What can businesses expect from the changes in carbon tax policy? has been saved
What can businesses expect from the changes in carbon tax policy?
Written by Deloitte Southeast Asia Tax & Legal Climate & Sustainability Leader Wong Meng Yew, Deloitte Singapore Global Trade Advisory Manager Alexander Goh and Senior Associate Tiffany Lee. The below are their personal views and may not represent the views of Deloitte.
As published in Singapore Business Review on 16 February 2022.
The global climate crisis is worsening and Singapore, a low-lying city state, is particularly at risk.
At the recent United Nations (UN) Climate Change Conference of the Parties (COP26), the UN stated that global temperatures are on track to rise by 2.7°C, well beyond the 1.5-2°C agreed at COP21 in Paris.
This fact resulted in the adoption of the Glasgow Climate Pact at COP26, where Singapore, along with 196 other countries, is expected to strengthen its climate pledge to reduce emissions (i.e., by 36% from 2005 levels by 2030) per the Paris Agreement.
What challenges do businesses face to be “greener”?
There are various schemes and programmes that can help businesses in Singapore adopt sustainable practices. For instance, the Enterprise Sustainability Programme is a S$180 million programme aimed at assisting at least 6,000 businesses capture sustainability opportunities and obtain financing, certification and training. Another initiative is the 3R Fund, a co-funding scheme to encourage organisations to design projects and systems to reduce waste. Depending on the effectiveness of the project, the grant can be up to 80% of the qualifying costs, capped at S$1 million per project or applicant. There has also been S$30 million set aside by the government, over the next five years (till 2026) for Electric Vehicle-related initiatives, in its push towards cleaner transport and reduced emissions.
Despite the government’s support, businesses will understandably have concerns regarding how they can make the changes to current processes and the additional investments needed to ensure that they meet the requirements, in particular carbon emissions requirements, set by the government to tackle climate change.
Affected businesses will have to consider their carbon calculation methods, potential revision of processes and systems, as well as the reporting format. If the calculation extends to external suppliers, businesses would need to consider their supply chain and possibly make different sourcing and procurement decisions.
These complexities add to the costs—those already incurred by businesses for compliance and administration, and to investments on the adoption and use of lower carbon intensive technologies and systems. With the recent growth in demand for sustainability-related jobs, businesses may also struggle to find the required skilled labour and will need to invest additional funds in upskilling and training their workforce to be carbon-ready. While the funding and grants available can help to offset these costs, they may not be sufficient and do not guarantee that the offerings of the business will be recognised in the market.
What can businesses expect as Singapore intensifies its efforts to decarbonise?
Amid concerns that the current carbon tax rate of S$5 per ton of CO2 emission set for 2019-2023 do not reflect the cost of emissions in Singapore, Finance Minister Lawrence Wong has said that this rate will be revised as of 2024, with details to be revealed in the upcoming Singapore Budget (Budget) 2022. While there were indications in the last Budget for this rate to be progressively raised to $10-$15 by 2030, the government has revealed in recent months that it was reviewing this trajectory, with the view of sharing the new carbon rate from 2024, as well as their plans up to 2030, at the upcoming Budget. Singapore’s current rate is relatively low, in comparison to data from the World Bank’s Report of the High-Level Commission on Carbon Prices, which states that the cost of CO2 needed to meet the Paris Agreement is estimated at USD$40–80 per tonne by 2020 and USD$50-100 per tonne by 2030. Hence, it may be likely that a steeper trajectory will be revealed in the Budget 2022 announcement.
In order to position Singapore as a carbon trading and services hub in Asia, the government also plans to launch an international carbon trading marketplace - the Climate Impact X (CIX). This digital platform allows the exchange of high volumes of carbon credits, enabling parties to emit a specific amount of greenhouse emissions in return for financing conservation projects. To enhance the transparency, integrity and quality of carbon credits, CIX will set up an ecosystem of partners and leverage technologies including machine learning, satellite monitoring, and blockchain.
It is evident from the proposals (and the dialogue preceding them) that achieving carbon neutrality is becoming more important, and the challenges of effectively implementing these proposals will need to be tackled. Drawing experience from the EU Emissions Trading System, the setting up of an international carbon exchange involves many complexities and would need to have a rigorous infrastructure in place. Moreover, to have meaningful impact as well as measures to counter profiteering and hoarding, consensus of different parties and jurisdictions is necessary.
How can businesses prepare for the changes?
Businesses must employ effective strategies to navigate the uncertainties brought about by the changes in carbon policy expected over the next few years to ensure that they are well-placed to adequately respond.
a. Monitoring domestic and global developments
Businesses need to stay current and monitor the evolving sustainability landscape, trends and regulatory developments at both the local and global level so that they can continually review their needs and plans to readily adapt to these changes and minimise risks.
b. Undertaking periodic checks and audits
Periodic checks and auditing on processes can help identify any exposures to taxes and allow greater management of risks arising from non-compliance.
Sufficient review would also be needed in key areas such as governance, data collection and tracking, tax liability, and disclosure and reporting of assessed emission—these areas should be prioritised and updated based on the regulatory requirements. It is key that these checks are performed by reviewers experienced in the carbon tax landscape who have a strong understanding of the changing regulations, domestic and global sustainability trends and how these can fit into the different business needs.
c. Ensuring transparent and accountable reporting
Businesses are advised to promote transparency and provide reliable information in order to create value from their sustainability approach—in line with the popular mantra “Do good and talk about it”.
Currently, it might be difficult for businesses to prepare sustainability reports due to the lack of an established standard. However, several standard setters have been established recently, including the Global Reporting Initiative (GRI). Businesses can look to these standards to ensure that their reporting is transparent and accountable—and aligned with internationally accepted standards. This would also serve to prevent greenwashing.
d. Evaluating impact on business models and supply chains
The implications arising from a potentially wider scope of the carbon tax is likely to compel bolder responses from businesses, including the need to review and even restructure existing business models and supply chains. While looking to decarbonise, businesses can take this opportunity to minimise costs and inefficiencies, to relook at emissions and introduce improved processes—across the life cycle of its products, as well as explore the availability of tax incentives and grants.
Tradeoff between costs and inaction
The upcoming changes to the carbon tax policy in Budget 2022 should be approached proactively. By making early investments in sustainability measures, businesses will be able to deal with increasing regulatory requirements and develop longer term strategies earlier, which will in turn result in greater shareholder returns.
As we draw closer to Singapore’s Green Plan 2030 timeline, businesses can expect more pressure from the government to go green(er). In addition to the expected increase in carbon tax in the Budget this year, businesses should also anticipate a widening of the carbon tax net. From the various schemes and programmes that have been introduced by the government to date, it is clear that the government is conscious of the challenges faced by businesses in lowering their carbon footprint. In this regard, we expect that we will see more grants provided to businesses to incentivise them to adopt more sustainable business practices as well as targeted measures to ease the transition towards carbon neutrality.