I’ve written about carbon credits (here and here); but I never really quite considered them from the perspective of carbon tax, because I generally thought of it as just another instrument that is used to price carbon. In reality, the different mechanisms actually work differently. And even for ‘carbon markets’, where you allow trading (which can take the form of credits or allowances, again slightly different conceptually), the carbon price can take on different meanings depending on the underlying instrument in question.
Singapore’s carbon tax system introduced the idea of allowing carbon credits to ‘offset’ these taxes. And the carbon credits are essentially international carbon credits generated from projects that removes or mitigates emissions in one way or another. This is not new as some other markets have allowed the use of offsets to reduce ETS liabilities (eg. Korea). In Singapore, companies who wish to do so can only have 5% of their carbon tax exposure offset using eligible carbon credits; and there are clear specifications of what works and what doesn’t.
This marriage of carbon taxes and pricing with the generation of quality international carbon credits is something critical to bring the next step of carbon pricing to maturity. Global ‘carbon resources’ in the form of means of removal and sequestration is not uniform, even when we are all sharing the same atmosphere. It is therefore necessary to be able to trade carbon. Technically, because there is negligible transport cost when you ‘trade’ carbon, global pricing of carbon should eventually converge to the same levels. It is potentially as close as it gets to a good that can be pure commodity. Yet because of the whole issue around measurement integrity and the lack of consensus around some of the dodgier types of carbon credit methods, it is going to be very difficult for pricing to converge any time soon. The variations globally in regulating carbon emissions and putting a price on carbon emissions would also serve to slow down global carbon trade.
At the end of the day, there are wider geopolitical and economic considerations blocking stronger climate action. Working along these forces will be necessary since fighting them is rarely an option.
