Journal of Cleaner Production 165 (2017) 1239e1248

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

The impacts of carbon pricing on coastal megacities: A CGE analysis of

Singapore
Yingzhu Li, Bin Su*
Energy Studies Institute, National University of Singapore, Singapore

a r t i c l e i n f o a b s t r a c t

Article history: Pricing carbon is a widely used policy instrument for climate change mitigation. Quantitative analysis of
Received 5 February 2017 carbon pricing are mainly conducted at the regional and national level, rarely at the city level due to data
Received in revised form availability. As a representative of coastal megacities that are vulnerable to both climate change and
24 July 2017
climate policies, Singapore has announced to impose carbon tax on large direct emitters as a comple-
Accepted 27 July 2017
mentary mitigation option to technical measures. A city-level Computable General Equilibrium (CGE)
Available online 28 July 2017
model is developed to simulate potential impacts of carbon pricing on the city, including paying border-
Handling Editor: Yutao Wang carbon-adjustment (BCA) on exports or introducing a domestic carbon tax. Different sector coverages
and carbon tax revenue recycling schemes are investigated for domestic carbon tax. The simulation
Jel: results show that a domestic carbon tax is a more cost-effective option than paying BCA. Given an
C68 identical carbon price at S$10/t-CO2, GDP, total exports and household consumption would decline less
E27 and average abatement cost is much smaller in the carbon tax scenarios compared to the BCA scenario. In
Q43 terms of absolute emissions reduction, a carbon tax that covers energy, manufacturing and land trans-
Q58
port sectors would be preferred, making emissions around 2.7% lower than 2010 baseline level.
Keywords: © 2017 Elsevier Ltd. All rights reserved.
Carbon pricing
Carbon tax
Border carbon adjustment
CGE model
Singapore

1. Introduction by 2020 are targeted with priority towards the LDCs and SIDS.
Many low-lying coastal cities (such as Los Angeles, New York,
As of July 2017, 153 Parties out of 197 Parties have ratified or London, Tianjin, Shanghai, Guangzhou, Shenzhen, Hong Kong,
acceded to the Paris Agreement. It was agreed at the COP 22 in Tokyo and Singapore) face the same threats from climate change as
Marrakesh to set 2018 as the deadline for finalizing implementa- SIDS do. But these economically advanced and populous megacities
tion details of the Agreement. The Least Developed Countries are supposed to suffer much greater loss and damage of lives,
(LDCs) and Small Island Developing States (SIDS) have the discre- properties and lands from extreme weather events or continuous
tion to either join or not join the global mitigation efforts, as these coastal erosion. Following national/state plans, many such cities
parties are considered to have contributed negligible greenhouse have implemented technical measures and market-based solutions
gas (GHG) emissions but are most threatened by climate change. to curb energy consumption and emissions. For example, Cal-
LDCs and SIDS argued during the COP 21 that impacts of many ifornia's efforts on energy efficiency started in the 1970s, and Los
extreme weather events and slow onset events, such as unusual Angeles has been covered in the California Cap-and-Trade scheme
cyclone/storm and gradual disappearance of low-lying islands, can for GHG emissions since 2012. Tokyo launched city-level Green
hardly be avoided or adapted. Finally, loss and damage is treated as Building Program in 2002, District Plan for Energy Efficiency in
a concept distinct from adaption. Supports and financial resources 2008 and Cap-and-Trade Program in 2010. China has implemented
including the developed parities’ pledge of annual US$100 billion several nation-wide programs for industrial energy efficiency since
2004, and Tianjin, Shanghai, Guangzhou and Shenzhen are major
participants of China's pilot emission trading schemes since 2013.
Although the group of developed coastal cities have progressed
* Corresponding author.
E-mail addresses: subin@nus.edu.sg, subin.nus@gmail.com (B. Su). at different paces, a common pattern is observed from their

http://dx.doi.org/10.1016/j.jclepro.2017.07.206
0959-6526/© 2017 Elsevier Ltd. All rights reserved.
1240 Y. Li, B. Su / Journal of Cleaner Production 165 (2017) 1239e1248

