content/dam/ltagov/who_we_are/statistics_and_publications/statistics/pdf/MVP01-4_MVP_by_fuel.pdf.
[11] Source: https://www.channelnewsasia.com/news/singapore/electric-vehicles-budget-2020-charging-points-energy-12512194
[12] Source : https://www.channelnewsasia.com/news/singapore/singapore-2040-target-internal-combustion-engine-13757550.
[13] Of all transport emissions, petrol accounts for around a third, while diesel two-thirds. Source: https://www.nccs.gov.sg/docs/default-source/default-document-library/2020-singapore-fourth-biennial-report.pdf.
[14] One concern with the imposition of taxes, especially on diesel, is that this would be regressive. The solution for this is straightforward: support for targeted recipients should be rendered directly, to reduce inefficiencies. Hence, if the objective is to provide income support to (say) taxicab drivers, a direct cash payout directly to those workers would be preferable to an indirect subsidy via lower fuel taxes.
[15] Statistics are available online, at: https://www.enterprisesg.gov.sg/industries/type/energy-chemicals/industry-profile and https://www.edb.gov.sg/en/our-industries/energy-and-chemicals.html.
[16] The natural upshot of this figure is that, should one wish to fully channel the full amount of the carbon tax toward CCS, the tax should be set, mutatis mutandis, at the equivalent USD 100/ton.
[17] In rolling out GST in 1994, the government introduced a slew of measures, including income tax relief for taxpayers and rebates for low-income households, which eased the transition. Source: https://eresources.nlb.gov.sg/history/events/c5594d45-4948-4080-a6fb-5175eb8d83c3.
[18] See, for example, a recent survey comprising of a large panel of top economists. See: Chicago Booth IGM (2020), available at: https://www.igmchicago.org/surveys/the-european-green-deal/. The carbon tax has also been endorsed by 28 Novel Laureates and 15 former Chairs of the U.S. Council of Economic Advisers, along with hundreds of economists. The statement on carbon dividends is here: https://www.econstatement.org/home.