The Straits Times says

Critical to ensure that the price is right

Energy and water both indubitably warrant policy measures to regulate sources, distribution and usage. Their supply is so vital, it is often described in "security" terms - lives indeed depend on them and so does the fate of a nation. There are also what economists call negative externalities that the authorities must deal with - namely, social, environmental and strategic costs that exceed the private cost of energy and water consumption. Obvious examples are the widespread harm from pollution caused by burning fossil fuels for energy, and national water shortages due to poor conservation and wasteful public habits.

Millions of people globally die every year from breathing air pollutants and millions more are affected by the ravages of climate change caused by carbon emissions. Such devastating effects spurred nations, including Singapore, to commit to reducing greenhouse gas emissions, under the Paris climate change accord. Now comes the hard part: Finalising policies that will do the job and implementing these on the ground. There is never an opportune moment to take the plunge, especially when one is held hostage by economic arguments. For example, if fears over higher costs had held sway, it would have taken much longer to raise standards for cleaner vehicles.

Still, some have questioned the timing of increases in the price of water - totalling 30 per cent - and the plan to introduce a carbon tax. After all, Singapore is at an inflexion point of its economic trajectory and enterprises are already facing acute cost and other pressures. Given the current climate, the recent measures were designed to have "as low a cost to the economy as possible", according to policymakers. In practical terms, three-quarters of businesses will see water cost increases of less than $25 per month; while a similar proportion of households will see their water bill rise by less than $18 a month. The carbon taxes proposed are likely to mean 2 to 4 per cent increases of current electricity tariffs, which translate to an extra $1.70 to $3.30 more for an average family living in a four-room HDB flat.

In principle, price signals are necessary to stimulate more low-carbon investments as well as promote water conservation efforts. If taxes are set too low and for too long, businesses will find it cheaper to simply pay these charges and stick to the status quo. If these are too high, certain businesses might become less competitive and migrate to a location with a lax regime. Alternative pricing methods, like an emissions trading scheme, have shown mixed results, whereas a carbon tax is arguably more stable. What is important is to ensure that prices are set at the right level to ensure that critical investments are made such that essential supplies are sustainable, both economically and environmentally.

A version of this article appeared in the print edition of The Straits Times on February 23, 2017, with the headline 'Critical to ensure that the price is right'. Print Edition | Subscribe