practices-the introduction of market-based solutions or carbon The remaining parts of the paper are organized as follows:
pricing to complement energy efficiency improvement efforts. Section 2 reviews Singapore's climate change mitigation efforts and
Pricing carbon emissions through a tax or emissions trading1 is the literature of carbon pricing studies. Section 3 describes the
seen as an important policy instrument for climate change miti- structure of the CGE model as well as the data and calibration.
gation and has been widely adopted or scheduled by economies Section 4 introduces the scenarios and analyzes the simulation
such as the EU, US, China, Japan and South Korea. Carbon pricing is results and Section 5 summarizes the main conclusions.
considered to be an effective way to encourage a country's in-
dustries, businesses and households to consume energy in the most 2. Singapore's climate change mitigation efforts and
efficient ways and thereby reduce the GHG emissions. In the short literature review
run, it raises the costs of production, thereby jeopardizing firms'
competitiveness and risking jobs. The coastal megacities are usually This section profiles Singapore's climate change mitigation tar-
manufacturing center and/or trade hub due to convenient coastal gets and continuous efforts, geographical features that limit
locations and are thus fairly vulnerable to trade with the outer extensive utilization of renewable energy, strategies proposed for
world as an important link of the regional/global supply chains. climate change mitigation, and concerns over local producers'
Increase in commodity price caused by domestic and overseas competitiveness in international trade. Most of the geographical
carbon costs could significantly affect these economies through limits and competitiveness concerns of Singapore are also faced by
imports and exports. other coastal megacities. An intensive literature review on quanti-
Many studies have quantitatively investigated the influences of tative analysis of carbon pricing and related issues is also provided
carbon pricing for a region, country or state in the literature. Due to based on different topics, with an emphasis on CGE modelling.
lack of sufficient data, there are very few studies on the influence of
carbon pricing at the city level, let alone on a coastal megacity with 2.1. Singapore's climate change mitigation efforts
an eye to its high degree of trade exposure, distinct economic
structure and income level that is far above national average. The Singapore government submitted its Intended National
Obviously, implications and conclusion drawn on studies of an Determined Contribution (INDC) to the United Nations Framework
aggregated economic zone cannot be directly applied or extended Convention on Climate Change (UNFCCC) in July 2015, stating that
to a trade-exposed megacity, even if it is located within that eco- it aims to reduce its emissions intensity by 36% from the 2005 levels
nomic zone. Therefore, this paper intends to use Singapore as a case by 2030 and stabilize its emissions with the aim of peaking around
study to demonstrate situations that are largely common to 2030. As a small island city-state, Singapore contributes around
economically prosperous costal megacities, and also to evaluate the 0.11% of global GHG emissions, and has embarked on policies and
potential impacts and abatement cost of carbon pricing based on a measures to reduce its emissions by 7e11% below the 2020
static Computable General Equilibrium (CGE) framework. In line business-as-usual level since 2009. Its motivations for emissions
with the literature, scenarios of border-carbon-adjustment (BCA) reduction include (a) reducing its vulnerability to the impacts of
externally imposed on Singapore's exports and a domestic carbon climate change, such as increased sea levels, accelerated coastal
tax,2 as well as alternative BCA/tax rates, sector coverages and tax erosion, changed weather patterns and threatened global food
revenue recycling schemes, are investigated. supply chains; (b) preserving economic competitiveness by shifting
The Singapore government has been closely watching the evo- towards a low-carbon economy; and (c) participating in the global
lution of carbon pricing policies implemented around the world, efforts towards combating climate change.
and announced in February 2017 that a carbon tax between S$10 to Singapore's early actions, geographical location and city size,
S$20 per tonne of GHG emissions will be introduced to power however, limit its ability to further reduce emissions. For example,
generation and other large direct emitters from 2019. This paper Singapore strictly controls vehicle emissions through its Vehicle
contributes to the literature as the first study using city-level CGE Quota System and a fuel excise duty levied on vehicles. Natural gas
modelling to quantify the impacts of climate policy on Singapore, has replaced oil in power generation, accounting for more than 95%
one of the coastal megacities that have natural motivation to in the fuel mix. The carbon intensity of electricity generation has
combat climate change but meanwhile need to consider to what already reached a level where there is little opportunity to be
degree and at what cost the economy would be affected by do- reduced further in the short-term (Ang and Su, 2016). Its tropical
mestic or overseas climate policy through trade. The simulation location, relatively flat land and limited land area prevent
results and policy implications thus can not only provide insights Singapore from switching to renewable forms of energy such as
for Singapore's policy makers based on the cost effectiveness of hydro, tidal, wind, nuclear, biomass and solar power. Therefore,
imposing carbon pricing, the average abatement cost for the whole enhancing energy efficiency is necessarily Singapore's core strategy
economy as well as the impacts for each individual sector, but also for emission reduction (Su et al., 2017). Other strategies include
shed lights on what other coastal megacities may be facing but using fiscal and facilitative regulatory tools to address sector-
overlooked and towards what direction they may progress. It is specific barriers, promoting energy conservation and higher R&D
expected that this study could inspire more studies of climate investment in low-carbon technologies and the relatively more
policy at the city level. In addition, this paper also shows that feasible solar energy.
mitigation through market-based solutions could be a cost effective The Singapore government is committed to contributing to-
option compared with technical solutions. wards the global efforts to reduce GHG emissions but is, of course,
highly aware of the country's unique economic circumstances. A
small island state with limited land area and virtually no physical
1
Emissions trading could be in the form of a cap-and-trade scheme, a baseline- resources, it has far fewer export options compared to larger
and-credit program or a rate-based program. Among them, a cap-and-trade scheme countries with multiple types of natural resources. The country's
is most certain to achieve an absolute emission reduction goal. Baseline-and-credit main exporters are almost all inherently large energy consumers,
and rate-based programs award credits for additional emission reductions against
such as Machinery & Transport Equipment, Mineral Fuels Lubri-
certain benchmarks and do not guarantee net reductions. See, e.g. EPA (2003) and
OECD (2004), for more details.
cants & Related Materials, Chemicals & Chemical Products, and
2
Given Singapore's small size, a carbon tax is more feasible to be implemented Miscellaneous Manufactured Articles (Su et al., 2017). During the
than emissions trading. period 2013e2015, more than 92% of Singapore's annual total
 Y. Li, B. Su / Journal of Cleaner Production 165 (2017) 1239e1248 1241

