Carbon Tax Management Strategies For Businesses In Singapore.
Legal News & Analysis - Asia Pacific - Singapore - Tax
8 September 2020
Singapore introduced the Carbon Pricing Act 2018, which came into effect in January 2019. It is currently S$5 per tonne of greenhouse gases (GHGs) emissions, and this price is expected to be reviewed in 2023, with plans for it to be increased to between S$10 and S$15 per tonne of GHGs emissions by 2030.
Bird & Bird Singapore has observed a trend in the past two years, particularly in our Energy & Utilities Group, for Carbon Tax terms to be increasingly negotiated by parties in contract renewals between generators and offtakers of not just energy but other energy-intensive industrial inputs such as contracts for supply of steam, heating and cooling at an industrial scale.
In this article, we will evaluate:
1. What is the benefit of carbon tax versus other decarbonisation strategies?
There are a few ways of tackling climate change and lowering carbon emissions.
(a) Internal Carbon Pricing
One way – called internal carbon pricing (ICP) – is for companies to place a monetary value on the carbon emissions or GHGs of their investment and business operations.
This means instead of – or in addition to – only taking into account the financial return of decisions, companies also factor in the impact of their decisions on climate change.
Some companies are already doing this, especially those in the oil & gas, mining and power sectors. They do this to manage climate related risks and prepare themselves for a transition to a low carbon economy.
According to the CDP (formerly the Carbon Disclosure Project), more than 1,200 companies globally are already implementing - or plan to implement – ICP in their business strategy.
The benefit of ICP is its ease of implementation. As an internal decision made by the company, it enables implementation of such climate change mitigation policies quickly.
The challenge in implementing ICP include getting company employees all onboard, and changing a corporate culture previously focussed on financials, to one which takes into account the impact of emissions. This will require a change in mindset and behaviour, perhaps through new key-performance indicators (KPIs) connected to emissions reductions.
(b) Emissions Trading System
Another decarbonisation strategy is to install an emissions trading system (ETS).
One example of this is the European Union’s (EU) ETS, which is a key tool supporting the EU’s policy to mitigate climate change. It was the first, and remains the largest, carbon market system.
An ETS operates on a ‘cap and trade’ system. This means setting a cap or limit on the total GHGs emitted by companies and facilities within the system. This cap is reduced gradually over time so that emissions generated concurrently falls over time. In 2020, the emissions from industry sectors within the EU system will be 20% lower than in 2005, and by 2030 the ambition is to reach 43% of 2005 levels.
Within the capped or limited amount, companies receive their emissions allowance or purchase/trade with each other as required to meet their needs. They may also purchase a controlled amount of international credits from approved projects globally. This incentivises companies to produce less GHGs in order to have excess to sell to those who exceed their quota.
The benefit of an ETS system is the fixed and gradually reducing amount of GHGs circulating and traded within the system. This achieves the primary purpose of reducing emissions over time.
The challenges of such a system include the complexity in setting it up, including the required infrastructure, and the requirement to have many parties and jurisdictions sufficiently enlightened and agreeing to be part of the system to make any impact. In addition, it is arguable that one drawback in making carbon credits a commodity within a capitalist system is the possible creation of a new set of issues like hoarding and profiteering – not the original intent of the system.
(c) Carbon Tax
A carbon tax is a fixed fee levied by governments on the burning of carbon-base fuels. This can be done by either taxing companies that produce beyond a certain amount of emissions, or taxing all companies based on their emissions.
Electricity is usually generated by burning carbon-based fossil fuels like natural gas. The purpose of a carbon tax in mitigating climate change is to encourage the transition from fossil fuels to renewable and clean sources of energy like solar power.
In Singapore, the carbon tax, which was imposed since 1 January 2019, applies to companies which emit more than 25,000 tonnes of GHGs per annum, at a rate of S$5 per tonne. This tax rate will be reviewed by 2023, with plans to increase the rate to between S$10-S$15 per tonne by 2030.
The benefits of a carbon tax include:
Certainty of the tax rate means that companies can make better informed strategies and plans over the longer term;
Motivating the transition to cleaner energy by increasing the conscious cost of carbon-based fuels in businesses; and,
Spurring innovation through use of tax revenue for research on renewables, as is the case in Singapore.
On the other hand, a weakness of the carbon tax could be this: a company may not reduce its carbon emissions if it considers the short-term profit generated through its traditional fossil fuel-based production process exceeds the tax payable.
However, even in this scenario, the company will stand to profit even more in the medium- to long-term by transitioning to renewable energy sources and positioning itself for more impending regulatory climate risks. Furthermore, continuing the use of fossil-fuels may cost the company public goodwill to a more enlightened consumer market, which eventually translates to lower profits.
Overall, it is thought that a carbon tax is fair, relatively simple to implement within a jurisdiction, and achieves the purpose of emissions reduction effectively and efficiently by directly charging producers and users for what they produce or use.
2. What can businesses do to reduce the amount of carbon tax they pay?
There are a range of strategies businesses can take to lower their electricity consumption and carbon tax liability. This is particularly relevant as the tax is expected to be reviewed and revised upwards in coming years. It is also relevant to consider these strategies as part of any organisation’s sustainability efforts, which is increasingly relevant under Sustainability Reporting which is mandatory for SGX-listed companies and on other global exchanges. It is also relevant for unlisted corporations, as part of standard contemporary business management practice.
