Straits Times 7 Feb 10;
As the world battles climate change, taxing carbon emissions seems a logical step. But different methods have their pros and cons, reports Tan Dawn Wei
Soon, you may have to pay for belching carbon dioxide from your air-conditioner, your car, or even your fridge.
As countries respond to climate change, one of the ways of curbing carbon emissions has been to penalise those who let all this bad gas off.
That was one of the recommendations put up last week by Singapore's high-powered Economic Strategies Committee (ESC), which suggested that the authorities introduce some kind of carbon pricing scheme, in the event that a global agreement putting a lid on carbon emissions comes about in the near future.
Other countries are already in on the act.
Finland was the first to introduce a carbon tax in 1990, which now costs about 20 euros (S$39) per tonne of carbon dioxide. Other countries followed suit with varying levies - Denmark, the Netherlands, Norway and Sweden - with varying results.
Under the European Union's Emission Trading System, which covers carbon emissions across the union's member states, plants are allocated a quota for emitting carbon dioxide, but will have to buy allowances from other plants if they want to emit more.
So which way should Singapore go? A carbon tax system, which puts a price tag on the amount of carbon dioxide you discharge? Or a cap-and-trade system, where a central body distributes limited rights, or credits, to companies to pollute, and companies which need to increase their emissions have to buy credits from those which emit less?
The authorities have not stated their preference, but researchers here have been studying the different pricing regimes, and even then views have been divided over which of the two is more suited for Singapore.
'Based on existing experiences from countries around the world, the verdict is not clear-cut,' said Dr Chang Youngho, assistant professor of economics at the Nanyang Technological University (NTU) and a senior fellow at the National University of Singapore's Energy Studies Institute.
The EU's emission trading system has been in place only since 2005, while the Scandinavian countries' carbon tax practices have seen revisions over the years.
The best policy that will meet the competing needs of having cheap, clean and secure energy is one that uses a price system to influence consumer and producer behaviour, while at the same time provides incentives to businesses to develop alternative energy technologies, said Professor Euston Quah, head of economics at NTU and a member of the ESC sub-committee that looked at energy and sustainability.
'But because the price system established by the market fails to fully incorporate the true or full social costs of using fossil fuels, for example the climate change impact and other pollution damages, then the price of these fossil fuels are lower than what they should be,' he said.
'This simply encourages a higher consumption of fossil fuels and discourages new technologies for alternative sources.'
If prices are adjusted to reflect the true costs of fuel consumption, which will no doubt be high, that will have the reverse effect of driving businesses to seek energy-saving solutions.
Of the two, a carbon tax is the more straightforward instrument. No one wants to pay high taxes, so slapping a tariff on those spewing carbon dioxide is likely to deter you from, say, turning on the air-conditioner at whim.
It will probably also force you to look for cheaper alternatives, as well as spur air-conditioner manufacturers to come up with greener technology.
'Economists generally favour a carbon tax for the following reasons: it is easy to administer; it can be comprehensively levied across all sectors of the economy which use carbon; everyone pays for it; the tax rate is much more transparent than the alternatively popular policy option of cap-and-trade and is less prone to special considerations and manipulation,' said Prof Quah.
And because the tax rate is given and would gradually rise over time, investment decisions can be made more easily. New investments in power plants, searching for alternative energies, and adopting new technologies would become attractive, he explained.
But Dr Chang pointed out that under a carbon tax system, those who emit less pollutants will not have any incentive to reduce their carbon output further, since 'the surplus cannot be recycled'.
Same goes for those that are inefficient in their energy resources. If they are big polluters, they could well just include the carbon tax as part of their expenses - and perhaps pass it on to consumers too.
Under a cap-and-trade scheme, this surplus can be sold, so the more energy-efficient a business is, the more credits it can sell off.
Dr Chang singled out Singapore's transport sector as a possibility of how a cap-and-trade structure might work.
Say, for example, that everyone is allowed to emit a certain amount of carbon while on the roads, maybe equivalent to 50km a day.
If you need to clock more kilometres on your car's odometer daily, you will need to buy credits from someone who travels well under this 50km a day, for example, someone who takes public transport, since the per capita of carbon emission is much lower for these users.
With certain infrastructure already in place, such as In-Vehicle Units, keeping track of your output and trading these credits will not be too difficult.
Then there is the matter of how much to tax. A high carbon tax will put a strain on lower-income groups and small businesses, but a low one will not have the desired effect of capping carbon emissions.
'Given that this will be the first time Singapore is considering levying such a carbon tax to the economy, I strongly believe that in order to get people or firms to be used to paying such taxes for their consumption or production, the initial tax rate should be relatively low and manageable,' said Prof Quah.
The tax can be increased over time 'until it becomes an acceptable norm of society for incorporating more of the true costs in using carbon', he said.
Singapore has already committed to slashing carbon output by up to 11 per cent by 2020, and a 16 per cent cut when a legally binding global agreement is reached.
It has also promised close to $700 million for R&D and manpower in clean tech areas, including clean energy and environmental and water technologies.
Will carbon pricing make Singapore less competitive?
Perhaps, say experts. The concern is that businesses may relocate to countries not affected by carbon tax or caps.
But investment decisions and economic activities are usually not just dependent on the cost of doing business or the price of the good produced in Singapore, said Prof Quah.
'The former will depend on many factors such as corporate taxes; safety of investments; location; fairness system in dealing with disputes; government transparency and efficiency; and skills of manpower of the population,' he said.
'The latter depends on quality of the goods produced; demand elasticities; currency exchange; and trading relationships between countries.'