domestic exports belong to these four categories (IE Singapore, designs of scope and coverage (e.g. Liang et al., 2007; Bednar-Friedl
2016). And there have been policy discussions for years in the EU et al., 2012; Fraser and Waschik, 2013), permit allocation methods
and the US on imposing a BCA against commodities from countries (e.g., Edwards and Hutton, 2001; Fischer and Fox, 2007; Paltsev
without comparable climate policy (ACSA, 2007; van Asselt and et al., 2008), recycling schemes for revenues from carbon tax or
Biermann, 2007; Weber and Peters, 2009; van Asselt and Brewer, permit auction (e.g., Liang and Wei, 2012; Allan et al., 2014; Liu and
2010; Monjon and Quirion, 2010, 2011). Obviously, this would Lu, 2015), and links with other carbon markets (e.g., Dellink et al.,
reduce the profit margins of emissions intensive exporters. 2014; Gavard et al., 2016; Zhang et al., 2016a,b), etc.
In 2010, Singapore's Prime Minister made a point of highlighting A firmly related topic with competiveness issue is carbon
the importance of carbon pricing in inducing behavior change leakage, which may occur when increased production cost result-
when speaking at the Singapore International Energy Week. ing from carbon pricing and other climate policies causes migration
Although a carbon price would send the appropriate price signals to of production and investment to countries with laxer or no emis-
limit energy consumption and encourage R&D in energy efficiency, sion constraints. Among other instruments, BCA (in the form of
Singapore government would still need to comprehensively export rebates or/and import tariffs) and output-based rebate to
consider the resulting economic and social impacts, especially for specific industries have received most attention to protect
industrial competitiveness and exports (NCCS, 2012). The INDC emission-intensive and trade exposed industries against com-
emphasizes achieving the mitigation objectives through domestic petiveness loss and also potential carbon leakage (e.g. Babiker and
efforts, but does not explicitly mention carbon pricing. In the Rutherford, 2005; Kuik and Hofkes, 2010; Lennox and van
Climate Action Plan released at the 2016 World Cities Summit, Nieuwkoop, 2010; Rivers, 2010; Bohringer et al., 2012; Fischer
Singapore harped on the same string with respect to the advantage and Fox, 2012; Weitzel et al., 2012; Burniaux et al., 2013; Fan
and uncertainty of carbon pricing, hesitating to progress without et al., 2014, 2015). Besides, some studies also discussed compari-
solid quantitative backup (NCCS, 2016). Finally, introducing a car- son of alternative options for emissions abatement (e.g., NZIER and
bon tax on large direct emitters in 2019 was officially announced by INFORMETRICS, 2009; Sancho, 2010; Alton et al., 2014).
Singapore government in early 2017.
3. The model
2.2. Literature review
The static CGE model developed in this study is based on Sin-
In the literature, issues relating to carbon pricing have been gapore's economic structure and the information available in the
investigated using quantitative methods for individual economies, literature, instead of any specific model. As a highly open economy,
regions and the world. For ex ante studies, CGE models are usually domestic goods and foreign goods are treated as imperfect sub-
used to evaluate the potential impacts of carbon pricing at the macro stitutes in production, consumption and investment. Singapore is a
level (e.g. Bohringer et al., 2009; Saveyn et al., 2011; Guo et al., 2014) resource-poor country that does not have quarrying and mining
while technology-rich sector or energy system models are used to sectors. The economy is divided into 114 non-energy industries and
explore optimal energy, technology and investment pathways/ 3 energy industries (i.e. Refinery, Gas, and Electricity) in simulation,
strategies subject to carbon cost (e.g. Knutsson et al., 2006; Kara which is based on the classifications used in Singapore input-
et al., 2008; Enerdata, 2014). Econometric models are usually output (I-O) Tables. For ease of explanation, when reporting the
employed to analyze ex post impacts, the determinants of carbon simulation results, the 114 non-energy industries are grouped into
prices and for forecasting (e.g. Chevallier, 2011; Aatola et al., 2013; nine sectors, i.e. Agriculture, Petrochemicals, Pharmaceuticals,
Byun and Cho, 2013). Technology-rich models or technical details Semiconductors, Other Manufacturing, Construction, Wholesale &
are sometimes integrated with CGE models to enable macroeco- Retail Trade, Land Transport, and Other Services. Each industry is
nomic analysis with bottom-up feedbacks (e.g. Betz and Owen, assumed to have one representative producer, and similarly, the
2010; Sceia et al., 2012; Fujimori et al., 2014). economy has one representative household, which provides capital
Since the work by Johansen (1960), CGE models have been and labor to the producers. Both households and producers have to
widely used to support policy analysis in areas such as taxation, pay various taxes to the government.
international trade, market reform, technology spillover, regional
cooperation, energy and environment, and so on (e.g., Ballard et al.,
3.1. Model specification
1985; McKibbin and Sachs, 1991; Kunneke and Voogt, 1997; Hosoe,
2006; Dixon, 2008; Hubler, 2011; Perali et al., 2012; Parrado and De
Fig. 1 illustrates the nested production structure for any sector j
Cian, 2014; Cabalu et al., 2015; Yu et al., 2015). The first CGE study
(see Eqs. A1-A6 in Appendix A). Primary factor inputs, capital and
on energy related issues is Hudson and Jorgenson (1975), who
labor are combined first.3 Two factor inputs are assumed to be fully
assess the likely impacts of a US energy tax program. It is as late as
mobile across the sectors. The capital-labor input is then aggregated
the early 1990s that CGE models started to be an important tool in
with energy input, a combination of fossil fuel and electricity, to form
analyzing energy and environmental issues. According to a recent
the capital-labor-energy input. The fossil fuel input is an aggregate of
survey by Zhang et al. (2016a) CGE model is the leading method-
i varieties of fossil fuels, and each variety comprises both domesti-
ology used to analyze carbon tax.
cally processed and imported products. Similarly, non-energy in-
Theoretically, imposing a carbon price on emissions incurs extra
termediate input is an aggregate of h varieties of composited non-
costs to producers and thus hinders the whole economy through
energy products. All the compositions/aggregations above follow a
supply chains. CGE simulations help to quantify the impacts of
constant elasticity of substitution (CES) function.
carbon pricing on GDP, household consumption, government con-
The gross output is, however, a Leontief composite of the
sumption, investment, outputs and exports at sector level, emis-
capital-labor-energy input and non-energy intermediate input. At
sions reduction, etc. (e.g. Babiker, 2005; Allen Consulting Group,
each level of the production structure, the firm maximizes profits
2006; Chan et al., 2012). Broadly, how to alleviate the welfare loss
of households and protect the competitiveness of domestic in-
dustries through sound policy designs are two important issues 3
Land is not included as one type of primary factors in the model as agriculture
explored in the strand of CGE literature on carbon pricing. In the is negligible in Singapore and the sector is not further broken down into sub-
literature, many studies have discussed alternative mechanism sectors.
1242 Y. Li, B. Su / Journal of Cleaner Production 165 (2017) 1239e1248

Export
Commodity j Commodity j

Gross Output j

Capital-Labor-Energy Intermediate Input

Intermediate … Intermediate
Energy Capital-Labor
1 h

Imported Imported
Fossil Fuel Electricity Capital Labor
Commodity 1 Commodity 1 Commodity h Commodity h

...
Fossil 1 Fossil i

Imported Imported
Fossil 1 Fossil 1 Fossil i Fossil i

Fig. 1. Production structure of sector j.

