In a first for South-east Asia, Singapore has announced a carbon tax in its 2017 Budget. The tax will come into effect in 2019 and will be a significant contribution to the city state's efforts to reduce greenhouse emissions.
Despite its small land area, Singapore is the world's 26th-largest carbon emitter per capita, so this is an important step towards limiting global temperature increases, as per the Paris Agreement on climate change, the first universal, legally binding global climate deal.
It is perhaps unexpected that a largely market-driven economy like Singapore has chosen a tax as the vehicle for changing behaviour - especially one which will hit the big emitters rather than the individual. With the price of oil being set internationally, the big refineries will be unable to pass on the cost and instead be forced to become more efficient.
This is an important first step for the region. Similar taxes in other countries certainly seem to be producing the desired effect, which is to reduce greenhouse emissions. The tax will affect 30 to 40 large direct emitters in the country, including Royal Dutch Shell and ExxonMobil which have their biggest refineries in Singapore. If these companies are forced to be more efficient, it would mark a significant step forward in making the country a little greener.
As Singapore is the first country in South-east Asia to enforce a carbon tax, there are concerns that the large producers of carbon emissions will simply relocate to surrounding, untaxed countries. But there are a number of factors mitigating against this. The price of relocation would be huge, so even with the tax likely to be between S$10 and S$20 per tonne of greenhouse gas emissions, staying in Singapore would mean profits are affected by 10-15 per cent, and relocation would still not be cost effective. Although not as low as Mexico's fuel tax, which comes in at less than US$1 (S$1.40) per tonne, Singapore's carbon tax would be on the lower end of the spectrum of the tax globally. In Sweden, by contrast, the tax is US$131 per tonne, which is staggeringly high in comparison.
Adding to the positive news, Finance Minister Heng Swee Keat announced that revenue collected from the tax will be used to help industries cut their emissions even further. This suggests Singapore has a real commitment to reducing its carbon footprint. Moreover, the Singapore Government has said it will offer further support by way of energy-efficiency incentives and helping companies to build better energy-management systems.
Aside from forcing companies to become more efficient, the tax could also create opportunities in clean-energy and green growth industries, a knock-on effect which should not only enhance the country's efforts to be environmentally-friendly but also hopefully embed this for the long term. In Australia and parts of Europe, the introduction of carbon taxes or carbon trading schemes has seen a decline in refining industries - the positive outcome of this is the parallel increase in investment in clean technology and job creation. This pattern may repeat itself in Singapore, given the Government's intentions to help the industry, which could see Asia's main oil-trading hub dominated by cleaner resources in the future.
The expected cuts are being driven by Singapore's signing of the Paris Agreement on climate change. The Paris Agreement's central aim is to strengthen the global response to the threat of climate change by keeping the global temperature rise this century to below 2 deg C. However, cutting carbon dioxide or CO2 is only part of the solution. The biggest emitter of greenhouse gases globally is the misuse of land and factory farming. Singapore itself is not largely guilty of this, but as a consumer, it is certainly indirectly responsible.
However, Singapore's carbon-tax announcement is a great milestone for both the country and the global effort to become more eco-friendly. Paired with the introduction of "comply or explain" sustainability reporting by the Singapore Exchange, to be enforced next year, the country is becoming greener each year.
For Singapore, a carbon tax is the fairest and most economically efficient way to reduce greenhouse gas emissions, and therefore a good option. The support from the Government in encouraging eco-friendly behaviour is very promising. The introduction of the carbon tax and sustainability reporting will help crack down on the country's biggest emitters - and hopefully see some long-term, positive results for climate change.
•The writer is regional director, Institute of Chartered Accountants in England and Wales, South East Asia.