(a) Changing to smarter devices and equipment
This includes transitioning to LED bulbs, which generally consumes about 70-75% less energy and lasts up to 25 times longer than traditional bulbs. Another method is the use of automated or timed control of electricity supply, or control of machinery remotely through a mobile app.
Switching to energy-efficient machinery, or replacing older machinery, may incur initial costs, but will reduce carbon tax and other maintenance costs over the longer term.
(b) Conducting regular checks and audits
Many companies begin their business journey by calculating how much energy they need and structuring their business needs and consumption patterns accordingly. Over time, however, their business structure may change – perhaps through expansion or consolidation. This should trigger a second look at how to optimise energy consumption, which is sometimes overlooked.
Conducting regular energy audits will identify areas of business operations which require more efficient management to reduce or eliminate wastage. This is especially so following a restructuring exercise. Incentives may be given to employees to identify such areas, which would also build in co-ownership in staff.
(c) Taking advantage of an open market system
In some jurisdictions, like Singapore, there is an open electricity market system. This means that businesses may choose a service provider and plan that best suits their operations. This also means that over time, services and plans can be changed as business needs evolve, resulting in savings.
3. Carbon tax pass-on strategies: can the carbon tax be passed down to counter parties by contracts?
With carbon tax expected to be revised upwards in coming years, many contracting parties involved in the supply of energy intensive inputs will consider which party should bear the burden of tax rate increases. Contracts entered into before 2019 that come up for renewal will also often involve discussions around how terms should be reframed to accurately capture the responsibility to bear the burden of the tax moving forward. Market standard generally aims to put responsibility for the tax on the end user of the taxable input.
Any industrial facility or business premises (plants, factories, warehouses, generating unit, etc.) which emit more than 25,000 tonnes of greenhouse gases are defined as “taxable facilities” under the Carbon Pricing Act 2018 (No. 23 of 2018) and will have to pay a carbon tax of S$5 per tonne.
A common query asked is whether a “taxable facility” is able to pass through the amount of carbon tax it has to pay for its emissions to its downstream contracting parties. For instance, can a supplier of steam to a factory charge the factory for the carbon tax levied on the production of steam?
In our experience, many contracts entered into prior to the passing of the Carbon Pricing Act 2018 do not contain specific provisions dealing with the burden of paying carbon or similar taxes. Most of these contracts are long term and some “taxable facilities” attempt to pass through via force majeure, change of law or tax provisions. Most of these provisions are not expansive nor comprehensive enough to allow for a pass through of the carbon tax to the downstream party or offtaker, depending on whether the parties had foreseen the possibility of carbon tax being implemented during the contract’s lifetime.
For long term contracts which do not allow pass through of carbon tax (even by dint of creative interpretation), the “taxable facility” will generally need to negotiate for a variation or supplement to pass through the carbon tax. It should be noted that carbon tax is subject to GST as well, which is frequently omitted in the negotiations or documentation.
A typical variation would reference the primary contract, specify the obligation of the offtaker to bear the carbon tax and the mode of payment. In terms of the computation of carbon tax, an allocation formula is sometimes needed if the “taxable facility” is generating carbon due to its supply to multiple offtakers; however, some “taxable facilities” will simply attribute the amount of carbon taxes payable for the specific supply and bill the offtaker accordingly. If possible, the variation should include an agreement by the parties to enter into good faith discussions again to vary the contract terms if the carbon tax regime changes in the future again.
Carbon tax is an effective decarbonization strategy, and this seems to be the primary strategy adopted by Singapore legislators as part of the jurisdiction’s overall carbon reduction and sustainability journey.
Businesses can and should turn to the established and growing industry of energy reduction and optimization tools and experts available in Singapore to audit, manage and reduce the amount of energy used in operations, particularly since there is now a quantitative measure of the added “cost” of carbon via the carbon tax.
Contracts for the supply of carbon and energy intensive industrial inputs will typically focus on ensuring that the burden of the tax is appropriately levied on end-users or other appropriate levels of the supply chain for any given product of service. Many existing contracts, including long term agreements, are being varied and renewed on this basis, and in-house counsel should be aware of this area which can amount to a significant sum that is likely to increase in coming years.
For further information, please contact:act:
Sandra Seah, Partner, Bird & Bird
 See CDP, ‘Embedding a carbon price into business strategy’ (2016) <https://6fefcbb86e61af1b2fc4-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/001/132/original/CDP_Carbon_Price_report_2016.pdf?1474899276> accessed 12 August 2020.
 See EU Emissions Trading System <https://ec.europa.eu/clima/policies/ets_en#:~:text=The%20aim%20of%20the%20EU,be%20achieved%20at%20least%20cost.> accessed 12 August 2020.
 For more details, see <https://www.nea.gov.sg/our-services/climate-change-energy-efficiency/climate-change/carbon-tax> accessed 2 August 2020.
 For more benefits of LED lights, see <https://www.thelightbulb.co.uk/resources/ultimate-guide-led-lights-advantages-leds/> accessed 13 August 2020.
 For more information, see <https://www.openelectricitymarket.sg/home> accessed 13 August 2020.
 Any business in Singapore that emits 2,000 tCO2e or more of greenhouse gases is required to submit an emissions report (see s7 and s11 of the Carbon Pricing Act 2018). Carbon tax is levied on any business that emits 25,000 tCO2e or more of greenhouse gases (see s16 of the Carbon Pricing Act 2018).