(i.e. revenue minus costs for factor inputs, intermediate inputs and assumed to maximize household utility subject to budget
taxes, etc.) subject to production technology. Domestic carbon tax constraint. Consumption of aggregated commodities at the upper
on direct emissions is introduced to the producer's profit function level and consumption of domestic and imported commodity for
for gross output production as an additional type of production each variety at the lower level are determined following a two-level
cost. To supply in different markets, the gross output is transformed nested CES function (see Eqs. A7-A8 in Appendix A).
into domestic commodities and export commodities using a con- Government revenues are mainly from tax collection. According
stant elasticity of transformation (CET) function. Border-carbon to the data, taxes in the model include (1) labor income tax, (2)
adjustment (BCA) on direct and indirect emissions embodied in capital income tax, (3) production tax on gross output, (4) import
the exports is collected by foreign countries, so it is modelled as an duty on final consumption and investment and (5) sale tax on final
additional type of transformation cost in the producer's profit consumption and investment. Tax revenues and non-tax payments
function for gross output transformation. Similar to production, the from households allow the government to spend on commodities,
firm also aims to maximize profit at this step subject to trans- save for development/infrastructure investment, and also make
formation function. transfer payments to households and the ROW. Based on Singa-
The major sources of household income are payment for capital pore's I-O Tables, government does not directly consume imported
and labor supplied and transfer payment from the government. commodities. Total government consumption is assumed to be a
After paying income taxes, the household uses disposable income composition of domestic commodities based on a Cobb-Douglas
on consumption of commodities, savings, non-tax payments to the function, implying a fixed proportion for each commodity in total
government, and transfer payments/remittance to the rest of the government consumption (see Eq. A9 in Appendix A).
world (ROW). The household consumption structure is shown in Household savings, government savings and foreign savings are
Fig. 2, where the total household consumption on the top is assumed to be entirely used for investment. Investment on com-
modities is based on a Cobb-Douglas function like government
consumption, but substitution between domestic and imported
Household products follows a CES function for each commodity j (see Eqs. A10-
A11 in Appendix A). In addition to market-clear conditions for
commodities, labor and capital, several other assumptions are
made to close the model: (1) saving rates are exogenous for the
household and the government, (2) prices of imports are exogenous
Commodity 1 … Commodity j to Singapore, but prices of exports change in pace with prices of
gross outputs (BCA scenarios) or prices of gross outputs net of
carbon costs (carbon tax scenarios) in corresponding sectors,4 and

Imported Imported
Commodity 1 Commodity 1 Commodity j Commodity j 4
As a trading hub, logistics hub, financial center and global leader of many in-
dustries, Singapore has some degree of pricing power in the international market,
Fig. 2. Household consumption structure. especially in regional trade.
 Y. Li, B. Su / Journal of Cleaner Production 165 (2017) 1239e1248 1243

Table 1
Scenario assumptions.

Scenario 1 Border-Carbon-Adjustment on Singapore's exports (BCA)

Scenario 2 (a) Carbon tax on Energy sectors (C_E)
(b) Carbon tax on Energy, Manufacturing & Land Transport sectors (C_EMT)
Scenario 3 (a) Carbon tax on Energy sectors with tax revenue recycled to Households (C_E_H)
(b) Carbon tax on Energy, Manufacturing & Land Transport sectors with tax revenue recycled to Households (C_EMT_H)
Scenario 4 (a) Carbon tax on Energy sectors with tax revenue recycled to Firms (C_E_F)
(b) Carbon tax on Energy, Manufacturing & Land Transport sectors with tax revenue recycled to Firms (C_EMT_F)

