Budget 2026: Cushioning carbon tax burden and maintaining competitiveness

Companies could reduce short-term competitive pressure by strengthening their decarbonisation investments. 

Since introducing a carbon tax of $5 per tonne of carbon dioxide equivalent (tCO 2 e) in 2019, Singapore has progressively raised the rate to $25/tCO 2 e in 2024 and to $45/tCO 2 e in 2026, with plans to increase it further to $50 to $80/tCO 2 e by 2030, to support the nation’s net-zero ambitions.

Budget 2026 reaffirmed this trajectory, although noting that the eventual 2030 rate may be set at the lower end ($50/tCO 2 e) if global climate momentum continues to weaken.

As the tax rate rises, carbon pricing becomes increasingly embedded in firms’ cost structures and investment considerations. Whilst higher carbon prices are expected to drive greater emissions reductions by incentivising emitters to adjust their production processes, energy consumption patterns, and low-carbon investments also cause concerns about business competitiveness.

Higher carbon costs can impose financial burdens on companies as they must pay more for their direct emissions, and may also face higher electricity bills if power generators pass on increased generation costs to end users. If such costs are ultimately reflected in product prices, trade-exposed firms may face growing competitive pressures in international markets.

Recognising this context, the Budget 2026 statement unveiled measures to cushion these burdens, maintain competitiveness, and accelerate the transition to a low-carbon economy.

How can the current measures support businesses?
In response to the carbon tax increase in 2024, the government introduced a support scheme comprising the use of international carbon credits (ICCs) and a transition framework for emissions-intensive, trade-exposed (EITE) sectors. Liable facilities may offset up to 5% of taxable emissions using high-quality ICCs, providing a certain level of compliance flexibility.

Transitional allowances for EITE sectors help mitigate near-term competitiveness pressures and carbon leakage risks, where production may shift to jurisdictions with less stringent climate regulations.

Beyond compliance flexibility, Budget 2026 extended the Energy Efficiency Grant (EEG) and green loans under the Enterprise Financing Scheme (EFS-Green) to March 2027 and March 2031, respectively, to sustain firms’ decarbonisation investments as carbon costs rise.

EEG co-funds energy-efficient equipment purchases, covering up to 70% of costs for SMEs and 30% for non-SMEs, capped at $30,000 per company, with enhanced support of up to $350,000 under the EEG Advanced scheme for companies that can demonstrate that new equipment will save more than 350 tCO 2 over its lifetime. This tiered structure directly links fiscal support to measurable carbon performance.

Meanwhile, EFS-Green enhances access to green financing through a 70% government risk-sharing arrangement across multiple loan categories ranging from $3m to $50m, enabling firms to undertake capital-intensive decarbonisation projects that might otherwise face financial constraints.

Additionally, a 40% corporate income tax rebate up to $30,000 was introduced for FY2026. Although not directly linked to the carbon tax, this transitional tax relief can improve short-term cash flow resilience amidst rising operating costs driven by carbon pricing, thereby enabling companies to invest in energy efficiency and low-carbon technologies without compromising financial stability.

Taken together, these instruments address challenges in industrial transition towards low-carbon production, including significant upfront capital requirements and risk exposure.

Through the various support measures, companies could reduce short-term competitiveness pressure by softening the carbon tax burden and enhance long-term competitiveness by strengthening firms’ capacity to invest in decarbonisation.

What is expected more?
To catalyse businesses’ preparation for a further rise in the domestic carbon tax and the implementation of global carbon pricing, such as the EU carbon border adjustment mechanism (CBAM), there is room to refine current support measures through more targeted assistance.

Despite their positive role, the current financial schemes may not fully cover capital-intensive decarbonisation projects, particularly in energy-intensive sectors such as chemicals, refining, and heavy industries. For these industries, transition costs can far exceed support caps.

The government could consider establishing a dedicated decarbonisation fund financed by carbon tax revenue, rather than relying on periodic budget allocations.

For example, Germany transformed its Energy and Climate Fund into the Climate and Transformation Fund, using carbon pricing revenues to finance industrial decarbonisation, hydrogen deployment, and electricity price compensation for energy-intensive sectors.

Formalising a revenue recycling framework could ensure sustained support for decarbonisation by securing a stable funding source, reinforcing the government’s principle that the carbon tax is transition-oriented rather than revenue-generating. Additionally, such clarification could also strengthen long-term policy credibility, particularly as investment cycles in heavy industries extend over decades.

Beyond financial support, bespoke technical assistance will be crucial, especially as CBAM expands. In December 2025, the European Commission proposed expanding the CBAM scope from 2028 to include 180 steel and aluminium-intensive downstream products, and it is reviewing a potential expansion to chemicals.

Other countries, including the UK, Norway, and Australia, have either scheduled or are considering similar mechanisms. In this case, without decarbonisation, Singapore’s exporters will need to address higher effective carbon costs and diminished competitiveness.

Accordingly, strengthening capabilities to manage carbon emissions across the entire supply chain will become a critical competency. Thus, the government could provide training and advisory services covering regulatory compliance, measurement, reporting, and verification (MRV), as well as production process decarbonisation. Such support would particularly benefit SMEs with limited capital and technical expertise.

Lastly, a clearer long-term carbon tax pathway would provide businesses with greater confidence for long-term investment planning. Whilst the government’s calibrated approach offers flexibility, it may also delay major decarbonisation investments by creating regulatory uncertainty.

Overall, Singapore has established a comprehensive toolkit to help businesses adapt to rising carbon costs and remain competitive. With further refinements, Singapore’s businesses will be better prepared not only for higher carbon taxes but also to take a leadership role in a decarbonising global economy.

This positions Singapore to leverage its climate strategy as a competitive advantage.