Tax incentives will continue to play a big role in developing Singapore's smart energy economy
Sunil Agarwal and Killian Pattwell, Business Times 18 Feb 10;
AS Copenhagen has shown, climate change is testing the ability of the world's leaders to develop effective environmental policies through consultation. Many are frustrated at the pace of negotiations. Therefore, the need for each jurisdiction to find solutions to manage climate change has become even more urgent.
In the recently released PricewaterhouseCoopers (PwC) report Appetite for Change, 95 per cent of the executives polled believed that tax and regulation would play a key role in helping the world reach a climate deal. Also, businesses are looking to governments for leadership in establishing the behavioural change necessary to halt global warming. These were some of the findings drawn from the most comprehensive survey of its kind yet conducted.
The PwC report also takes a close look at attitudes in the international business community towards environmental regulation, legislation and taxes. In almost 700 interviews in 15 countries, executives share their perspectives on issues such as the impact of climate change, the role of government, preferred environmental policy tools, and the essential ingredients for an effective global climate change deal.
Singapore is a signatory to the UN Framework Convention on Climate Change but as a non-annex 1 country. This puts Singapore in the category of 'developing nations' and thus under no obligation to reduce emissions. However, Singapore has already made progress in this space by offering incentives to players in the smart energy sector.
Tax incentives play a key role in attracting new business to Singapore and will continue to play a big role in developing Singapore's smart energy economy. The incentives as they stand are generally broad enough to cover most industries, including smart energy.
Singapore has also adopted some existing incentives to encourage growth of this sector. In 2009, emission derivatives were included as designated investments under Singapore's fund management tax regime, allowing qualifying funds exemption from Singapore tax. Qualifying income from the trading of emission derivatives under the Financial Sector Incentive-Derivatives Manager (FSI-DM) scheme allow approved financial institutions to enjoy a 5 per cent (instead of a 17 per cent) corporate tax rate. Companies with carbon trading activities can apply for a 5 per cent or 10 per cent concessionary tax rate under the Global Trader Programme administered by IE Singapore. Expenses incurred in the research and development of green technology may also qualify for further tax deductions.
While these enhanced tax incentives and concessions add to the attractiveness of the sector in Singapore, the key question is whether these are enough to change environmental behaviour.
Appetite for change suggests that there is no one single solution to the complex problem of sustainability & climate change. Rather, those surveyed believed that a combination of tax incentives and regulation/tax charges would be most effective in encouraging businesses to reduce their environmental impact. One of the executives who was surveyed believes: 'If we all think we're going to win the game by giving incentives to people who behave well, instead of levying a tax for those who pollute, then we are a long way from home. If we only do this by sending out carrots and not using sticks, we will run out of carrots'.
Despite the lack of a binding agreement at Copenhagen, Singapore has voluntarily announced its commitment to cut emissions by up to 11 per cent by 2020 and by 16 per cent cut when or if a global agreement is reached. The Economic Strategies Committee (ESC) report suggests that Singapore is likely to adopt a blend of various initiatives such as regulation to increase energy efficiency, mandatory energy audits and carbon-pricing schemes to combat climate change.
Opinion is divided between respondents hailing from annex 1 countries and non-annex 1 countries on their preferences for a carbon tax or emissions-trading scheme, with the majority of the latter expressing preference for emissions-trading schemes (see Figure 1). This may be because non-annex 1 countries (for example, China and India) are generally located in the developing world where the bulk of the carbon credits under the Kyoto Protocol's Clean Development Mechanism are generated for trade.
The choice for Singapore would therefore depend on its long-term ambitions. In order for Singapore to remain competitive, the government will need to consider environmental fiscal reform. The introduction of environmental taxes should go hand in hand with overall reform of the tax system such that genuine carbon-reducing activity is rewarded. Revenue generated from carbon taxes should ideally be ring-fenced for use in environment-friendly or carbon-reducing projects.
With adequate regulatory touch and appropriate use of tax policy, Singapore has the potential to become a smart energy & low-carbon economy.
Embracing change for sustainability can give businesses a competitive advantage. While regulatory changes can encourage adoption and awareness of sustainability-related practices and opportunities, businesses need not and should not wait to act.
Pro-active integration of sustainable practices into business decisions demonstrates thought leadership and builds trust in the community. This results in brand awareness and enhances shareholder value. Environmentally conscious organisations also build loyalty with a new generation of increasingly civil-minded staff and consumers. For most businesses, becoming carbon neutral will require the integration of carbon and energy management systems with operations and key performance indicators. Rather than being just an annual-number crunching exercise, these systems will inform investment decisions and therefore need to be readily available and reliable.
While 58 per cent of business leaders say they have already changed the way they conduct business as a result of climate change, 84 per cent expect changes in the next two to three years (see Figure 2). The increase in activity will be greatest in some of the sectors which are least impacted to date, such as financial services, communications and entertainment.
Singapore's extensive treaty network, strong infrastructure, established legal framework, tax-friendly incentives, free trade agreements; etc makes it a strategic location for sustainability-related investments in a growing Asian market.
While a focus on sustainability can bring valuable tax planning opportunities, oversight or misjudgement may result in material tax risks. As governments increasingly turn to taxes to manage harmful emissions or discourage use of plastics, investors and analysts will demand to know whether the prospect of environmental taxes have been factored into investment decisions.
Where funds invest into production-based assets in India or China, due diligence processes and financing models need to consider whether there are environmentally damaging processes which may trigger pollution taxes, fines or penalties.
Government action is inevitable but in general the global business community is supportive and recognises the need for meaningful emissions targets. Perhaps in the upcoming Budget 2010, we might hear further details of what is in store for Singapore businesses. The ESC envisages Singapore as a 'future ready' urban location including energy efficiency, renewable energy, waste management, etc. Let us hope that a pro-green Budget will stimulate growth in this sector and put Singapore at the leading edge.
PwC's 'Appetite for Change' report is available for free download at http://www.pwc.com/gx/en/appetite-for-change/index.jhtml
Sunil Agarwal is a Tax Partner, PricewaterhouseCoopers Services LLP, and Killian Pattwell is a Tax Senior Manager, PricewaterhouseCoopers Services LLP