(3) foreign savings are fixed while the exchange rate is floating. 91% of total CO2 emissions from fossil fuel combustion are priced.
Scenarios 3 and 4 discuss whether the negative economic impacts
caused by a carbon tax could be alleviated if the government re-
3.2. Data and calibration
funds the collected tax revenue to households through a lump-sum
transfer and to firms through rebates based on their outputs in the
A social accounting matrix (SAM) is constructed according to the
baseline year, respectively.
framework presented in Section 3.1. Most data used were taken
Generally, a carbon price affects the energy intensive sectors
from Singapore's 2010 I-O Tables (DOS, 2014) and Yearbooks of
more significantly than the non-energy intensive sectors. The re-
Statistics Singapore (DOS, 2010). Although Singapore is an impor-
sources (i.e. capital and labor) tend to flow towards the non-energy
tant port for re-exports, only domestic exports are included in
intensive sectors, which make the energy intensive sectors dete-
Singapore's I-O Tables (Su and Ang, 2013). Energy data such as
riorate further and the non-energy intensive sectors recover to
sectoral consumption of fossil fuels were obtained from various
some degrees. The service sectors are overall not energy-intensive,
sources,5 and emission factors used in the calculation of CO2
but the demand for services as intermediate inputs and final goods
emissions from combustion follow the IPCC (2006) guidelines. The
would reduce if the rest of the economy sinks into production
“Data Treatment Scheme 2” proposed in Su et al. (2010) was used to
reduction. Thus the impacts of a carbon price on the service sectors
disaggregate the energy consumption data to match the detailed I-
could be quite uncertain, depending on the relative magnitude of
O classifications. The result shows that power sector accounts for
the positive resource relocation effect and the negative demand
about 47% of the CO2 emissions from primary energy consumption,
effect. Exchange rate depreciates in both BCA and carbon tax sce-
industry 31% and land transport 11% in 2010 (Su et al., 2017). Most
narios. The economic intuition is that, when exports become more
parameter values used in the simulation, such as tax rates and
expensive stemming from higher production costs, certain degrees
saving rates, were calibrated on the basis of the SAM, but elasticities
of exchange rate depreciation could help retain international
of substitution/transformation in production, consumption and
competitiveness of the country's commodities and/or profit mar-
investment functions were set in line with those in the MIT EPPA
gins of exporters in domestic currency.
model (Paltsev et al., 2005) and the GTAP model (Huff et al., 1997).
Singapore is a top export refining center and a global leader in
So far there is no agreement in the literature on an optimal
industries, such as semiconductors, oil rigs and oilfield machinery,
carbon price. While carbon prices in models are usually set at a high
petrochemicals, marine and aviation maintenances and repairs.
level, such as US$100 in Rivers (2010) and US$59e73 in Burniaux
However, service sectors have become increasingly important over
et al. (2013), the trading price of a CO2 emission permit is quite
the last two decades, which contributes to about two thirds of the
low in carbon markets. For example, the European Emission
GDP and 70% of the employment. So the impacts of a carbon price
Allowance at the European Energy Exchange has been traded at
on the service sectors are expected to dominate or significantly
3e9 Euros for more than 3 years, and the California Carbon
influence its impacts at macro level. Simulated changes in GDP,
Allowance at the Intercontinental Exchange has been auctioned at
total exports, total imports, household consumption, government
less than US$14 since late 2013. As the carbon tax to be imposed on
consumption and energy-related CO2 emissions are shown in
large direct emitters in Singapore starts at S$10 per tonne of GHG
Table 2. Based on model settings, changes in gross outputs and
emissions, a rate of S$10 per tonne of CO2 (short for “S$/t-CO2”
exports at the sector level would be consistent, i.e. exports would
henceforth) was adopted as the benchmark carbon price on emis-
not increase if gross outputs decrease. To save space, only changes
sions from fossil fuel combustion in this paper.
in sectoral exports are given in Table 3.6

4. Scenarios and results

4.1. Impacts of BCA at different rates
Table 1 summarizes the scenarios studied in this paper. Scenario
1 assumed that the ROW imposes BCA on Singapore's exports and The first three columns of Table 2 show the impacts of BCA at
Singapore exporters bear the cost. Both direct carbon emissions S$10, S$20, S$30 and S$60/t-CO2, which are equivalent to around
from fossil fuel inputs and indirect carbon emissions from elec- US$7, US$14, US$21 and US$42/t-CO2, respectively. As expected, the
tricity inputs are taxed. Following this criteria, around 44% of Sin- carbon cost hinders the economy and all macroeconomic indicators
gapore's energy-related emissions in 2010 are directly embodied in drop. The decline in real GDP expands from 0.12% to 0.84% when the
exports and subject to BCA. Scenario 2 assumes that Singapore BCA rate increases from S$10/t-CO2 to S$60/t-CO2. Total imports
imposes an equivalent carbon tax on domestic gross outputs. Two generally fall more than total exports. One reason is that the 117
sub-scenarios were tested: carbon tax on energy sectors, implying industries, which are affected quite differently by BCA, have diverse
that approximately 66% of total CO2 emissions from fossil fuel demands for imported commodities as intermediate inputs. For
combustion are subject to carbon cost, and carbon tax on energy, example, the refinery depends on imported crude oil, and con-
manufacturing and land transport sectors, implying that more than tributes to 0.85% out of 2.33% decline in total imports when BCA

5 6
Detailed energy data sources can be found in Su et al. (2017). All sector level simulation results are available upon request.
1244 Y. Li, B. Su / Journal of Cleaner Production 165 (2017) 1239e1248

Table 2
Macro impacts of BCA and carbon tax (%).

BCA(S$/t-CO2) Carbon tax of S$10/t-CO2

S$10 S$20 S$30 S$60 C_E C_E_H C_E_F C_EMT C_EMT_H C_EMT_F

GDP
0.12
0.25
0.39
0.84
0.03
0.03
0.03
0.07
0.06
0.06
Total Exports
0.53
0.99
1.39
2.35
0.41
0.39
0.36
0.55
0.52
0.48
Total Imports
2.33
4.45
6.39
11.41
0.88
0.85
0.81
1.53
1.48
1.43
Household Consumption
1.18
2.29
3.34
6.19
0.37
0.26
0.29
0.75
0.59
0.62
Government Consumption
1.06
2.06
3.01
5.65 0.35
0.24
0.20 0.28
0.54
0.48
Emissions
2.21
4.16
5.92
10.25
1.72
1.70
1.64
2.74
2.70
2.63
Average Abatement Cost (S$/t-CO2) 399 439 478 591 139 111 120 184 160 169

Note: E ¼ Energy, M ¼ Manufacturing, T ¼ Land Transport, H ¼ Tax recycled to Household, and F ¼ Tax recycled to Firms.

Table 3
Impacts of BCA and carbon tax on sectoral exports (%).

