The Singapore Carbon Tax: Opportunity for International Carbon Credits to be Used as an Alternative to Paying the Tax

Introduction

Singapore’s carbon price is regulated by the Carbon Pricing Act 2018 (the “Original Act”). Singapore’s Parliament has passed the Carbon Pricing (Amendment) Act 2022 (the “Amendment Act”, and the Original Act as amended is the “Act”), which amends the Act. This amendment comes into force from 1 January 2024 and creates the ability for an entity to surrender certain international carbon credits (ICCs) for the purposes of meeting its carbon tax obligations. The Ministry of Sustainability and the Environment (MSE) has also separately promulgated subsidiary legislation that supplement and clarify the ICC regime under the Act, all of which come into effect on 1 January 2024. For the purposes of this chapter, the most relevant subsidiary legislation is the Carbon Pricing (Carbon Tax and Carbon Credits Registry) (Amendment) Regulations 2023, which amends the Carbon Pricing (Carbon Tax and Carbon Credits Registry) Regulations 2020. Together with the amending instrument, this is referred to as the “Amended Registry Regulation”.

The amendment of Singapore’s carbon tax rates is “a key enabler” in Singapore’s Long-Term Low-Emissions Development Strategy which aims to, amongst others, achieve Singapore’s goal of net zero emissions by 2050 (see National Climate Change Secretariat, 4 November 2022, “Singapore’s Long-Term Low-Emissions Development Strategy”).

However, for the market, this development creates an arbitrage opportunity for registered persons as defined in the Act (“Registered Persons”). At a risk of oversimplification, a Registered Person is a person who is obliged to register as a “registered person” under the Act for a business facility that is a subject of the Act and if the business facility is a “taxable facility”, the registered person is obliged to pay the carbon tax for that business facility. Specifically, where they are obliged to pay the carbon tax, Registered Persons may:

• procure and surrender eligible ICCs at a price that is lower than the carbon tax rate for an emissions year; and
• if the price of the ICCs in the (then) spot market is significantly higher than the carbon tax rate, sell these ICCs and use the proceeds to pay their carbon tax instead.

However, this chapter considers whether the Act and the Amended Registry Regulation provide enough investor certainty for structuring forward sale and purchase arrangements, and, if not, the potential issues which a Registered Person or a market intermediary will need to consider.

Singapore’s carbon tax framework

Broadly speaking, under the Act, a carbon tax is “charged on the total amount of reckonable [greenhouse gas (GHG)] emissions” of a business facility for a prescribed industry sector that emits 25,000 tCO₂e or more GHG emissions in an emissions year. The carbon tax presently covers “80% of [Singapore’s] total GHG emissions from about 50 facilities from the manufacturing, power, waste and water sectors”. The Amendment Act increases the “carbon tax rate” set out in Part 2 of the Third Schedule to the Original Act on an incremental basis:

• SGD 5/tCO₂e in 2023;
• SGD 25/tCO₂e in 2024 and 2025; and
• SGD 45/tCO₂e in 2026 and beyond.

However, based on official statements from the Singapore government (the “government”), the carbon tax rate will increase to between SGD 50/tCO₂e and SGD 80/tCO₂e by 2030. The existing carbon tax system set out in the Original Act had relied on what is now known as a “fixed-price carbon credit” (FPCC). A Registered Person can apply and pay for FPCCs issued by the National Environment Agency (NEA). The Registered Person can then surrender their FPCCs to NEA in lieu of paying the carbon tax which the Registered Person is liable to pay under the Act. The price of FPCCs is set out in Part 2 of the Third Schedule to the Act. The FPCC scheme will remain broadly unchanged when the Amendment Act comes into force. However, the price of FPCCs will increase, broadly in line with the carbon tax rates discussed above.

The introduction of ICCs

One of the principal changes introduced by the Amendment Act is the introduction of an ICC, and the distinction between an FPCC and an ICC. The new ICC regime will work in a similar way to the FPCC scheme in that eligible ICCs can be surrendered in lieu of FPCCs up to a prescribed limit (discussed below). The Registered Person is “treated as having paid the tax to the extent of the carbon price of the [FPCC] that the eligible [ICC] has been surrendered in place of” (see Sections 33B(3) and 17(3A) of the Act). The government’s intention appears to be to tap into Singapore’s arrangements with other jurisdictions under Article 6.2 of the Paris Agreement on ICCs (Article 6.2). For instance, in April 2023, Singapore’s Deputy Prime Minister Lawrence Wong talked about Singapore building “a pipeline of high-quality carbon credit projects to help meet our climate goals”.

