Cost of living may rise with carbon tax going up, say experts

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SINGAPORE - The impending carbon tax hike could bring about an increased cost of living for households over the next few years, if businesses decide to pass on their increased operating costs to consumers as they make their green transition, experts here told The Straits Times.

Dr David Broadstock, a senior research fellow and head of the energy economics division at the National University of Singapore's (NUS) Energy Research Institute, told The Straits Times that as natural gas makes up 95 per cent of the fuel used in power generation, and as burning it creates carbon, Singaporeans can therefore expect the phased increments in the carbon tax to be reflected in their electricity prices.

However, the revisions of the carbon tax will be added to the baseline cost of utilities, which also depend on the cost of fuel inputs.

Therefore, while Singapore has been seeing sustained increases in electricity tariffs, it does not mean that the tariff prices will not fall, or that the impact of the carbon tax will lead to a sudden and equivalent change of the same size.

Acknowledging that the rise in carbon costs could lead to firms increasing the prices of their goods and services, Dr Broadstock noted that households may face a combination of the direct and indirect effects of the carbon tax.

"As with any increase in the cost of living, those that feel it most severely will be lower- and middle-income households. The distributional impacts of carbon pricing (including taxes) are therefore something that require understanding and planning for," he added.

His remarks came after Finance Minister Lawrence Wong said in his Budget speech on Friday (Feb 18) that the carbon tax will be increased from the current rate of $5 a tonne of emissions to $25 in 2024 and 2025, $45 in 2026 and 2027, before reaching $50 to $80 a tonne by 2030.

Singapore's carbon tax applies to all facilities producing 25,000 tonnes or more of greenhouse gas emissions in a year.

This covers 30 to 40 large emitters such as oil refineries and power generation plants, which contribute to 80 per cent of Singapore's greenhouse gas emissions.

Mr Wong noted that a $25 carbon tax per tonne of emissions will likely translate to an increase of about $4 a month in utility bills for an average four-room Housing Board household. To support households, additional U-Save rebates will be given out to them during this transition.

The National Climate Change Secretariat also said in a statement on Friday that households are encouraged to practice energy-saving habits and switch to energy efficient appliances to mitigate cost impact.

Eligible households, such as those living in one-, two-, or three-room HDB flats can tap the Climate Friendly Households Programme to make the switch to more energy or water efficient appliances, it added.

Professor Vinod Thomas, a visiting professor at NUS' Lee Kuan Yew School of Public Policy, said that a $4 increase in monthly utility bills at a carbon tax of $25 a tonne will not increase proportionately to a further increase in the carbon tax.

"With the tax imposed, the carbon-emitting industries will try to reduce their emissions to save on tax, such that the cost that is passed on to the consumer, will also be less. Secondly, when you put a tax on carbon, say for natural gas, it means that solar, which is cleaner, is going to become more attractive and viable."

He added: "So in the time between now, and say 2026 or 2027, and eventually 2030, you will see renewables becoming a much bigger part of our lives, and the amount of carbon tax that is passed on to consumers will be a lot less than otherwise." 

In addition, the revenue generated from income tax and how it will be redistributed should also be taken into account, he noted.

In Singapore's case, the revenue will be used to support decarbonisation efforts and the transition to a green economy, as well as to cushion the impact on businesses and households.

However, economists also pointed out that the estimated increase in household utility bills at about $4 monthly will likely have "a very small impact" on most households.

Professor Euston Quah, who is the Albert Winsemius Chair Professor of Economics and director of the Economic Growth Centre at the Nanyang Technological University, said: "For the lower income households, they will receive the rebates and that will compensate them for (the carbon tax).

"But an increase in utility bills is only one item in households' expenditure. There will be more. (For example), eating out may be more costly as restaurants may increase prices as their own utility bills increase." 

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The same could be said for transport, as the use of gas and fossil fuels will increase, which could also be passed on to users, as well as leisure and recreational activities, said Prof Quah.

"Whether households will genuinely feel the impact will depend on the amount of (price) increase but also whether firms can pass these additional costs to their users, which economists call tax incidence," he added.

For items that are more price sensitive, such as dining out and leisure activities, people can find "easy substitutes" or reduce their own consumption easily, therefore, firms are likely not able to pass on their increased cost to consumers, noted Prof Quah.

He also felt that the increase in carbon tax within the next few years is "still manageable", though the impact could be much larger if the tax reaches $80 per tonne of carbon emissions.

However, by then, the situation could have changed - households may have found ways to lower their overall expenditure, and new technologies could ensure the increased capacity of renewable energy usage and efficiency, said Prof Quah.

NUS' Prof Thomas noted that the trickled down proportion of carbon tax faced by the end-consumer may end up only being a fraction of the original cost.

"For example, as Singapore ramps up its use of solar energy, a power generation company may think about relying less on natural gas, and more on cleaner fuels. So while they pay some of the tax, it would be a lot less compared to if they didn't make the switch," said Prof Thomas.

The cost can then affect secondary industries like F&B, who may pass part of it to consumers in the short term, he added. Therefore, the eventual increase in prices that consumers face may be accordingly less, he added.

"The adjustments would ultimately be aided by a switch in consumer behaviour, and a recognition of the unacceptable social cost of not transitioning to a low carbon economy." 

This article was first published in The Straits Times. Permission required for reproduction.