How much should Taiwan price carbon in 2024?

Taiwan’s Legislative Yuan in January 2023 passed the Climate Change Response Act on third reading to establish a carbon fee system, which will put a price on carbon as early as 2024. When it comes to carbon prices, it is important to distinguish them from carbon taxes. Under Taiwan's administrative system, a carbon tax is considered a general tax and could be used for diplomatic or security purposes; while a carbon fee belongs to a special levy, which must be earmarked for specific purposes such as climate change-related reduction and regulation activities. In practice, both carbon fees and carbon taxes are charged based on the carbon emissions generated by a company, only differing in legal terminology. Amid the global trend of carbon pricing, how much should the upcoming carbon fee be priced in Taiwan for businesses to remain competitive while taking into account their affordability?
 

Carbon pricing difference between Taiwan and its neighboring countries

According to the Environmental Protection Agency (EPA), the initial price is likely to be set at NT$300 (approximately $10) per metric tonne or higher. Such a price level has sparked a mixed response. Supporters believe that it is imperative for Taiwan to align its carbon pricing with international standards, and that too low a price would affect Taiwan in a negative manner; while opponents argue that such a price has exceeded the affordability of enterprises. In this regard, the implementation progress of carbon pricing and price ranges in Taiwan's neighboring countries are listed in Table 1 below for reference.

 
Table 1. Carbon pricing in Asian countries

Many may think that since the initial carbon prices in Taiwan's neighboring countries are not high, about NTD 100 to NT$200 per tonne, Taiwan should be able to start with such a price. In fact, Taiwan has started late in carbon pricing system. Based on the trends in the table above, carbon prices in these Asian countries are forecast to range from NT$200 to NT$300 per tonne by 2024, and even up to NT$500 per tonne in Singapore. Therefore, the EPA set NT$300 as the initial price for the levy, which is not too high and is in line with the development of neighboring countries. It is also viable to set the price at NT$500 per tonne following Singapore's case, so that companies will not have to face high increases in the future.

Global carbon pricing trends outside of Asia

Taiwan is actively developing carbon fee-related regulations in the hope that it can follow the footsteps of the global community in the future. For instance, under the EU Carbon Border Adjustment Mechanism (CBAM), the carbon tax paid by the exporting country can be offset upon import ^[1]. This is where the price of carbon taxes in other countries becomes particularly important. If the price difference between Taiwan and other countries is large, the funds will inevitably flow to other countries. Therefore, the global carbon pricing is crucial, as shown in Figure 1 below^[2].


Figure 1. Global carbon price range in 2022 (outside of Asia)^[3]

As can be seen from the figure above, the rates of carbon tax (or carbon fee) in Taiwan and other Asian countries fall behind other part of the world, averaging only about $10 per tonne; while those in many other countries have reached more than $100 per tonne and continue to rise. Switzerland's carbon tax rate, for example, rose from $101 per tonne in 2021 to $130 per tonne in 2022. This is because the country's tax rate is subject to an automatic adjustment mechanism that will raise the rate if the greenhouse gas target stipulated in the law is not met. There are also countries that have set their rate increases through targets set in their policies. For example, the South African government has announced an increase in the carbon tax rate from the current $10 to $20 per tonne in 2026 and to $30 in 2030.
 

Impact of carbon fee on Taiwanese enterprises and solutions

With the carbon fee of NT$300 per metric ton, which is most likely to be adopted, companies will face an annual price increase of 20% to 30% if Taiwan wants to catch up with the global average or reach the price suggested by the World Bank by 2030. InfoLink suggests companies take carbon costs into account when making their future plans, especially when making long-term investments or building plants. One effective strategy for businesses is to set an internal carbon price based on their own terms to assist them in evaluating and stress-testing their activities. The imposition of carbon fees and future adjustments are inevitable, and even if the initial price is lowered, companies will still face larger degree of rate increases in the future. Therefore, companies should focus on adopting carbon reduction measures, such as using renewable energy, as the most practical way to reduce carbon costs.