This suggests that the government may be directly or indirectly financing these projects, purchasing carbon credits on a forward basis to lock in supply, or both. Notably, this willingness to accept Article 6.2-related ICCs does not appear to extend to the other mechanism set out in Article 6.4 of the Paris Agreement (the “Article 6.4 Mechanism”).

What is an ICC?

Section 2 of the Act defines an ICC as “a certificate representing one tonne of GHG emissions reductions or removals measured in tCO₂e, generated from any project or programme outside Singapore”. The two key elements to this definition are that it (i) is a certificate representing 1tCO₂e of GHG emissions reductions or removals (ie, the government is not limiting ICCs to just one of “reductions” or “removals” and the definition explicitly includes both reductions and removals) and (ii) relates to a project or programme outside Singapore (ie, a GHG emission reduction or removal project in Singapore, eg, a Verified Carbon Standard (VCS) or Article 6.4 Mechanism project relating to a GHG emission reduction activity in Singapore, will not be accepted for the purposes of the ICC scheme).

ICC eligibility criteria

Pursuant to section 33A of the Act, an eligible ICC is an ICC that (i) “meets the prescribed criteria” and (ii) “is acceptable as an eligible international carbon credit by [NEA] in accordance with any direction of the [Minister for Sustainability and the Environment]” – which is discussed further below.

Accordingly, in an alert (MSE Alert) published on its website, mse.gov.sg, on 4 October 2023, MSE and NEA have jointly set out the eligibility criteria (the “Eligibility Criteria”) in the form of seven internationally recognised principles that ICCs must meet in order to demonstrate high environmental integrity. In summary, an eligible ICC must be or involve (as applicable):

• not double-counted;
• additional;
• real;
• quantified and verified;
• permanent;
• no net harm; and
• no leakage.

These points are explained in the Amended Registry Regulation. An example of how they may be applied is set out in the MSE Alert. However, please note the following.

Vintage

The vintage requirements are presently tagged to 2021 to 2030, in line with the period of Singapore’s nationally determined contributions (NDC) under the Paris Agreement. The vintage requirements should change for the next NDC period.

No double-counting

In the writers’ view, it is likely that eligible ICCs will have to be authorised for corresponding adjustment and for use towards Singapore’s NDC. Although this is not expressly stated in the Act, the Amended Registry Regulation or the Parliamentary reports, Minister Grace Fu has expressly stated in the debates for the Carbon Pricing (Amendment) Bill (the Carbon Amendment Bill Debates) that surrendered eligible ICCs will need to be “compliant with Article 6 of the Paris Agreement”. This suggests that the requirements for internationally transferred mitigation outcomes (ITMOs) under Article 6 would have to be satisfied.

It is proposed that these elements are (i) the de minimis requirements under the Article 6.2 guidelines agreed under the Paris Agreement, and more importantly (ii) corresponding adjustment and NDC use authorisation. This is because the carbon tax relates, ultimately, to Singapore’s emissions and accordingly Singapore’s obligations in relation to its NDCs under the Paris Agreement. For every tCO₂e that exceeds Singapore’s committed NDC level (a “+1”) (and to the extent that Singapore intends to meet its NDC), Singapore would have to procure a reduction or removal (a “−1”) to cancel out such excess and ensure that Singapore can meet its NDC. Recognising that Singapore is an “alternative energy disadvantaged” country, the government stated in the Second Update to its First NDC that it “will also pursue opportunities to leverage international cooperation under Article 6 of the Paris Agreement. This includes the use of internationally transferred mitigation outcomes (ITMOs)” (see UNFCCC, “Singapore’s Second Update of its First Nationally Determined Contribution (NDC) and Accompanying Information”).

