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With carbon tax hikes and green bond issues, Asia’s oil hub Singapore embarks on low-carbon transition

01 March 2022 Max Tingyao Lin

Since its independency in 1965, Singapore has emerged as Asia's top petroleum trading hub, with many attributing the success to its geographical position, business-friendly environment, and efficient logistics infrastructure.

As the world begins to shift to low-carbon energy sources, experts said the city state has begun to chart the path of its next stage of development during the energy transition.

This is driven by necessity. "Singapore's reliance on [a] high emission industry is not sustainable," said Vinod Thomas, a visiting professor to the National University of Singapore (NUS). "New drivers need to emerge."

"Singapore needs to align its economy with a decarbonizing world, to ensure a comparative green economic advantage," non-profit Climate Analytics' Energy Policy Analyst Anna Chapman told Net-Zero Business Daily.

In the annual budget speech 18 February, Singapore's Finance Minister Lawrence Wong presented a bucket list of the country's decarbonization plans that include hydrogen, carbon capture and storage (CCS), more adoption of electric vehicles, and sustainable aviation and marine fuels.

Some of those elements were in line with industry hopes that Singapore could eventually transform itself into a transshipment center for low-carbon products.

"In the longer term, some of the current oil and petrochemical infrastructures will probably be remodeled for cleaner energies such as LNG or hydrogen," said Tan Tsiat Siong, a lecturer at the Singapore University of Social Science's business school.

"In the future, Singapore might no longer be an oil hub but a hydrogen hub. The new energy industry will grow," he added.

Wong also suggested Singapore is keen to become a center for carbon trading and green finance, but he admitted there won't be aggressive renewable power expansion within the country. "We do not have huge rivers or hot springs to draw hydro and geothermal power. We do not have the land for wind or solar energy to be sufficient for our needs," Wong said.

He promised to strengthen the country's push to fund a low-carbon transition while unveiling a higher climate target.

In its updated Nationally Determined Contribution in 2020, the country targeted reaching peak GHG emissions of 65 million metric tons (mt) of CO2e by 2030 and cutting its emissions from that proposed peak to 33 million mt by 2050.

But Singapore only stated then that net zero would be achieved "as soon as viable in the second half of the century." Wong said the timing is now advanced to "by or around midcentury."

"With advances in technology and new opportunities for international collaboration in areas like carbon markets, we believe we can bring forward our net-zero timeline," he added.

Later this year, the Singaporean government plans to submit a long-term low emissions development strategy to the UN Framework Convention on Climate Change after consulting with industry stakeholders and civil society.

Wong said Singapore is on track to meet the 2030 target, in line with the expectation of many analysts. That said, to kickstart deeper decarbonization, the government plans to introduce several rounds of carbon tax hikes and issue green bonds worth up to S$35 billion (US$23 billion) by 2030.

The money could be used to invest in energy efficiency, decarbonization projects, green infrastructure, and mitigate the impact from the low-carbon transition on some businesses and households, according to Wong.

More taxes on emissions

Among the policy measures, the increases in taxes for companies with annual GHG emissions exceeding 25,000 mt/year are expected to have a widespread impact on the Singaporean economy.

Singapore previously set the tax at S$5/mt of CO2e (US$3.69/mt) for the 2019-2023 period and suggested it could be raised to S$10-15/mt by 2030. But Wong said the government's plan now is to hike it to S$25/mt in 2024 and 2025, S$45/mt in 2026 and 2027, and S$50-80/mt by 2030—and he predicted that at least some of the increases will be passed onto individuals.

"We will need to set the right price of carbon, so that businesses and individuals will be able to internalize the costs of carbon, and take actions to moderate their emissions," he added.

According to government figures, the industrial sector accounts for just below half of Singapore's GHG emissions—and most of them come from oil refineries and petrochemical plants.

"The writing on the wall is clear on fossil fuel-driven petrochemical operations," Thomas said. "They need to cut emissions through the adoption of new technologies, which may be limited in scope, switch to renewables, or revise their business lines."

