Consumers, businesses could bear cost of cleaner energy, say experts

The impending carbon tax hike could bring about a higher cost of living for households over the next few years, if businesses decide to pass on their increased operating costs to consumers as they make their green transition, say experts here.

Dr David Broadstock, a senior research fellow and head of the energy economics division at the National University of Singapore's (NUS) Energy Research Institute, told The Straits Times that as natural gas makes up 95 per cent of the fuel used in power generation and burning it creates carbon, Singaporeans can expect the phased increments in the carbon tax to be reflected in their electricity prices.

Acknowledging that the rise in carbon costs could lead to firms increasing the prices of their goods and services, he noted that households may face a combination of the direct and indirect effects of the carbon tax.

"As with any increase in the cost of living, those that feel it most severely will be the lower-and middle-income households. The distributional impacts of carbon pricing (including taxes) are therefore something that require understanding and planning for," he added.

His remarks came after Finance Minister Lawrence Wong said in his Budget speech that the carbon tax will be raised from the current rate of $5 per tonne of emissions to $25 in 2024 and 2025, then to $45 in 2026 and 2027, before reaching $50 to $80 per tonne by 2030.

Mr Wong noted that a $25 carbon tax per tonne of emissions will likely translate to an increase of about $4 a month in utility bills for an average four-room HDB household. Additional U-Save rebates will be given out to them during this transition.

Visiting professor Vinod Thomas at the NUS' Lee Kuan Yew School of Public Policy said monthly utility bills will not increase proportionately to a further increase in carbon tax.

He said: "With the tax imposed, the carbon-emitting industries will try to reduce their emissions to save on tax, such that the cost that is passed on to the consumer will also be less. Secondly, when you put a tax on carbon, say for natural gas, it means that solar, which is cleaner, is going to become more attractive."

"So in the time between now and, say 2026 or 2027, and eventually 2030, you will see renewables becoming a much bigger part of our lives, and the amount of carbon tax that is passed on to consumers will be a lot less than otherwise."

Some experts said the estimated $4 a month increase in household utility bills will likely have "a very small impact" on most households.

Professor Euston Quah, who is the Albert Winsemius Chair Professor of Economics and director of the Economic Growth Centre at Nanyang Technological University, said: "An increase in utility bills is only one item in households' expenditure. There will be more. Eating out may be more costly as restaurants may increase prices, with higher utility bills.

"Whether households will genuinely feel the impact will depend on the amount of (price) increase but also whether firms can pass on these additional costs."

For more price-sensitive dining out and leisure activities, for example, people can find "easy substitutes" or reduce their own consumption easily, so firms are likely unable to pass on their increased costs to consumers, noted Prof Quah.

He felt the rise in carbon tax within the next few years is "still manageable", though the impact could be much larger if the tax hits $80 per tonne of carbon emissions.