Abhijit Ghosh and Killian Pattwell, Business Times 30 Nov 07;
Governments are taking up cudgels and imposing a raft of swingeing taxes on carbon dioxide emissions
Singapore as a small island nation with little natural energy resources is vulnerable to the impact of a volatile energy market. Rather than adding to the cost of the traditional energy sources, our focus should instead be on improving energy efficiency islandwide and encouraging investment in clean energy.
To do so, Singapore may consider offering fiscal incentives and not penalties, for reducing CO2 emissions. It can also consider channelling investment into research and development of energy-efficient products and processes.
IN EARLY February 2007, a United Nations-sponsored panel, consisting of hundreds of scientists from all over the world, declared that average global temperatures would probably rise 4°C over the next century. If so, catastrophic flooding, famine and water shortages could follow, along with the extinction of up to half of existing animal species.
Malaria and other tropical diseases may spread. Some of the leading coastal cities may be threatened by the higher ocean levels caused by melting ice caps. These extrapolations in climate change and the disastrous impact they may have on the environment are a growing cause for serious concern.
Despite being a small city state, the Singapore government has been proactive in promoting energy efficiency. Last year, Singapore acceded to the Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC). Under the Kyoto Protocol, Singapore can participate in Clean Development Mechanism (CDM) projects. Apart from this milestone, the Singapore government also introduced a plethora of non-fiscal initiatives this month to encourage heavier investment in energy efficiency.
More recently, the Agency for Science, Technology and Research's announcement of a $38.5 million investment in the Republic's inaugural R&D capabilities for clean energy solutions - Sinergy (Singapore Initiatives in New Energy Technologies) - is further testament that the environment is gaining due attention at both national and corporate levels.
Notably, environmental problems were also featured prominently at the 13th Asean summit this month and one expects this subject to be high on the agenda in the 2008 Budget Speech.
The threat of global warming is now compelling governments of some developed economies such as Finland, Sweden and the United Kingdom to take up cudgels and impose a raft of swingeing taxes on carbon dioxide emissions. These are commonly known as carbon taxes. Carbon tax is payable whenever a molecule of carbon dioxide is emitted into the atmosphere by burning fossil fuels.
For example, power plants will pay it based on their smokestack emissions and pass the cost to consumers in their monthly electricity bill. Individuals will pay it when they buy petrol, based on the content of fossil carbon in the fuel.
While a carbon tax system may discourage the use of energy-guzzling gadgets and spur R&D projects that encourage the efficient use of fossil fuel in all sectors of society, it is likely to lead to an increase in our cost of living.
Recognising this effect, French President Nicolas Sarkozy, when announcing what he termed France's 'green revolution', indicated a desire to avoid an increase in the tax burden in France. Although the French have not completely ruled out carbon tax as yet, they seem to be favouring direct funding of R&D in alternative energy sources and investment in energy efficiency.
With today's world dependent on carbon emitting fuels, carbon tax has the potential to become a massive source of revenue for governments. However, there is a danger that over the course of time, this revenue source will be relied upon for general public expenditure like any other tax, and not ring-fenced for environmentally friendly projects.
Furthermore, in view of the current inflationary trend and soaring oil prices, countries such as Singapore can ill-afford to introduce such a tax system to fight global warming. The challenge is, therefore, to introduce fiscal and non-fiscal policies to directly promote and support long-term environmentally friendly initiatives to combat global warming.
Playing our part - what it means to go green
Singapore as a small island nation with little natural energy resources is vulnerable to the impact of a volatile energy market. Rather than adding to the cost of the traditional energy sources, our focus should instead be on improving energy efficiency islandwide and encouraging investment in clean energy.
To do so, Singapore may consider offering fiscal incentives and not penalties, for reducing CO2 emissions. It can also consider channelling investment into research and development of energy-efficient products and processes.
Singapore may therefore consider and introduce innovative fiscal incentives to tackle climate change issues. Such incentive schemes may comprise features such as:
# a National Fund to promote and finance 'green' initiatives;
# single or double tax deduction for taxpayers' donation to the National Fund;
# aid or incentives for R&D/manufacturing/service companies involved in energy efficiency;
# government grants and/or National Fund money to support R&D of energy-efficient products and processes, and test bedding of alternative clean energy sources, as well as tax rebates to consumers with lower carbon consumption;
# partial or full tax holiday for taxpayers involved in manufacturing and/or distribution of energy-efficient products;
# funding or incentives for entities engaged in environmentally friendly waste management initiatives;
# exempting rebates/grants received for energy conservation measures;
# encouraging businesses to adopt energy-efficient practices;
# capital allowance claims for taxpayers acquiring energy-efficient equipment for their business;
# accelerated capital allowances for certified energy-efficient vehicles;
# incentives to encourage companies to adopt ISO 14000 environment management standards;
# zero rating of GST on installation of energy-saving devices;
# encouraging individuals to adopt energy-efficient practices;
# reduced tariffs for the importation of fuel-efficient vehicles, in order to make a clear price distinction from traditionally powered vehicles;
# extension of the Green Vehicle Rebate scheme (this allows for a rebate of up to 40 per cent of the Additional Registration Fee for hybrid, electric and compressed natural gas vehicles) beyond Dec 31, 2009);
# tax deduction for donations to approved carbon offsetting programmes (increasingly becoming available to jet-setting individuals);
# tax credits for home improvements designed to make homes more energy-efficient (such as new windows, more efficient heating/ cooling systems, or for the installation of solar power/fuel cell systems, etc) and allowing any excess tax credits to be carried forward and offset against future year's tax liabilities.
Admittedly, these suggested measures need to be carefully evaluated from an economic standpoint before introducing them as part of long-term fiscal measures to combat global warming issues.
However, it is evident that to tackle a borderless issue such as global warming, the national policies need to be geared towards encouraging international cooperation with other governments by collaborating with non-profit organisations and government agencies from around the world.
Interestingly, while any announcement of possible tax policies to combat global warming can only be expected as part of the 2008 Budget Speech early next year, the Singapore government has already pushed ahead with its non-fiscal initiatives.
At the launch of the National Energy Policy on Nov 12, the government unveiled six key non-fiscal strategies to deal with the efficient use of energy, increased consumer choice in the energy market and more investment in energy efficiency.
It is evident that Singapore is getting ready to fight climate change issues. With proper planning and innovative policies, it will play its part to contribute to the global cause. However, individual taxpayers should not shy away from accepting certain responsibilities and must do whatever they can to help reduce carbon emission by at least 20 per cent.
As individuals, we can adopt relatively simple and moderate changes to our lifestyle which does not require us to sell our SUVs or turn off our air conditioners. For example, we as taxpayers should make a habit of using less hot water, recycling more aluminium and paper, and turning down (or up depending on the season) our thermostat.
The next time we shop around for a new car, we could consider buying a more fuel-efficient one. In a more competitive domestic energy market, taxpayers can enjoy the flexibility of choosing an electricity company that generates energy from renewable (CO2-reduced) sources. Alternatively, one may even consider installing solar panels. The financial initiatives will merely serve as a catalyst to promote positive, permanent changes in our daily lives.
In the spirit of the 'whole-of-government' approach embedded in the National Energy Policy Framework, the minister of finance may be planning to put the issue of global warming high on his agenda come Budget Day 2008. Encouraging and implementing 'green' strategies need not be regressive nor put economic growth in jeopardy.
In fact, Singapore could seize the opportunity to position itself as the leader in the development of alternative energy solutions and the provision of world-class R&D in this sector.
Abhijit Ghosh is a tax partner and Killian Pattwell is a tax manager with PricewaterhouseCoopers Singapore.
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