As we move from 2023 into 2024, Goods & Services Tax (GST) in Singapore will rise by another 1%. Given the prevailing rate is 8%, the 1% rate increase is actually a 12.5% increase in the consumption tax. No doubt companies will try to convince you to buy stuff before 31 December 2023 to benefit from the lower GST, rather than wait till next year. And if we were to project this logic forward, knowing that GST might eventually be 10%, there is a question of whether we should bring forward some of our purchases even more.
This is more of a psychological trick than anything. Take for example, your interest in an iPhone that may cost you $1000. Buying it before end of the year will save you $10 at the most because of the 1% additional GST that you will need to pay next year. That is hardly a ‘discount’.
Let’s say you got 10% discount from a Black Friday sale instead. Would it compel you to change to a new model rather than stick to your old one? You might. But what if instead of using your existing phone for 1 additional year (eg. 3 years instead of 2 years). If your original phone was also costing $1000, you’d effectively get a discount of 33% just by using it for 1 additional year. Obviously, it goes down if your base time length is longer.
But you get my drift. The biggest discount is when you can use your goods for longer and get more life out of it. There is no point chasing after lower prices of new goods upfront if you keep replacing them quickly. This is an element where sustainability on the consumer end actually lines up with economics but the challenge is psychology.
As we try to navigate the climate transition, we are working within a framework of incentives and economic structure where incentives are sometimes mis-aligned to driving climate-positive behaviours. Not just climate but sustainability overall. Waste management represents one of the more problematic area. In many situations, the cost of waste management is pretty much socialised with the cost spread out across a large number of people while the economic benefits accrued by only some. Take electronic waste without proper framework in place for disposal and attribution of responsibility to producers, the society bears the overall cost of managing these difficult waste while the benefits are borne only by the users (especially those who are replacing devices extremely often, and the producers who are selling electronic products.
By incorporating producer responsibility, the cost of disposal and waste management should preferably be priced upfront to customers so that they are paying for the lifecycle cost.
The same should be done for various product packaging. After all, the producers are typically the ones responsible for handling the packaging in the first place so it won’t be too bad for them to take on the responsibility. They can then put the cost into the price tag of the users, who would then be the ones paying for those goods that require the particular packaging. The thing about packaging materials and electronic waste is that they have value as recycled materials anyways – which means that if the ‘disposal’ logistics cost can be at least in part offset through the value recovered from aggregation of these materials, it is a win-win.
What about food waste? Food waste should not be the responsibility of the producers since it is the consumers who determine the level of waste based on how much they purchase and eventually consume. Likewise, those in-between the value chain from farm to table would also be responsible for some of the food waste through their utilisation of the ingredients. The way to make them responsible for the disposal cost is to allow only specific channels of disposing food waste and pricing it properly. The cost of disposing food waste will necessarily be the logistics involved, and then offset against whatever residual value the food waste can generate. What kind of residual value is there? After all, food waste cannot be used to remanufactured food (unlike cardboard whose fibre can be used for recycled paper, or e-waste where the extracted metals can be turned back into materials to produce new products).
Food waste can be turned into energy through anaerobic digestion. And the process will generate methane that can be used as a fuel. The fuel potentially displaces fossil fuel and emits biogenic carbon dioxide in the short carbon cycle. Of course, there are plenty of other biofuels that can also be produced from food waste. If we start putting a value on the food waste, does it mean more of such waste would be produced? It is quite unlikely since the value will probably represent some kind of residual value from the primary use of the food. Yet we find CEO of multi-national company Lufthansa thinking otherwise.
The challenge we have today is that the incentives around recovery of residual value from waste. We will need to redesign how we are able to extract residual value, offset against the disposal costs. We will also need to ensure disposal costs are properly priced and applied to the right parties responsible for the waste generation. We need to set up incentives such that waste is properly sorted and pushed into various streams. The cost of mixed-stream convenience needs to be costed to reflect the cost of sorting.
There’s a lot of work ahead. We need people to get on to them.
There was a recent piece on Eco Business about Singapore’s packaging recycling scheme being delayed and how the polluter-pays principle seems to have failed to take hold in this particular situation. It was partly because of a speech by an activist in the recent SG Climate Rally.
The principle of polluter-pays is important because it helps to internalise the social cost of pollution and allows the market to price it in correctly. The result would be that the production and eventual consumption of the relevant goods stays at the level which is socially optimum.
