Carbon pricing in Singapore: Good first step on long road

Environmentalists must have pricked up their ears when Singapore last week declared its intention to put a price tag on carbon if all countries pledge to curb greenhouse gas emissions.

It is still early days yet. Such a global deal has not been struck and it is unclear just what form this carbon price will take. But the important thing is that the Republic is willing to play its part as a global citizen in putting a price on pollution, and is taking a vital step on the journey to energy diversity.

But first, back to basics. Carbon refers to the greenhouse gases or carbon dioxide emissions generated when you use fossil fuels to generate energy. These gases pollute the atmosphere.

Most daily activities generate carbon. But while users pay for the energy used, that price does not include the cost of the pollution in the form of worsening air quality, deterioration of the natural environment and climate change, for example.

In economic parlance, pollution is a ‘negative externality’ - a bad side effect of an economic activity that affects everyone but which no one pays for. The result is that no one has an incentive to reduce activities that cause pollution.

The only way to change this is to factor in the costs of such externalities and put a price on them. For example, if turning on the air-conditioner for one night costs $1 in energy but results in pollution that costs the economy 20 cents, the cost of that night of cool comfort to you should be $1.20.

The failure to put a price on pollution has been labelled the ‘greatest market failure of all time’ by former United States vice-president Al Gore and British economist Nicholas Stern.

This was an issue that emerged last week at the Singapore International Energy Week, where policymakers and business leaders discussed energy-related issues. It took place just as governments across the globe are preparing for the next round of United Nations climate change talks in Cancun, Mexico, at the end of the month.

They are racing against the clock to ink an agreement before the current treaty, the Kyoto Protocol, expires in 2012. The current agreement binds developed nations such as Japan and those in Europe to reducing their carbon emissions by a certain amount.

Negotiators are trying to iron out details for a treaty to bind all nations to legal carbon reduction targets beyond 2012.

Prime Minister Lee Hsien Loong said at the conference that a price on carbon will be introduced in Singapore if there is such a global climate change deal inked by all countries.

While experts think it unlikely that the Cancun conference will result in a binding agreement, it is just a matter of time before countries impose some sort of carbon pricing.

The fact is that energy prices look set to rise for the foreseeable future, so many countries will have to eventually look at effective ways to force cutbacks in consumption.

Also, if not at Cancun, the world is bound to reach such an agreement sooner or later - perhaps in South Africa, where next year’s UN talks are due to be held.

As Mr Lee noted in his speech, it is not enough to push for efficiency gains in an economy, or wait for a change in consumption patterns in society.

There are two ways that governments can impose a charge on carbon. The first is a carbon tax, which is a tax levied on the carbon content of fuels.

The other way is a cap and trade system that European countries and New Zealand use. There is a cap on the amount certain industries can pollute, beyond which companies have to pay extra. If they pollute less, they gain carbon credits which can then be sold, contributing to the company’s profits.

Singapore can use either or both mechanisms. Energy prices would then take into account ‘not just the price of extracting and producing the fuel, but also the social cost of carbon emissions’, as the Prime Minister put it.

For Singapore, a move to carbon pricing makes sense, both environmentally and economically.

But putting a price on carbon will also lead to higher costs for both households and businesses. The latter may also raise prices, passing on costs to consumers.

Higher cost is an unavoidable, short-term consequence of carbon pricing. My view is this bitter pill is best swallowed quickly, in order to reap the benefits to follow.

For consumers, a carbon price or tax could be just the thing that levels the playing field between environmentally friendly products, which are often costlier, and more polluting ones.

The financial impact of a carbon price will be very real, but it can be phased in gradually, as the goods and services tax was. The impact on lower-income households can be cushioned with grants.

For industries, a carbon price will raise business costs for sure. This is why Singapore cannot afford to move ahead of everyone else.

But it will provide a very strong incentive in driving efficiency and innovation in energy usage - in much the same way that the water conservation tax has driven innovation in water treatment.

Industries will be more motivated to audit their manufacturing operations and buildings to ensure no energy is wasted, thus lowering costs and becoming even more competitive.

A carbon trading industry could also flourish in Singapore, adding to our financial services sector.

The taxes raised can help Singapore fund renewable energy projects and further cement its position as a clean technology hub for Asia.

At the same conference, Mr Lee also talked about Singapore’s attempt to diversify its energy sources. If solar power becomes as cheap and reliable as fossil fuels, or if nuclear becomes a feasible source of energy, Singaporeans’ energy bills could see a reversal in prices eventually, as we tap on cleaner sources and liberate our economy from its dependence on fossil fuels.

That long-term goal takes political will and the right monetary incentives to nudge behaviour in the right direction. Putting a price on carbon is an excellent first step on that journey.

Source: The Straits Times

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