Tan said the most inefficient oil refineries could be forced to exit. "Large emitters will surely be hit hard by the higher carbon tax, at least in the shorter run. Oil refiners are generally operating on low margins."

Wong's announcement came after the Economic Development Board—a Singaporean government agency—established a decarbonization roadmap for major emitters on Jurong Island in November.

The island, home to most of Singapore oil refining, petrochemicals, and power plants, was responsible for 54% of the country's 27 million mt of CO2 emissions in 2019, according to NUS academics.

ExxonMobil has a 592,000-b/d oil refinery on Jurong Island, its largest in the world. Chevron and PetroChina jointly own a 290,000-b/d refinery on the same island. Meanwhile, Shell has chemical plants and oil refineries on Jurong and nearby Bukom Island.

In the power sector, Singapore's second-largest emissions source, natural gas made up 95% of the country's electricity generation mix in the first half of 2021. Joo Yeow Lee, an analyst at S&P Global, suggested that a combined cycle gas turbine (CCGT) power plant operator will see the financial incentives in investing in carbon capture and storage (CCS) when the carbon tax reaches S$60 per mt.

"The higher carbon tax will … help to level the playing field between the [plant with the] costlier low-carbon technology and a standalone CCGT," Lee said.

On top of taxing carbon, Singapore has an existing plan to import up to 4 GW of low-carbon electricity by 2035, which is expected to account for 30% of its generation mix. This compares with around 3% in January-June 2021.

"The carbon tax … makes renewable or low-carbon electricity relatively more attractive" than gas-generated power, said David Broadstock, a senior research fellow of the NUS' Energy Studies Institute.

Chapman believes that the tax hikes—coupled with the high, volatile gas prices lately—could make renewables more competitive in Singapore's power sector.

"Singapore's gas supply is highly dependent on international markets and fluctuating gas prices, creating energy and economic insecurity," she said.

Spending plans

The government has promised to spend the revenue from a carbon tax on energy efficiency, low-carbon projects, and to cushion the impact on households and businesses. "I do not expect to derive additional revenue from this increase in the carbon tax," Wong said.

He added that Singapore will introduce a "transition framework" on emissions allowances and let companies use "high-quality, international carbon credits" to offset up to 5% of their taxable emissions from 2024. The proposals' details are still being determined.

The policy measure on carbon offsets is intended to "create local demand for high-quality carbon credits and catalyze the development of well-functioning and regulated carbon markets," Wong said. "We can become the go-to location in Asia for expertise in carbon services, and the trusted regional marketplace for carbon credits," he added.

Broadstock said the 5% cap suggests Singapore is trying to find the right balance. "It indicates that Singapore is committed to having international market involvement, but that this [cap] should not displace local market development" when it comes to the low-carbon transition, he said.

Last year, Singapore Exchange, Development Bank of Singapore, Temasek Holdings, and Standard Chartered Bank launched carbon exchange Climate Impact X, with a focus on offset projects related to nature-based solutions.

"Singapore's biggest advantage is its track record and credibility as a financial market maker and regulator," Thomas said. "The success of a carbon market depends on the quality and credibility associated with the credits being given out, sidestepping risks of greenwashing. Singapore has the technical and financial capacity to govern carbon markets."

Separately, Singapore will publish a Singapore Green Bond Framework this year and issue its inaugural green bond. In total, Wong said the government itself and statuary boards aim to raise up to S$35 billion from selling green bonds to fund low-carbon infrastructure.

"The public sector will do its part to develop a robust green finance market … Singapore now accounts for close to half of the ASEAN [Association of Southeast Asian Nations] green bond and loan market," said Wong, who didn't provide exact figures. "We aim to do more, so that banks and financial institutions will use Singapore as a base to develop their capabilities."

Analysts said sovereign green bond issues have provided strong policy and pricing signals for the private sector in recent quarters, contributing to the buoyant scene for environmental finance. IHS Markit data suggests sovereign states were responsible for 51.5% of the total issuance value of $306 billion between March and December 2021.

Posted 01 March 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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