Lessons from Singapore's Successful Carbon Tax

By: Indrajaya Burnama, employee of the Directorate General of Taxes

Singapore became the first Southeast Asian country to implement a carbon pricing scheme on January 1, 2019, by imposing a carbon tax. This policy aim wants to achieve Singapore's climate ambitions by reducing emissions, creating green growth opportunities and transiting to an energy-efficient, low-carbon economy.

According to World Bank statistics, Singapore applies a carbon tax to all facilities or sectors with no exemption at all. It was imposed not only on the energy sector but also on the other sectors as long as the sector meets the emissions threshold, which was set by the government before.

Singapore's emissions threshold is annual greenhouse gas (GHG) emissions of 25 ktCO2e. It means that the sector with annual direct GHG emissions of less than 25 ktCO2e will not be subject to tax. On the other hand, all sectors with direct GHG emissions of more than 25 ktCO2e must pay carbon tax.

Low Rates and Incentives

There are two aspects that support the carbon tax implementation in Singapore. First, the carbon tax rate is quite low. Singapore has applied a carbon tax rate of S$5/tCO2e in the first instance, from 2019 to 2023. It has been done to provide a transitional period to give emitters time to adjust. 

The carbon tax rate is lower than the other countries which have imposed carbon taxes at the same time. In 2019, Canada applied a carbon tax rate of US$20/tCO2e or S$24/tCO2e. South Africa imposed a carbon tax of US $9/tCO2e (S $13/tCO2e). It is lower than Canada but higher than Singapore.

Although it is a low tax rate, Grace Fu, Singapore's Minister of Finance (2022), said that carbon tax is the primary approach to mitigate climate change and has succeeded in decreasing 80% of GHG emissions. In these three years, the government does not target raising tax revenue but wants to mitigate climate change effectively.

It does not mean it will be steady at that rate, but it will increase gradually. The carbon tax will be raised to S$25/tCO2e in 2024 and 2025. Then it will be raised again to S$45/tCO2e in 2026 and 2027, with a view to reaching S$50-80/tCO2e by 2030 to meet Singapore Green Plan 2030.

Second, Singapore's government has given support to mitigate the effect of the implementation of carbon tax directly. Some incentives have been made to ensure the impact of climate change on all residents is minimised. Singapore's National Climate Change Secretariat said the government provides compensation to help households reduce their emissions.

Since December 2020, it has introduced incentives such as e-Vouchers ranging from $25 to $150 in value under the Climate Friendly Households Programme. It has been done to support lower-income households in purchasing more energy-efficient and climate-friendly appliances.

It not only provides the electricity incentive above but also gives a discount on fees and taxes for ships. The Maritime and Port Authority of Singapore has decided to offer them some criteria to reduce carbon emissions. It is an award for ship owners who support government programs from 1 May 2022 until 31 December 2024.

Lessons from Singapore

By observing the successful carbon tax implementation in Singapore, we have to motivate ourselves to do successful adaptation and mitigation for climate change in Indonesia. According to Act Number 7 of Year 2021 regarding The Harmonization Taxation Regulations, it is stated that carbon tax will be implemented in our country on 1 April 2022. 

But it has been postponed twice by the government. First, it was postponed from 1 April 2022 to 1 July 2022, and then it was postponed again from 1 July 2022 until now. The question is, if the postponement is bad for our commitment to reach climate change ambition, it is not about good or bad actions, but it is about the best priority to do first.

Carbon tax is important to do but we have been struck by the COVID-19 pandemic for a long time. It has affected day-to-day life and is slowing down the global economy. Now, economic recovery is a higher priority than carbon tax implementation now. It does not mean that a carbon tax is unimportant, but we must first prepare supporting equipment to ensure its effective implementation.

From the successful carbon tax implementation in Singapore, we can get some lessons. First, there is no need to set the carbon tax rate high. Many countries implement carbon taxes gradually. They started with a low rate but increased step by step. It is a good strategy to spread carbon policies without many cons in our daily lives, like in Singapore and Canada.

The carbon tax rate that will be implemented in Indonesia is quite low. It is set by Act Number 7 of 2021 regarding the Harmonization Taxation Regulations that the rate is Rp30.000,00/tCO2e or lower than the government planned before (Rp75.000,00/tCO2e). This is the correct action to realize our climate change ambitions in 2030.

Second, the government must give incentives to minimise the carbon tax effects for all residents, especially the lower-income class. Learning from Singapore, it can be started by giving electricity compensation because the energy sector, electricity, will be first imposed by carbon tax in our country.

This incentive is very important to anticipate the cons of carbon tax effects on the lower income class in Indonesia. It is true that carbon tax effects increase electricity prices, but it is substituted with an electricity incentive for some people who need real support to face the carbon tax effects.

The other alternative can be done by giving a discount on some local taxes with criteria, i.e., vehicle tax or fuel tax. These incentives can also avoid double taxation between carbon tax and some local taxes, which basically have the same aim of protecting our environment.

Applying carbon tax revenue is not the primary aim. The most important goal of the carbon tax is to mitigate climate change, so it must be provided with complete supporting equipment. On the other hand, we are still waking up and trying to stand up to the COVID-19 pandemic. Carbon taxes cannot be implemented in haste, but must be done with care.

*)This article is the author's personal opinion.