As Minister Grace Fu noted during the Carbon Amendment Bill Debates, with the finalisation of the Article 6 rulebook and countries now able to “cooperate through carbon markets to mutually support their respective climate targets… Singapore is keenly exploring… new possibilities”. Therefore, it seems likely that Singapore will wish to ensure that eligible ICCs qualify as ITMOs for use towards Singapore’s NDC. However, it is important for MSE or NEA to clarify this because obtaining a corresponding adjustment commitment from the host country of the ICC will come at a cost to investors.

The prescribed limit

Pursuant to Section 33B(1) of the Act, the total number of eligible ICCs cannot exceed the “prescribed limit”, which has now been prescribed to be 5% (rounded down to the nearest whole number) in Regulation 9 of the Amended Registry Regulation. As noted by the National Climate Change Secretariat in its Carbon Tax article:

“The facility-level limit has been set at 5% to ensure that the industry continues to prioritise domestic emissions reduction, while providing an additional decarbonisation pathway for hard-to-abate sectors that may find it challenging to significantly cut emissions in the near to medium term. This limit is aligned with other comparable jurisdictions with similar climate ambitions, such as South Korea and California. We will continue to review the facility-level limit over time to align with international developments.”

In November 2022, Minister Grace Fu acknowledged that this number was the start and that “as the market develops, [Singapore] will see how it goes and [it] will make changes along the way” (see Carbon Amendment Bill Debates). Further, Section 33B(2) of the Act provides that the Minister for Sustainability and the Environment can permit eligible ICCs to be “surrendered in excess of the prescribed limit in any particular case or class of cases” – thus potentially allowing flexibility in respect of certain industry sectors or participants. This power is distinct from the transitory allowances which “Emissions-Intensive Trade-Exposed sectors” are permitted under Division 1A of Part 5 of the Act. These allowances are deducted directly from total taxable GHG emissions for the purposes of calculating the carbon tax payable by a Registered Person. As at 15 November 2023, there are no public announcements to that effect and the Amended Registry Regulation does not provide for this either. It therefore does not appear that the Minister’s power to permit excess surrenders will be utilised when the Amendment Act comes into force.

CORSIA+

It should be noted that the Eligibility Criteria “minimally reference the Carbon Offsetting and Reduction Scheme for International Aviation” (CORSIA) as “[t]hese are a set of environmental integrity standards that have been developed and backed by a multilateral process led by the International Civil Aviation Organisation (ICAO), in consultation with green groups and experts, and are widely regarded as some of the most rigorous in the industry”, as indicated by Minister Grace Fu in November 2022 during the Carbon Amendment Bill Debates. The MSE Alert also provides that the Eligibility Criteria “take reference from the most rigorous and reputable international standards, such as [CORSIA]”. However, Minister Grace Fu has also advised that “[a]s the market for carbon credits is nascent and growing, [Singapore] will review [the] eligibility criteria periodically to align with developments” so there may be changes over time. The MSE Alert similarly states that “[a]s environmental integrity standards continue to evolve, the Eligibility Criteria will be reviewed periodically to align with developments in Article 6 of the Paris Agreement and high-integrity carbon markets”. Further, in Minister Grace Fu’s written reply to a parliamentary question on carbon credits released on 7 November 2023, she advised that the government “will publish a list of eligible host countries, carbon crediting programmes and methodologies that adhere to Singapore’s ICC eligibility criteria [later this year]”. The MSE Alert echoes this timeline.

ICC eligibility procedure

As mentioned earlier, Section 33A of the Act provides that an eligible ICC is an ICC that (i) meets the Eligibility Criteria, and (ii) is accepted as an eligible ICC by NEA in accordance with the direction of the Minister for Sustainability and the Environment (the “Acceptance Procedure”).

The Acceptance Procedure, as set out in the Amended Registry Regulation, will likely cause investor uncertainty, in particular, for market intermediaries looking to source ICCs for supply into Singapore via forward transactions with purchasing commitments longer than 18 months. The following factors illustrate the challenges of a market intermediary’s supply of eligible ICCs to Registered Persons.

