By Alistair Jones
Credit: Singapore Management University
By Alistair Jones
SMU Office of Research – “Climate change is an increasingly urgent and existential crisis that threatens all sectors of society in most countries of Southeast Asia,” says Weikai Li, an Assistant Professor of Finance at Singapore Management University (SMU).
Professor Li is participating in the Climate Transformation Program, a multi-year, interdisciplinary research project that has “a mission to develop, inspire and accelerate knowledge-based solutions and educate future leaders to establish the stable climate and environment necessary for resilient, just and sustainable Southeast Asian societies”.
The program, which is being run by the Earth Observatory of Singapore at Nanyang Technological University, is the recipient of significant Ministry of Education funding and will include researchers from other Singapore universities and from research centres across the globe.
“There are multiple research clusters,” Professor Li says, “and I am one of the co-PIs (principal investigators) within the cluster, ‘climate and finance markets’, where we will examine the risks and opportunities posed by climate change on business and financial markets.”
The clusters, which comprise finance, climate, biodiversity, mitigation, engineering and health, intend to form industry partnerships. Insurance company Prudential and luxury brand Chanel are already on board.
“Other potential industry partners include large banks and asset management companies (such as DBS and GIC), who will be interested in understanding the economic impact of climate policies on their loans and portfolios,” Professor Li says.
Policies and design
With so many variables in the climate change challenge, it must be difficult to know where to begin.
“[In our cluster] we will start with the most important climate policies, which is carbon pricing. We will look at the impacts of carbon pricing policies on firm profitability and market value as the starting point,” Professor Li says.
The program will recruit a number of students, many at doctoral level, with the aim of developing future climate leaders.
“Students can work as research assistants and get exposure to cutting-edge knowledge in climate science and economics,” Professor Li says.
“They will also get experience in applying what they have learned to solve important societal problems such as climate mitigation. They will understand better the costs and benefits of various climate policies and design more effective policies later in their careers.”
With its track record for innovation, Singapore is an appropriate choice to become a hub for Asia-focused research on issues such as green finance, sustainable financing solutions, and climate risk management.
“Singapore is a global finance centre with the most developed capital markets, and a large talent pool, in the Southeast Asia region,” Professor Li says.
“Large institutional investors and banks are also interested in developing green finance products to provide funding for net-zero transition and to satisfy client demand. Given green finance and sustainable investment is a new trend, they are likely first to be tested in Singapore before spillover to other emerging countries.”
Price impacts
When Singapore implemented a carbon tax in 2019, it was the first carbon pricing scheme in Southeast Asia. It was initially set at $5 per tonne of carbon emissions, but this year was raised to $25 a tonne with proposed incremental increases to 2030. It’s too early to quantify the effects of an increased carbon price on Singapore businesses, but the researchers are able to look elsewhere.
“My study will utilise a global sample of firms and carbon policies to shed light on the likely economic impacts of increasing carbon prices on business,” Professor Li explains.
“It is true that Singapore only enacted carbon taxes in 2019 and increased the carbon prices very recently. But some countries in Europe had implemented carbon taxes back in the 1990s and have much higher carbon prices than Singapore. We could use the evidence drawn from those EU countries to project the potential economic impacts on Singapore and other countries with currently low carbon prices.”
So, how does an increased carbon price support the transition to a low-carbon economy?
“Higher carbon prices can support the transition to a low-carbon economy through three channels,” Professor Li says.
“First, high-emission firms will face higher operating costs and have incentives to reduce emissions by either shutting down polluting plants or adopting green technologies. Second, governments can recycle the revenues raised through carbon pricing to support the green sectors. Third, by observing a strong carbon price signal, consumers can switch to more sustainable lifestyles with a low carbon footprint.”
Taking the lead
While modest by European standards, Singapore’s carbon price is the highest in Southeast Asia and will become more so in the coming years. It begs the question: what could be the implications of Singapore’s pricing for other countries in the region?
“If Singapore successfully decarbonises without hurting its economic growth and competitiveness, other countries may follow Singapore to adopt more stringent carbon taxes,” Professor Li says.
The study will be looking for strategic opportunities. One may be found in Singapore’s agenda to become the premier trading place for firms to purchase high-quality carbon credits from Asia and beyond to offset their greenhouse emissions. There are already more than 100 carbon service providers in Singapore. The Economic Development Board estimates that this nascent industry could generate $5.6 billion in gross value to the state’s economy by 2050.
So, is this potentially profitable activity something the climate and finance markets cluster will be considering?
“Yes, we will look at both compliance carbon markets (such as carbon taxes and ETS) and the voluntary carbon credit markets, where Singapore is well positioned to become the regional marketplace, given its high-quality trading infrastructure and large talent pools,” Professor Li says.
The Climate Transformation Program was announced in September 2023. Professor Li has already made headway.
“So far, I have completed a working paper that examines the effect of carbon pricing policies on firm financial and environmental performance. The paper has been circulated and presented in several conferences and seminars. It will take around five years to complete my part of the project,” he says.