BCA(S$/t-CO2) Carbon tax of S$10/t-CO2

S$10 S$20 S$30 S$60 C_E C_E_H C_E_F C_EMT C_EMT_H C_EMT_F

Refinery
6.72
12.62
17.85
30.49
5.13
5.10
4.99
6.34
6.30
6.15
Petrochemicals
3.93
7.50
10.78
19.18
0.53
0.53
0.41
3.64
3.64
3.48
Pharmaceuticals 2.14 4.16 6.10 11.51 0.82 0.70 0.67 1.55 1.39 1.34
Semiconductors 1.05 2.01 2.90 5.24 0.62 0.65 0.76 1.31 1.35 1.51
Other Manufacturing 0.04 0.03
0.02
0.37 0.09 0.12 0.15
0.01 0.02 0.06
Wholesale & Retail trade
0.09
0.16
0.21
0.29
0.23
0.19
0.18
0.20
0.14
0.13
Other services 0.35 0.68 0.98 1.80 0.11 0.09 0.08 0.25 0.22 0.21

Note: E ¼ Energy, M ¼ Manufacturing, T ¼ Land Transport, H ¼ Tax recycled to Household, and F ¼ Tax recycled to Firms. Agriculture, Construction, Land Transport, Electricity
and Gas are omitted because these sector have limited exports.

rate is S$10/t-CO2. Another reason is that imported commodities implementation of an equivalent domestic carbon tax tends to
are also directly consumed and invested. Lower aggregate income affect the economy less in all scenarios and make a greater
leads to decrease in overall consumption and investment (of both contribution to emission reduction if the carbon tax is imposed on
domestic and imported commodities). Similarly, with lower tax the energy, manufacturing and land transport sectors. For example,
revenue, the government spends less. The reduction in carbon GDP decreases by 0.12% in the BCA scenario, but by only 0.03% and
emissions is moderate, at 2.21% and 4.16%, when the BCA rate is 0.07% in two carbon tax sub-scenarios (Scenario 2a and 2b). Intu-
S$10/t-CO2 and S$20/t-CO2 respectively. But the reduction becomes itively, instead of paying BCA to foreign countries, the carbon tax
very impressive, at 5.92% and 10.25%, when the BCA rate increases revenue is still within the country and is used for government
to S$30/t-CO2 and S$60/t-CO2 respectively. As expected, it would be consumption or savings/investment. In Singapore, the government
more costly to further reduce more emissions. Average abatement consumption mainly lies in high value-added domestic service
cost, which is defined as the decline in real GDP per tonne of carbon activities such as public administration, defense and education.
emissions reduction in this paper, increases from S$399/t-CO2 to Greater emission reduction in the carbon tax scenario is mainly due
S$591/t-CO2 along with the increase in BCA rate. to the fact that BCA is only applied to emissions from fossil fuel
In Table 3, changes in sectoral exports vary across sectors, which combustion and power generation directly for the production of
depends on both sectoral emission intensities and their positions exports. Emissions such as those embodied in domestic interme-
along the supply chain. Among the sectors, Petrochemicals is most diate inputs and final consumption are not covered by BCA. In
emission intensive and would be significantly affected by BCA-the addition to greater reduction, the emissions are reduced at a much
2nd largest loser at all simulated rates. Refinery is the sector that lower cost than paying BCA, with average abatement cost at S$139/
would suffer most from BCA and experience the largest declines in t-CO2 in Scenario 2a and S$184/t-CO2 in Scenarios 2b.
exports. The reason is that Petrochemicals uses petroleum products Changes in sectoral exports have similar patterns in two carbon
as major intermediate inputs, so Refinery would be affected by BCA tax sub-scenarios, but show some differences compared with the
directly due to its high emission intensity and indirectly via Pet- BCA scenario. Generally, a carbon tax increases the electricity price
rochemicals. Singapore's manufacturing industries such as Phar- and effective prices of oil and gas. So almost all sectors are affected
maceuticals and Semiconductors are much less energy intensive except for Pharmaceuticals, Semiconductors and Other Services.
and thus would benefit from BCA due to resource relocation, the Pharmaceuticals and Semiconductors are non-energy intensive
positive effect from which dominates the potential negative de- sectors, while Other Services expands mainly due to increased
mand effect stemming from decrease in intermediate demand by expenditure from the government. When the carbon tax is
other sectors and final demand. For Other Manufacturing, the extended to manufacturing and land transport (Scenario 2b), sec-
positive effect from resource relocation would only dominate when tors such as Petrochemicals, Other Manufacturing and Land
the BCA rate is low. Wholesale & Retail Trade would shrink along Transport are directly affected and show worse performances than
with the economy and trade, while Other Services would benefit in Scenario 2a. Refinery, as important intermediate input supplier
from resource relocation from energy-intensive sectors and display of sectors such as Petrochemicals and Land Transport, would
an expansion. consequently be further deteriorated. On the other hand, the rela-
tively less energy intensive sectors such as Pharmaceuticals and
4.2. Impacts of carbon tax with different sector coverage Semiconductors would perform better due to increased resource
relocation from other sectors. Wholesale & Retail Trade is almost
In Table 3, compared with paying BCA at S$10/t-CO2, the unchanged in these two sub-scenarios. And higher carbon tax
 Y. Li, B. Su / Journal of Cleaner Production 165 (2017) 1239e1248 1245

