Singapore's latest carbon tax announcement hailed as timely for refining sector

Singapore's latest Budget announcement unveiling plans to raise the carbon tax rate from the current S$5/mt of CO2 equivalent to between S$50/mtCO2e and S$80/mtCO2e by 2030 is largely hailed as a positive move by industry sources. However, they believe that the refining sector will have to transition swiftly, amid other hurdles, to aid the country's net zero ambitions.

The tax applies to all facilities producing 25,000 mt or more of greenhouse gas emissions in a year.

"I think Singapore's carbon tax move is quite timely," Derrick Dao, founder and CEO of Clima Platform, a startup operating in the voluntary carbon markets space said.

However, "it will be quite difficult for the refining sector to ensure that they are able to run much more efficiently and in a cleaner way in the short run because upgrading a refinery is quite a capital-intensive process and not as simple a task as installing a scrubber to remove emissions," he said.

While the carbon tax hike plans are positive, Dao noted that the planned carbon credit offset was not enough.

Businesses will be allowed to offset up to 5% of taxable emissions in lieu of paying carbon tax by using "high-quality, international carbon credits," local media reported quoting Finance Minister Lawrence Wong on Feb. 18.

"Within the last eight months or so, carbon credit pricing has grown three-fold," Dao said, adding that the demand for nature-based solutions was rising, which will drive up the cost for emitters to offset emissions using carbon credits.

The first thing to recognize is not the numbers themselves but that the carbon price is rising and that too significantly, Peter Godfrey, managing director Singapore at the Energy Institute said.

"What that means is that no longer can they [industry] look at carbon prices as a theoretical constraint because it will be incorporated in future investment decisions," Godfrey said.

The Singapore government's move sends a clear signal around its net zero targets. Setting a carbon tax is not a voluntary but a regulatory issue, and the government is committed to that end, he said.

"These elements will start affecting the local supply chain and impact other countries too in terms of what action they'd like to take," Godfrey said.

As far as the refining industry is concerned, some of it will be absorbed as part of their own company's net zero targets and ESG goals, he said, adding that a lot will depend on the refining agenda -- whether they adopt decarbonization technology internally or through a framework of carbon capture and storage.

"Clearly, working on this in the short term, when the exposure is not so high, is better than waiting for the longer term when the taxes come to bite," Godfrey added.

Singapore's refining sector will have to invest in carbon measurement and management technologies and processes, assuming they don't want to pay a rising carbon tax over the coming decades, Kelvin Fu, Managing Partner, Gunung Capital said.

Making strides

While not an easy transition, it is possible given the government-led support and incentives. Companies will also have to take a serious look at their value chain and pursue carbon-neutral certification where possible to reduce their footprint at every opportunity, Fu said.

A refinery source based in Singapore said that upgrading older refineries may not be worth the effort "but we also know there won't be zero fossil refining, and it won't completely disappear overnight."

"Newer refineries can consider circular refining while the older ones can consider carbon capture or carbon offset schemes," the source said.

Companies such as Shell have already outlined their path to transform their business in the country.

In 2020, Shell said that it welcomed Singapore's goal towards net zero emissions as a country and was committed to playing a key role in supporting the government's ambitions.

It planned to accelerate this transition through repurposing its core, providing low carbon solutions, and partnering with key stakeholders, it said at the time.

ExxonMobil, in its Advancing Climate Solutions - 2022 Progress Report, said that over the next six years, it planned to invest more than $15 billion on initiatives to lower greenhouse gas emissions, with a significant share focused on scaling up carbon capture and storage, hydrogen, and biofuels.

The company has announced progress on 10 carbon capture and storage opportunities since establishing its low carbon solutions business. These are in addition to previously announced projects in Qatar; Antwerp, Belgium; Rotterdam, the Netherlands; and Australia. It also highlighted Singapore as a prospective CCS location.

Ripple effects

Derrick Dao noted that high gas prices worldwide, and Singapore's heavy reliance on natural gas means that this raise will likely have ripple effects on consumers.

"The saving grace is that we may have cleaner forms of energy like hydrogen that come up but that is still quite a long way to go," he said. There are various projects being developed globally but very little offtake, he said.

The logistics around transporting hydrogen commercially and on a large scale poses a huge challenge currently. "You have to currently transport it as other vectors such as ammonia, which adds another layer of cost," he said.

Inevitably consumers will need to take some of the pain, but much is dependent on how Scope 1, 2 and 3 emissions get "appropriately" and "effectively" managed within each appropriate value/supply chain as part of its journey to net-zero, Godfrey said.

Oil companies will have to decide to what extent they are able to pass costs through to end consumers versus absorbing the increased costs themselves, in the context of an increasingly competitive market where more green alternatives are becoming available, Fu said.

Ultimately, companies in the oil sector will have to invest in tracing their carbon footprint and decarbonization and tracking technologies to become more competitive in the new carbon-conscious market, he added.