Product packaging is itself a massive problem where it is clear certain social costs of the waste production is not properly internalised. The fact that supply chains are such that buying a new product is cheaper than the refill version, and the fact that massive amounts of materials are used in packaging without producers having to foot the cost of disposal, seems to be an issue. But the situation is also because waste management is not properly priced. Today, in Singapore, the amount of cost you shoulder for waste disposal is based on where you live and the type of dwelling you live in rather than the amount of waste you generate. This in itself is already not exactly adhering to the polluter-pay principle.
Creating a plastic bottle or aluminum can refund scheme would also jack up the cost of the products but sometimes we forget who are actually the polluters. The ultimate polluters are still the consumers and in making our purchase decisions, if we recognise the cost to the environment and decide that accordingly, it changes the dynamics of the situation and allows the producers to ‘suffer’ the cost from the lack of demand despite the low-ish prices. But that still doesn’t produce a very reliable signal in the marketplace. And that’s why it makes sense to properly ‘tax’ the producers or the consumers somehow to get the market back in line.
As it turns out, the identification of the polluter does not matter much. What matters is that the associated product gets the pollution priced in somehow. You can charge even the shops that are stocking the products. The reason is that the cost will reverberate through the supply chain; the higher price will result in less customers buying it, sending a demand signal that reduces the orders and stocking by the shop, who will order less from their suppliers and so on. Eventually, at the default price point the producer will realise the market isn’t taking as much of the product that they are producing hence reducing their production and hopefully the pollution as well.
The tricky issue is pricing the pollution and getting a sense of how much the marginal reduction in production could reduce the pollution. This is tricky because the average pollution per product isn’t the same as the marginal pollution. And indeed you may have to curb consumption/production very drastically in order to reduce a bit of pollution if there is significant non-linearity involved. I won’t go into the mathematics here but suffice to say, there is reluctance to tinker too much with the pricing of more ‘ordinary’ consumer goods in Singapore. And it might be a shame for sustainability.
There are certainly some positive self-fulfilling prophecies in life, and they represent positive cycles in life that we can do more to encourage and harness. Students who have teachers believing in them tend to end up doing better than if they were left on their own; encouragement matters, and more importantly, the social dimension of love and nurturing has an impact on the learning outcomes of students. That is an input for teachers beyond pedagogy, but are we training teachers to believe in their students?
The industrial system works best when we can identify success factors and then invest in them to keep those positive feedback loops in the system. The tricky part is how the industrial system seeks to interact with that ‘scientific management’ koolaid about measurability and creating metrics and indicators. As a result, some of those success factors that are strictly unmeasurable get left out. After all, how do you make sure that a teacher can ‘believe’ in the students evenly in the class? But that question, which is precisely what standardisation and industrialism are based upon, misses the point.
Some of these unmeasurable success factors can generate power feedback loops. Consider the culture of graciousness in a workplace, gentleness, kindness, patience. Just because we cannot correlate the attributes with outcomes doesn’t mean they do not exist. And we all are worse off because we have allowed measurability and ‘big data’ to take such a dominant position in our systems.
There will be players who cannot electrify their processes, and they will need solutions. Most of them would be using natural gas running through the pipelines. And for them to decarbonize, they would need either a renewable form of natural gas, which is probably the most acceptable solution for them technically. For some of them, burning green hydrogen could potentially work as well, assuming they overcome the issues around the lower energy content of the hydrogen. Let’s consider again the drive to electrify. Using green hydrogen for these industries is equivalent to electrification because green hydrogen production is driven by renewable wind or solar power production. The notion is ultimately to shift the energy demand of these hard-to-abate industries back to the electricity grid, except through green hydrogen. Except, of course, the green hydrogen route is a very inefficient use of electricity because of poor conversion by electrolyzers and then coupled with the fact that more energy might be used to transport or store the hydrogen.
What I’m trying to point to here, is not that green hydrogen isn’t a viable solution – because in due course, with technological improvements, it definitely can and should be used. But in light of the electrification challenges I highlighted in part 1 (yesterday’s post), green hydrogen does not help alleviate the problem. It tends to complicate it and put even more stress on the electricity system when trying to green the grid. The mix of policy stances involving the heavy promotion of green hydrogen, the attempts to accelerate the reduction in gas use domestically, and setting aggressive renewable energy targets (really more like renewable electricity targets) for the grid emissions factor are all putting a lot of pressure on the electricity system while trying to keep electricity cost pressures under control.