revenue from a broader tax base allows higher government con- on Singapore of paying BCA and of introducing a domestic carbon
sumption and further expansion of Other Services. Compared with tax with alternative sector coverages and tax revenue recycling
paying BCA, a domestic carbon tax affects the production costs of all schemes.
the gross outputs directly or/and indirectly, which changes the The comparisons between the BCA scenario and the carbon tax
pattern of resource relocation and makes sectors such as Refinery scenarios are performed at the price of S$10/t-CO2. Based on the
and Petrochemicals better off. simulation results, a domestic carbon tax generally leads to smaller
declines in GDP, total exports, imports, household consumption
4.3. Effectiveness of recycling carbon tax revenue and government consumption, especially when only energy sectors
are covered. Total exports are only slightly more affected in the
Recycling carbon tax revenue scenarios were designed to carbon tax scenarios when energy, manufacturing and land trans-
explore whether the distortion caused by the carbon tax can be port sectors are all covered and the tax revenue is not recycled.
reduced through a properly designed revenue recycling scheme. Emissions reduction in the BCA scenario is ranked in the middle,
The simulation results of Scenario 3 in Tables 2 and 3 generally higher than those in carbon tax on energy sector scenarios but
show that recycling tax revenue to the household through a lump- lower than those in other carbon tax scenarios. Paying BCA turns
sum transfer would reduce the distortion caused by carbon tax. The out to be the most expensive option, with the highest average
impacts of carbon tax on GDP, total exports and total imports are abatement cost at S$399/t-CO2. Average abatement cost in carbon
almost unchanged or slightly smaller compared to Scenario 2. With tax scenarios ranges from S$111 to S$184 per tonne of emissions
additional income from transfer payment of carbon tax revenue, reduction, which is more acceptable and consistent with other
the decrease in household consumption is much smaller than that countries’ experience. For example, Fischedick et al. (2011)
of Scenario 2. reviewed global, regional and national supply curves of renew-
Government consumption declines in Scenarios 3 as tax base able energy and carbon abatement cost curves of mitigation pack-
reduce in line with the economy and extra revenue from carbon tax ages, and showed that most abatement costs are under US$200/t-
is recycled to the household. Emissions reduction is smaller than in CO2 at different levels of mitigation target or potentials. In this
Scenario 2, but average abatement cost displays an obvious drop sense, carbon tax could be considered as a cost-effective option to
from S$139/t-CO2 and S$184/t-CO2 to S$111/t-CO2 and S$160/t-CO2 complement energy efficiency policy in Singapore.
in Scenario 2a and 2b respectively. Sectoral exports are almost At sector level, BCA and domestic carbon tax tend to influence
identical with and without refunding to the household. Small dif- the sectors in similar patterns, but to different degrees. Generally,
ferences are induced by different structures of household con- resource relocation arising from carbon pricing would be more
sumption and government consumption. Generally, the revenue moderate in the carbon tax scenarios, and the changes in sectoral
recycling scheme in Scenario 3 helped only to alleviate opposition exports are thus smaller. For the energy intensive and trade
from households, as transfer payments cannot create much value in exposed sectors such as Refinery and Petrochemicals, the negative
real terms. impacts of BCA and domestic carbon tax are quite similar. With
In Scenario 4, carbon tax revenue is entirely refunded to pro- more countries introducing carbon pricing policy and potential
ducers according to their baseline outputs in 2010, regardless of pressure from paying BCA, the simulation results suggest that a
whether the sector is subject to carbon tax or not. The refund thus domestic carbon tax may not trigger relocation of these sectors
offsets the burden of carbon tax for covered sectors, and serves as a away from Singapore. The remaining three major manufacturing
subsidy for sectors that are not subject to a carbon tax. The simu- sectors (i.e. Pharmaceuticals, Semiconductors and Other
lation results for Scenario 4 show that the impacts of carbon tax on Manufacturing) and Other Services overall benefit from carbon
GDP, total exports, total imports, household consumption and pricing, and thus it is very likely that they would not oppose a
emissions reduction are smaller than those without recycling domestic carbon tax after effective communication. Wholesale &
(Scenario 2) or a lump-sum refund to the household (Scenario 3). Retail Trade would be moderately affected by both BCA and do-
The decline in government consumption is also smaller than in mestic carbon tax, even after the carbon tax revenue is refunded to
Scenario 3. That is, recycling carbon tax revenue to producers is producers. Therefore, a more properly design of recycling scheme is
better in economic sense but worse in terms of climate change needed to address the potential opposition.
mitigation. Although higher than that in Scenario 3, average Without an absolute reduction target, an optimal carbon tax rate
abatement cost in Scenario 4 is still lower than that in Scenario 2. cannot be suggested in this study. A domestic carbon tax of S$10/t-
The changes in sectoral exports have slightly larger magnitudes CO2, which is proposed by the Singapore government and also close
than in Scenario 2 and Scenario 3 due to the impact of output-based to prevailing allowance prices in worldwide carbon markets, can
refund on resource relocation, but the direction (i.e. expansion or reduce Singapore's energy-related emissions by 1.6e2.7% below
deterioration) are the same. the baseline 2010 level in the simulations. Further emission re-
ductions through an even higher carbon price would be at the cost
5. Discussion and conclusions of greater economic distortions. Therefore, having a well-designed
carbon tax revenue recycling scheme that can alleviate the negative
The Singapore government appreciates market-based solutions impacts of carbon costs and gain industrial and public acceptance is
to mitigate climate change. It is proud of its status as one of the particularly important. For example, recycling part of the tax rev-
most pro-business, open cities in the world, and proud to be a enue to promote investment in RD&D of low-carbon technologies,
policy leader in many aspects of government policy, spanning adoption of energy efficient technologies, import of renewable
everything from education and law to health, housing and sus- energies from overseas, and upgrade of public transport systems
tainable development. Specifically, it would like to play a key role in proves workable in many countries and is in line with Singapore's
developing carbon reduction policies for small jurisdictions, INDC.
notably, small island states which have high per capita emissions. Distinct from most existing studies that analyze climate policy
Additionally, maintaining the status quo exposes Singapore to the mainly at region and national level, this is a city-level CGE analysis
risk of paying BCA for its exports to countries with carbon pricing using Singapore as a case study. In recent years, there has been a
policies. Therefore, aiming to shed some light on this policy issue, demand driven trend to conduct studies at more disaggregated
this paper uses a static CGE model to evaluate the potential impacts level, accompanied by the phenomenon that many developed
1246 Y. Li, B. Su / Journal of Cleaner Production 165 (2017) 1239e1248

