By Mr Nicholas Chang and Ms Tan Chin Yee
In conjunction with the Singapore International Energy Week (21 October – 4 November, 2010), the Singapore government announced its intention to introduce carbon pricing if a global treaty is reached to curb carbon emissions.
The two likely approaches are cap- and-trade systems and carbon taxes. A cap-and-trade system sets quantitative targets for emission reductions for a period of time and allows companies to buy and sell "rights" to produce the targeted emissions. The carbon tax implements tax levy on products or activities that result in carbon emissions arising from the consumption of fossil fuels. Carbon tax is viewed to be easier to be implemented and require a smaller bureaucratic overhead as it could utilise on existing methods of tax collection. A cap-and-trade system would require new structures to support the distribution of permits and extensive monitoring to track emissions statistics.
The cap-and-trade system will present Singapore with unique opportunity to tap into the fast growing global carbon trading market, estimated to increase in value from EUR90 billion in 2008 to EUR1.2 trillion by 2020. Asia region will play a crucial role in carbon market with investments in renewable energy in Asia at an all time high and emissions trading schemes and stronger policies being developed in the region. The adoption of cap-and-trade may have positive effect on carbon trading activities through securities markets, and the creation of new classes of carbon derivatives and securities. The Singapore Merchantile Exchange (SIMEX), an electronics platform for derivative contracts, plans to offer trading of carbon emission in future depending largely on the global trends and political conditions.
Given the limited influence, Singapore would have to adapt to whatever pricing regime is eventually adopted globally. As the major international financial centre, Singapore could become a carbon trading hub and has recently attracted leading carbon trading companies, such as Tricorona and Gazprom by offering grants for carbon credit projects and enhancement of tax incentives.
While London is widely viewed as the carbon trading capital of the world, there are now other growing hubs in the Asia and could develop into regional or domestic carbon markets. For example, New Zealand has established its own carbon trading system, and countries like Japan and South Korea are in the process of doing so, which could promote trading in the region.
In short, the global carbon market holds exciting opportunities and challenges. How the market will develop and shape would depend not just on how the regulatory environment would evolve, but also how market players would respond. But whatever the eventual environment, the regulatory policy in Singapore shall be well placed to leverage on this growth opportunity.
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