Already mentioned in the earlier blog post is that natural gas resources can serve as part of the transition story. Now, there are concerns and worries about an addiction to fossil gas. After all, the economy might actually be addicted to it because it is a very lucrative export for Australia and so even as the country tries to reduce domestic use, it is unlikely to give it up as an export. And the fear is that the addiction would make it harder to decarbonise. This is why the other area for the government to direct its resources and develop policies that channel efforts in the right direction would be to promote biomethane production and displacement of fossil natural gas through the use of biomethane.
It is almost a no-brainer. Yet, there were concerns about the costs of biomethane while the more costly green hydrogen is being subsidised in all directions. There were further concerns about the limits of the resource potential of biomethane when the grid resources for green hydrogen production are even more scarce and expensive.
In providing my opinions, I have not given any figures but assumed that readers can find and discover for themselves the relative costs, and other challenges associated with how the overall policy mix and energy transition conversation is creating needless bottlenecks and distorting the orderliness of the energy transition. I suggest that we direct our efforts as an industry, economy, society and country in a more sensible, coherent, and directed manner to navigate the energy transition. The technically sensible approach is available and on the table, let’s set that as a destination first, and then slowly navigate the political minefield to get to it. This would likely produce better results than to be muddling through the technical solutions while trying to satisfy various political constituents and be none the wiser as to which destination we’re trying to get to.
Just an additional note to say that these entries are purely my personal opinions and do not reflect any views of my employers or any organisations I happen to be affiliated with.
What happens in economics when technological innovation happens? There’s a bit of dilemma between technological progress and economics because technology needs to progress to a stage when it upend the economics of an established technology – yet the incumbent is often enjoying scale economies as well as other effects such as network economies that can make it incredibly difficult for the new comer even if it is superior to existing technology at the scale that the incumbent operates.
In the Innovators’ Dilemma, that was being described and the strategy as well as the market approach is always for the new technology to chip away at the market of the incumbent technology by being appealing enough to a small group in the market to help it grow its scale and challenge the incumbent on more fronts gradually. Can the new technologies that we are trying to cross over towards make their way through this path in order to break the dominance of the incumbent technologies?
They probably won’t be able to move fast enough. And that is probably the justification for government to intervene and encourage developments. Yet governments do not want to be seen as favouring particular technologies. There is also a concern about creating inefficiencies in the market by distorting prices or forcing the taxpayers to shoulder the wrong costs.
Yet in reality, for the world to create a better future, there’s no real ways around it. The modern world was not built by shielding taxpayers from the wrong technological investments nor from carefully betting on the right technologies to take off. The complex problems around climate issues today are not so different from the public infrastructure challenges that people faced in the time before government had the kind of powers they have today. They are more complex, and we probably need more talented people working on them, both in the private sector as well as in government. In fact more so in government than ever.
The challenge remains the cost-benefit paradigms and all the free-market type principles to government and what intervention should be like. Without more mission-oriented policy-making principles and a system that is properly leveraging talents and passion, it will be difficult for governments around the world to assume the kind of role and leadership it needs to lead the transition.
Despite the bad press for EY in Germany and PwC in Australia; the big four and their sprawling professional services activities continues to grow. Accounting and audit services aside, advisory services appears to be in demand across the international business world. Overall across the economy, as best practices across the industry spreads, companies becomes more competitive and efficiency goes beyond just market prices and matching of customer demands. Innovation takes place as well.
Consultants, through advisory services helps information and knowledge work themselves out in the market. Mariana’s Big Con argument about economic rents however, might still somehow stand in the sense that the fees they attain may be somewhat outsized compared to the value created. And I’m referring more to generic type of business consulting as compared to technical advice or consulting that augments capacity of businesses during special situations such as a transaction or some kind of innovation project.
Yet I would say that the bigger con that is present in the market is the financialisation of our economy and everything that the financial industry abd banking does to generate rents. The issue is that the labour of financial industry keeps serving capital, and capital, with its sustained bargaining power (as pointed out by Thomas Piketty), continues to direct rents towards the financial industry.
The main force that can change this will be the government and regulators; there has to be more research and thinking around the manner we are setting up our economies.
What does it mean if companies declare that they are committed to the energy transition including committing resources towards it, and massive investments, only to make a U-turn when oil & gas turns out to be way more profitable? It tells you that it had always been about the money it makes rather than the transition. Never mind that the fossil fuels continue to drive up carbon emissions and hurting the climate. In fact, maybe climate change would drive up demand for energy – especially in terms of heating or cooling, or requiring more activities in the economy to deal with and mitigate the impacts.
