During the United Nations Climate Change Conference (COP28) in Dubai, the managing director of the Monetary Authority of Singapore (MAS), Ravi Menon, argued that Singapore’s current carbon tax trajectory might not be sufficient to drive the necessary action against climate change. Menon made this point on December 4, 2023, urging for more aggressive carbon pricing to accelerate climate mitigation efforts.

Currently, Singapore’s carbon tax, which started at S$5 per tonne of emissions, is set to increase to S$25 per tonne in 2024 and rise further to S$45 between 2026 and 2027. The government’s guidance suggests that the tax could land between S$50 and S$80 by 2030. While this increase is seen as significant, Menon emphasized that it is “not quite enough” to generate the needed momentum to combat the effects of global warming.

Menon believes that a much higher carbon price is essential to push governments and industries towards quicker, more decisive action on climate change. According to him, pricing carbon correctly could make traditional financial mechanisms, like blended finance (which combines public and private funds to reduce the risks of investments in clean energy projects), less critical. If the cost of carbon were properly accounted for, Menon suggested that the need for lowering capital costs would be reduced, allowing climate investments to flow more efficiently, particularly in developing and emerging markets.

Menon also pointed out that global progress in carbon taxation remains slow. At present, only about 30% of global emissions are subjected to some form of carbon pricing, and just 5% of those emissions are taxed at levels that could realistically lead to net-zero outcomes. This, he argued, leaves a massive gap in the global effort to combat climate change.

The reluctance to implement higher carbon taxes, Menon said, is often political, as carbon pricing is not popular among voters. “In a democracy, these things don’t fly,” Menon noted, acknowledging that imposing taxes, even those aimed at curbing emissions, is typically met with resistance.

Blended Finance and Regional Collaboration
While Menon emphasized carbon pricing, he also acknowledged that blended finance still plays a fundamental role in the current landscape of climate investment. Blended finance, combined with carbon credits, has become essential in lowering the cost of capital for energy transition projects in emerging markets. Investors tend to perceive higher risks in these regions, making projects less attractive without financial incentives to mitigate those risks.

Temasek CEO Dilhan Pillay, who was also on the panel with Menon, added that alongside reducing capital costs, blended finance must be made more affordable for projects in Southeast Asia to succeed. This region, made up primarily of emerging economies, is essential to the global supply chain, and for Singapore to thrive, its neighbors must also prosper. The Financing Asia’s Transition Partnership, which involves MAS, Temasek, and the World Bank’s International Finance Corporation, is an effort to support these transitions through investments in sustainable projects across the region.

Carbon Tax and Singapore’s Role in the Energy Transition
Singapore’s carbon tax, while not among the highest globally, is a key component of the country’s broader climate strategy. By raising the cost of emissions, the government aims to incentivize companies to adopt cleaner, more sustainable practices. The current carbon tax plan outlines gradual increases, but according to Menon, it must go higher and faster to be effective in steering the economy away from fossil fuels.

The country is also limited in its ability to generate renewable energy, as it lacks extensive natural resources like wind or hydropower. Currently, 95% of Singapore’s electricity comes from natural gas, which is viewed as a transitional fuel. While Singapore has already phased out coal and fuel oil from its energy mix, the transition to a fully renewable energy system presents unique challenges.

To ensure that the region can continue to progress while meeting global climate goals, Menon and Pillay both stressed the need for continued regional collaboration. Singapore’s involvement in these efforts is crucial not only for its own future but also for the stability and growth of Southeast Asia, which is becoming a critical hub in global supply chains. Investing in lower-carbon, more efficient supply chains, they said, will be essential for ensuring the region’s competitiveness on the global stage.

As COP28 continues to focus on finding ways to mitigate climate change, Singapore’s leadership on carbon pricing and regional cooperation will be critical. Raising the carbon tax, as Menon suggests, may be one of the key steps toward ensuring a more sustainable future for both Singapore and the region.