megacities put efforts into developing city I-O tables. Most of these

r r
1
developed megacities are located on the coastline or next to the r
Ej ¼ aE;j lF;j Fj E;j þ lELC;j ELCj E;j E;j (A3)
coast (such as Beijing and Shanghai), and rely heavily on imports
and exports of commodities with foreign countries and the rest of
where aE;j is the scaling coefficient of Ej input production, lF;j and
the nation. Except for Singapore which is a city state, other coastal
lELC;j are the input share coefficients that sum up to 1, and
developed megacities face challenges from both foreign suppliers
and domestic competitors outside the city. As a result, it is essential sE;j ¼ 1
1r is the elasticity of substitution between the fossil fuel
E;j

for the city government to understand the potential impacts of input and electricity.
local, domestic and overseas policies on the particular city. Analysis Then the capital-labor input and energy input are combined into
of carbon pricing impact for Singapore in this paper is expected to the capital-labor-energy input (KLEj ) following a CES function:
encourage more efforts for database development and energy/

r r
 1
climate policy studies at the city level. r
KLEj ¼ aKLE;j lKL;j KLj KLE;j þ lE;j Ej KLE;j KLE;j (A4)
Last, the analysis in this paper is based on a single-region CGE
framework that cannot incorporate the interactions of Singapore
where aKLE;j is the scaling coefficient of KLEj input production, lKL;j
with its major trade partners and competitors in the international
markets. And the model setting implicitly assumes that exports to and lE;j are the input share coefficients that sum up to 1, and sKLE;j ¼
all foreign countries are subject to BCA. So the future work is to 1 is the elasticity of substitution between the capital-labor
1
rKLE;j
build a multi-region CGE model that covers Singapore and its major
input and energy input.
trade partners such as other ASEAN countries, the EU, US, China,
Finally, h non-energy intermediate inputs (INj ) and the capital-
Japan, South Korea and others. The multi-region framework will
labor-energy input are aggregated into gross output following a
not only provide more precise insights for Singapore's producers
Leontief function:
and policy-makers, but also contribute to regional policy analysis.
With the establishment of the ASEAN Economic Community in !
IN1;j IN2;j INh;j KLEj
2015, the region is supposed to be more integrated both econom- Yj ¼ min ; ; /; ; (A5)
ically and politically, which implies great potential for more 41;j 42;j 4h;j 4KLE;j
intensive regional cooperation. Among others, an EU type multi-
state emissions trading scheme could be a good choice for the where 4h;j and 4KLE;j are the input requirement coefficients of the
ASEAN region to collectively combat climate change. h-th non-energy intermediate input and the capital-labor-energy
input for a unit output of Yj , respectively. Each individual non-
energy intermediate input is a CES composite of domestic and
imported commodities of the same variety.
Appendix A. Key model specifications The gross output is transformed into domestic commodities (Dj )
and export commodities (Xj ) using a constant elasticity of trans-
1. Production activity formation (CET) function:

r r
1
The gross output of sector j (Yj ) is produced following a multi- r
Yj ¼ aY;j bD;j Dj Y;j þ bX;j Xj Y;j Y;j (A6)
level nested production structure. At each level of the production
structure, the firm maximizes profits (i.e. revenue minus costs for
factor inputs, intermediate inputs and taxes, etc.) subject to pro- where aY;j is the scaling coefficient of the transformation, bD;j and
duction technology. bX;j are respectively the output share coefficients of the domestic
Capital (Kj ) and labor (Lj ) are combined first into a capital-labor and export commodities that sum up to 1, and sY;j ¼ r 1
1 is the
Y;j

input (KLj ) following a constant elasticity of substitution (CES) elasticity of transformation for gross output j.
function:

r r
 1 2. Household
r
KLj ¼ aKL;j lK;j Kj KL;j þ lL;j Lj KL;j KL;j (A1)
Household income are mainly from payments for factor inputs
where aKL;j is the scaling coefficient of KLj input production, lK;j and and transfer payment from the government. The disposable income
lL;j are respectively the input share coefficients of capital and labor (i.e. net of income tax) is then used on consumption of commod-
that sum up to 1, and sKL;j ¼ 1
1r is the elasticity of substitution ities, savings, non-tax payments to the government and transfer
KL;j
between capital and labor. payment to the rest of the world. The representative household is
In Singapore, two types of fossil fuel are used: petroleum (PLj ) assumed to maximize its utility from total consumption (C) subject
and natural gas (NGj ). Both inputs are CES aggregates of domesti- to budget constraint.
cally processed and directly imported products, and are further For each variety of commodity except for electricity, the
composited into the fossil fuel input (Fj ) using a CES function: household have both domestic and imported choices. So the con-
sumption of each commodity (Ci ) is a CES composite of consump-

r r
1 tion of domestic commodity (DCi ) and consumption of imported
r
Fj ¼ aF;j lPL;j PLj F;j þ lNG;j NGj F;j F;j (A2) commodity (MCi ):

where aF;j is the scaling coefficient of Fj input production, lPL;j and 0 1g gC;i
1
C;i

lNG;j are the input share coefficients that sum up to 1, and B g1 gC;i
1 1
gC;i
1
C
B C;i gC;i gC;i gC;i C
sF;j ¼ 1
1rF;j is the elasticity of substitution between the petroleum Ci ¼ BuDC;i DCi þ uMC;i MCi C (A7)
@ A
input and natural gas input.
The total energy input (Ej ) is a CES composite of the fossil fuel
input and electricity (ELCj ): where uDC;i and uMC;i are respectively the consumption share
 Y. Li, B. Su / Journal of Cleaner Production 165 (2017) 1239e1248 1247

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