Can Singapore really transit to a post-oil economy?

Published by Straits Times (Singapore) on 10 January 2020

By Tilak Doshi and Euston Quah

Some commentators have called for more drastic action from Singapore’s policymakers to “mitigate”, or reduce, the effects of climate change.

One academic, for example, wrote pointedly: “We can continue to reject plastic straws, but to significantly reduce its greenhouse gas emissions and future-proof its economy, Singapore must adopt a strategy to shift its reliance on the petroleum and refinery industry.”

The latter, said Assistant Professor Angel Hsu of Yale-NUS College in a Dec 23 commentary on CNA online, accounts for half of Singapore’s greenhouse emissions.

However, it is important to clarify what Singapore policymakers can really do that is meaningful and efficient, given the impact of such measures on the lives of ordinary working Singaporeans.

Key questions of economic trade-offs (the costs and benefits of a higher carbon tax, reducing plastics, for example) and the distributional impacts across the population and time need to be subject to rational debate. Policies fashioned by green ideology will lead to Singapore collapsing economically first before it may drown in sea level rise.

According to Prof Hsu, Singapore must adopt a strategy to shift its reliance on the petroleum and refinery industry in favour of “clean energy” investments such as electric vehicles, battery storage and efficient energy appliances. Specific policy measures proposed include “a more aggressive solar energy road map”, a target for net-zero energy buildings by 2030 and a much higher carbon tax.

Should we all jump quickly onto the green bandwagon, or pause and carefully ascertain what requires action, and how much it would cost? It is not a question of whether we should be greener, but how green we want to be and at what pace.

Different countries are at different levels of development, growth and quality of life. National priorities will naturally be different as with the costs and benefits to their societies in adopting one set versus another.

WHITHER RENEWABLE ENERGY?

In the debate about green energy transitions, the fundamental realities of legacy, scale and inertia are front and centre in any reasonable discussion of climate change policies. Energy transitions are not sudden revolutionary advances. They have taken long periods of time, typically several generations to continuously unfold new processes that gradually change the composition of fuels used to generate light, heat and motion.

We live in a “fossil-fuel civilisation”, as well-known Canadian environmental science professor Vaclav Smil terms it.

In 2018, approximately 85 per cent of commercial primary energy was supplied by the trio of fossil fuels: coal, oil and natural gas. Renewable energy technologies such as solar, wind and modern biofuels (excluding hydro and nuclear) accounted for just 4 per cent.

It took 100 years of the 19th century for coal to account for 50 per cent of global energy production, replacing mankind’s earliest “poor man” fuels such as foraged wood, animal dung and agricultural waste.

And from its early beginnings in the 1870s, it took another 100 years for oil to come up to its current share of roughly a third of global primary energy consumed.

It also took almost a century for natural gas to account for about a fifth of global primary energy demand by the 1980s, from its beginnings in the early 20th century.

There is little evidence still of an accelerating energy transition, despite ambitious calls by European Union and United Nations leaders for halving global emissions by 2030 and achieving net-zero emissions by 2050, made at the recent inconclusive UN climate change summit in Madrid.

BP’s base case forecast sees renewable energy accounting for 15 per cent in 2040 and the fossil fuel trio (coal, oil and natural gas) delivering almost three quarters of global primary energy supply. This forecast is broadly in line with those of other authoritative sources, such as the International Energy Agency and the United States Department of Energy.

THE SINGAPORE CASE

Singapore played a century-long role as an oil storage centre (in Pulau Bukom) in colonial times before rapidly developing into Asia’s premier oil refining and trading centre by the 1970s.

The congealed investments in Singapore’s oil infrastructure are vast. With a refining capacity of over one million barrels a day, the millions of tons of steel, concrete, and mechanised and electronic process equipment, as cumulative value added which accompanied Singapore’s oil industry development, are not easily captured in national statistics.