The Approval Process can only be done via a Registered Person

Communications with, applications to and approvals from NEA are all as between NEA and the Registered Person (eg, the notice of ICC use and notification from NEA to the Registered Person under Regulation 10 of the Amended Registry Regulation). In other words: (i) a market intermediary cannot get approval for use of that ICC, and (ii) the approval given by NEA to one Registered Person will not count as approval for another Registered Person. For the reasons discussed below (see the Surrender Procedure), the information given by the Registered Person at this stage is crucial. Regulation 11(7)(b) of the Amended Registry Regulation provides that NEA can reject the “evidence of retirement” if the information submitted as part of the Acceptance Procedure is inconsistent with what is ultimately stated in the “evidence of retirement” when the ICC is used towards discharging the carbon tax liability.

The Approval Process is annual only

The ICC approval application window for a Registered Person for each emissions year is from 1 July of that emissions year till 30 June of the year after that emissions year. The approval, once given, only lasts for a year. In other words, a Registered Person cannot make an application for emissions year 2026 in 2024, thereby reducing certainty on whether an eligible ICC for one year will remain eligible for the next year. It is not clear as to why an annual assessment was adopted as opposed to approval for a particular period.

It may be the case that press criticism of carbon offset project activities from which ICCs could be supplied have made the MSE nervous about granting eligible status to ICCs for more than a limited period. The shorter authorisation status increases the MSE’s discretion to reject ICCs that were eligible in a previous year. If so, this eligible ICC status revocation risk is not good for supply and investment certainty.

Status of proposed “whitelist” activities

MSE has stated that there will be a “whitelist” of, amongst others, host countries and methodologies (see MSE Alert). MSE has stated that “as the administrator of the carbon tax regime under the Carbon Pricing Act, NEA will develop processes to determine which ICCs adhere to the Eligibility Criteria before carbon tax-liable companies use the ICCs to offset their taxable emissions. More details on these processes and a list of eligible host countries, carbon credit programmes and methodologies that adhere to the Eligibility Criteria will be released by the end of this year [ie, 2023]” (see MSE Alert). However, it remains unclear how this “whitelist’ will interact with the Acceptance Procedure or the Eligibility Criteria.

It is unclear whether NEA’s approval under the Acceptance Procedure will be deemed to be given if the ICC is issued in respect of a project on the whitelist, and therefore provide more comfort to Registered Persons intending to enter into forward sale and purchase arrangements. MSE or NEA should clarify whether the whitelist grants any additional certainty to investors.

Surrender of eligible ICCs and the ICC Registry

Prior to the Amended Registry Regulation, there were uncertainties and many questions revolving around the surrender of eligible ICCs by a Registered Person to the International Carbon Credit Registry (as defined in the Act) (the “ICC Registry”) and the role of the ICC Registry. Specifically, determining what surrender amounts to, what has to be surrendered (the ICCs themselves or something else) and how it might be effected, were key aspects of how the market will approach delivery mechanisms as between a Registered Person (as buyer) and a project developer or intermediary (as seller).

Regulation 11(10) of the Amended Registry Regulation provides that “surrender” occurs through the Registered Person’s submission of “evidence of retirement” of Eligible ICCs on the Emissions Data Monitoring and Analysis System (the “EDMA system”) and “takes effect upon the acceptance by [NEA] of the evidence of retirement relating to that [eligible ICC]” (the “Surrender Procedure”). In other words, market intermediaries should be able to retire eligible ICCs for a Registered Person.

This helps resolve questions of delivery of eligible ICCs from market intermediaries to Registered Persons but it still raises a number of questions. For example, how will certain information be reflected in the evidence of retirement (eg, the Registered Person’s “Fixed-Price Carbon Credit” account number) given that presently the various carbon registries do not expressly provide for such a field to enter such information? Similarly, it is not clear how/when the Registered Person will specify the emissions year for surrender under arrangements that NEA may put in place with the relevant carbon standard/registry. The settlement mechanism of sale and purchase agreements for Eligible ICCs will remain uncertain until this is clarified.

Conclusion

While the Amended Registry Regulation helps to clarify the position relating to the Eligibility Criteria and the Surrender of eligible ICCs, some of the processes or procedures provided may make it difficult for Registered Persons and market intermediaries to structure forward sale and purchase arrangements.

If the intention of MSE and NEA is to spur market activity relating to eligible ICCs, then further clarification is needed from the regulators.