Can the work of accelerating the energy transition be left to the markets? Can profits really motivate companies to support the transition and reduce carbon emissions? Does the market demand understand, appreciate and would be willing to drive and pay for the transition? I don’t think so. Absent regulation, it is unlikely for the markets to drive the emergence of the solution. It is as if we want seat belt manufacturers to drive the messaging around safety and benefits of having seat belts rather than legislate it as a requirement in cars. Or just waiting around for cars to adopt them as the standard feature in a car.
We probably don’t have enough time for all that to make an impact on mitigating climate change. Regulations will be required. To put a price for carbon on the market, to push technologies and options in the market that will reduce emissions. We must also evolve and steer the regulation as our understanding of the technologies and impact on environment advances. We don’t have to get everything right on the first try but we do need to be trying.
New York Times just ran an opinion piece about Big Oil and whether the rhetoric about these big international oil companies actually push for the energy transition or not, their contribution to the development was probably not that significant anyways. There is minimal capital redeployment from oil & gas towards renewable energy. The truth is that capital coming into renewable energy is largely from other sources and areas.
The big oil players were in any case just trying to defend their turf when they invest into renewable energy; and in other instances, it was probably just more of a PR exercise. The recent big retreats from the rhetoric around energy transition can only serve to create more climate anxiety amongst the younger ones, and discourage us further about our ability to get the climate transition right. There’s really limited plan B options for us as the human race on earth facing climate change so everyone needs to work together regardless what the big oil is trying to do.
The biggest challenge for the world with the big oil not doing much to withdraw from the fossil fuel business is not about the market, the demand from the energy users but perhaps more about the people who are continuing to work within the big oil’s supply chains and operations. If we are serious about the transition, we need to give oil rig workers something new to work on that can help with the climate transition; we need to get the refinery process engineers to work for some other sort of plants. In general, we need a coordinated effort to transform our economies by making it a mission to do so.
When the world sent people to the moon decades ago, we were creating new industries using taxpayers’ dollars. We were using military spending to drive advancements that would usher in a new era. We could do the same with energy transition. It will take a lot of political will and convincing people but there is enough resources to redirect ourselves from the global warming path that we are on.
Earlier this year, Guardian released an expose about forest carbon offsets, in particular about a handful of projects and brought a bit of an uproar in the industry. While it created more awareness about carbon credits and concerns around the quality, methodology around calculation of the emissions reductions or how the “offsets” can really be quantified, there seem to be a lot of misconception remaining around carbon markets and how they work.
First, we need to recognise that there are compliance markets and voluntary markets for carbon. And while we may sometimes call them all ‘carbon credits’, the concepts are vastly different. In compliance settings such as the EU Emissions Trading System (EU ETS), the object that is traded are actually permits or allowances. These are regulatory objects that are created arbitrarily by regulators. Basically, when the regulator says the industry is allowed to emit 100 tonnes of carbon dioxide equivalent, this 100 units becomes permits or allowances. Each unit represents the permission to emit a unit of carbon dioxide linked to a time period based on regulation.
On the other hand, there are voluntary markets; and these are where the majority of carbon credits that can constitute conceptually ‘offsets’. Putting that notion aside first, we need to recognise that those ‘credits’ are conceptually different from emission allowances. In reality, those are supposed to be like merit points awarded for good behaviour – of not emitting carbon dioxide. They are given to projects that protects rainforests, improve efficiency, manage waste more carefully, switch fuel from fossil to low-carbon ones and so on.
The manner for calculating these merit points are complex and set by various standard bodies that are structured as non-profits. In and of themselves, the credits when valued in the market encourages more of the activities that generate them. And because they inevitably entail some kind of emission reduction or even carbon removal (through some sort of sequestration), when companies buy and then retire them, they are basically trying to ‘offset’ their own emissions. The calculation of the amount of merit points was essentially what the Guardian article referenced was really criticising.
The projects in and of themselves are voluntary; and those buying the credits are not really forced to buy them by any regulators. That said, companies have been buying them in order to ‘offset’ their actual emissions and then gain the ability to pass of their products as ‘carbon neutral’ – not because they rejigged the supply chains to no longer emit carbon but because they used the credits/merit points off those projects to neutralise the demerit points they had from emitting carbon. The problem is when this is the value of the carbon emission reduction – so that companies have the ability to emit more, we really wonder if that is worthwhile.
Using the market mechanisms to spur production of something tends to be quite easy but to reduce it might be harder. This is why we have the government, public services such as the police and defence force and not leave these things to the market. Otherwise, the police could just offer bounties for anyone to catch the criminals and so on. Carbon markets are interesting but further regulation and a proper understanding of how we want to value emission reductions and count them is vital.