In Singapore’s national accounts, the “chemical” industrial cluster (which includes petroleum refining, petrochemicals, speciality chemicals and others) contributed 9.3 per cent of value added to total manufacturing in 2018. The marine and offshore engineering segment (primarily drilling rigs and offshore oil and gas equipment) accounted for a further 11.3 per cent. Together, these two industries accounted for over a fifth of manufacturing gross domestic product.

Comparing the value-added contribution of these two industries against those of electric vehicles, battery storage, green buildings and solar power ignores the issues of legacy, scale and inertia.

The two sectors are incommensurate, differing in value added by orders of magnitude. It should be noted too that the two sectors would differ by their intensive backward and forward linkages, for example, activities generated by the oil storage, refining and trading sector with other sectors such as financial services (trade and project finance, commodity brokers, energy news reporters, risk management services, and others), upstream suppliers of steel, concrete and equipment, and the entertainment and service industries.

The key question for policymakers is how to make a viable transition to future technologies and businesses without destroying value in sectors of the economy that are “fit for purpose” for another half century or more.

Singapore’s policymakers need to decide whether they can so easily manage a transition to a “post-oil” future without disrupting the existing value added, jobs and the lives of ordinary Singaporeans, and do so while adding a purported equivalent number or more of so-called future green jobs yet to be realised.

Singaporeans cannot afford to be piqued into demonising fossil fuels – Singapore’s continuing role as an oil refining centre needs a clear-headed approach to measuring the costs and benefits of what could be an over-hasty transition to newer but less efficient technologies.

Regarding an often heard aggressive road map for solar power, the basic Economics 101 question has not been answered. If renewables including solar are so competitive, why do they often require huge subsidies? While statistics of the penetration rate of solar roofs in the Singapore landed private residential market are not available to the authors, common observation suggests they are not that widespread. “Why is that?” would be a typical economist’s question.

At the policymaker’s macro level, standard cost-benefit calculus of renewable energy relates to the technology’s specific characteristics of “intermittency”: there is power only when the sun shines or the wind blows.

There is well-established peer-reviewed literature on the examples of Germany, California in the US, and South Australia. These countries or states offer generous taxpayer-financed subsidies and regulatory mandates for encouraging solar and wind power adoption.

Empirical data suggests that once penetration rates for solar power and wind power (both intermittent, dependent on the weather) go much past 10 per cent to 15 per cent of the electricity grid, systemic costs of balancing the grid against contingent weather variables mount exponentially.

Who will pay for these higher costs? Which “stand-by” companies will have to step in to supply electricity when the weather determines erratically that solar or wind is no longer capable of providing power? And at what cost?

INTERNATIONAL COMPETITIVENESS

Should policymakers legislate fully “carbon-neutral” buildings if such measures compromise Singapore’s international competitiveness by raising rents and costs of buying commercial property? Will 100 per cent “carbon neutrality” cost us our ability to participate in international trade?

Likewise, early moves on carbon pricing in Asia are likely to remain limited. Singapore is the first on record to implement a nationwide carbon tax of just under US$4.00/tCO2e (ton of carbon dioxide equivalent, a measure of greenhouse gases emitted) on large industrial emitters from last year.

This constitutes a good start to pricing an external effect of harm on the environment by producers, and for all consumers as well to understand that their actions carry a price that needs to be accounted for. There is a follow-up plan to scale up the carbon tax eventually and it is important for society to adjust to this new tax in paying for the true costs in using resources.

Global warming is not an easy or straightforward problem to deal with. Solutions such as carbon pricing to reflect the full cost of economic activities are steps in the right direction, as is the requirement to price intangibles or externalities as they affect the environment. But countries should be allowed to go green at a pace desired by their citizens, and at a price they can afford.

It is vitally important that we choose policies that are based on a careful analysis of costs and benefits and informed decision-making such that rationality prevails.

Tilak Doshi is a Singapore-based energy consultant. Euston Quah is Albert Winsemius Chair Professor and head of economics at Nanyang Technological University. He is also president of the Economic Society of Singapore.

Published by Straits Times (Singapore) on 10 January 2020

https://www.straitstimes.com/opinion/can-spore-really-transit-to-a-post-oil-economy