The Government intends to review the level and trajectory of its carbon tax, with Finance Minister Lawrence Wong saying last month that the Republic’s current carbon price is too low at $5 per tonne (To be announced in next Budget: Revised carbon tax for 2024, and what to expect till 2030, Oct 16).
I feel that raising the carbon tax rate would cause more harm than good. An increase would cause a spike in the prices of various goods and services. To remain profitable, firms would likely raise the prices of products in tandem with the tax rate.
A carbon tax on polluters is ineffective if firms continue to produce goods regardless of the costs due to consumers’ willingness to pay for the goods.
For instance, since there are no affordable substitutes for carbon-based commodities such as electricity and petrol, there would be little change in demand even if prices increase due to a higher carbon tax rate.
Financial strain would be put on low- and middle-income families. Higher commodity prices might not affect higher-income households as only a fraction of their income is used to cover their daily necessities. Consequently, increasing the tax rate will only amplify income inequality.
Instead of raising the tax rate on carbon, the Government could consider a corporate tax break for firms producing sustainable commodities. In return, the authorities should mandate that firms producing sustainable commodities keep their prices affordable by setting a price ceiling on those goods.
This way, consumers could consider these sustainable goods as viable substitutes. Firms that produce goods with a carbon footprint would then respond to consumer dollar voting by producing fewer goods or making the switch to the production of sustainable goods instead.
Bryan Thng Wei Feng