As the world ramps up its decarbonization efforts to abide by the Paris Agreement, governments in Southeast Asia have started to develop more ambitious climate regulations.
Southeast Asia’s attention to climate change has traditionally trailed behind major developed countries, but the region has, in recent years, started to prioritize decarbonization. This is driven by greater scientific consensus that Southeast Asia is particularly vulnerable to the impacts of climate change, including physical risks such as a rise in sea levels, as well as more frequent and intense extreme weather conditions including cyclones, floods, droughts, and heat waves.
In this series, we highlight some of the key regulatory development in five major Southeast Asian markets - Indonesia, Malaysia, Singapore, Thailand, and Vietnam. We also share insights on potential ways in which these developments may impact businesses, while providing practical suggestions on how industries can better prepare themselves to navigate this dynamic landscape.
We begin this series with a deep dive into carbon pricing.
Carbon pricing aims to financially incentivize emitters to reduce their greenhouse gas emissions (GHGs) through two main mechanisms - carbon tax and/or emissions trading. Carbon tax requires emitters to pay a defined amount of tax in accordance with their emissions. On the other hand, an emission trading system (ETS) - also called “cap-and-trade” system - allocates each emitter with an emissions allowance. If an emitter (emitter A) produces more emissions than its allowance, and another emitter (emitter B) produces less emissions than its allowance, emitter A can buy emitter B’s unused allowance to compensate for emitter A’s emissions which exceeded its allowance. More jurisdictions are implementing carbon pricing instruments.
According to a 2022 World Bank report, there are 68 carbon pricing instruments - including carbon taxes and ETSs - in operation, which collectively cover about 23% of total GHG emissions.
Singapore is the first ASEAN country to implement a carbon tax. The tax applies to the Scope 1 emissions of all companies that emit at least 25,000 tCO2e of GHG emissions annually, starting from US$3.70/tCO2e in 2019. While this quantum is low compared to European jurisdictions such as France (US$49.30/tCO2e), it is comparable to other Asian jurisdictions such as Japan (US$2.40/tCO2e). Furthermore, Singapore's carbon tax rate will progressively increase to about US$37-60/tCO2e by 2030. The higher tax rate trajectory provides a clear price signal for businesses to reduce their carbon footprint, while the early announcement gives greater certainty to help businesses plan their investments in decarbonization strategies and technologies. Notably, the Singapore Government has implemented financial schemes to support businesses’ decarbonization efforts and increase competitiveness.
Singapore’s carbon tax currently directly applies to about 50 facilities from the manufacturing, power, waste, and water sectors, which account for 80% of its total GHG emissions. This makes Singapore's carbon tax coverage (in terms of share of the country’s total GHG emissions) one of the highest in the world, higher than Japan (around 75% coverage) and France (less than 40% coverage).
Starting from 2024, Singapore will also allow companies to purchase high quality, international carbon credits to offset up to 5% of their taxable emissions. Singapore has two international carbon exchanges which enable the voluntary trading of carbon credits. Nonetheless, Singapore does not have plans to establish an ETS.
Under its Tax Regulation Harmonization Law (2021), Indonesia - the world’s top coal producer - had originally intended to implement a carbon tax from April 2022, which would have charged US$2.10/tCO2e on coal plants. Though higher commodity prices arising from the war in Ukraine caused an indefinite delay in the tax’s introduction, the Indonesian Government remains fully committed to its implementation.
In February 2023, Indonesia announced the launch of a mandatory, intensity-based ETS for its power generation sector. Set to be implemented in three phases, the first phase (2023-2024) will cover coal plants whose production capacities exceed 100 MW (accounting for 81% of Indonesia’s power generation capacity). The subsequent phases - from 2025 to 2030 – will expand the ETS coverage into oil and gas plants as well as other coal plants that are not connected to the national grid. The government will establish intensity targets to determine the number of allowances to be received by each facility for every MWh of electricity generated. Facilities covered by the ETS are expected to be allocated with an estimated 20 million tCO2e carbon allowances in total. Under this new ETS, which will function as a hybrid “cap-tax-and-trade” system, facilities that fail to meet these obligations will be subject to a tax - the rate of which will eventually be linked to the price of the domestic carbon market.
Thailand, Vietnam, and Malaysia have not adopted carbon pricing but changes may be on the horizon. Malaysia and Thailand are considering putting ETS into effect and have already established voluntary carbon exchanges. Both countries are also looking into implementing a carbon tax, although specific details have not been announced. Vietnam’s revised Law on Environmental Protection – which took effect in January 2022 – legalised the establishment of a carbon market. It aims to officially operate a carbon credit trading floor by 2028; by which time, businesses that cannot reduce their carbon emissions will have to either purchase carbon credits or face administrative fines.
These carbon pricing developments will have financial implications for businesses operating in Southeast Asia. Regardless of whether a carbon tax or ETS is adopted, businesses may incur higher costs for their Scope 1, Scope 2, and certain Scope 3 emissions. For instance, even though the Singapore carbon tax only applies to Scope 1 emissions by companies in the manufacturing, power, waste, and water sectors, companies in other sectors would also indirectly face a carbon price on their Scope 2 emissions (arising from the electricity they consume). This is because power generation companies are expected to pass on some tax burden through increased electricity tariffs.
Businesses can prepare for these regulatory developments by taking the following three practical steps:
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