A proposed legislation that will require industry to set decarbonisation targets using an emissions trading system should instead focus on implementing a carbon tax on fossil fuels, according to an environmental economist from nonprofit Worldwide Fund for Nature (WWF) Philippines.
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Applying a direct tax on coal, natural gas and petrol will generate revenue while reducing emissions and will be less costly than setting up a cap and trade scheme, said Edgardo Tongson. The WWF Philippines’ sustainable finance lead was speaking to an audience of business leaders and government officials at the Unlocking capital for sustainability Philippines event held in Metro Manila.
Tongson unveiled a study he authored which showed how increasing excise taxes on coal and natural gas could double revenues collected by the Philippines government from 0.25 per cent to 0.50 per cent of gross domestic product (GDP). This is based on the International Energy Agency’s benchmark carbon tax of US$15 per total carbon dioxide (tC02) that each sector generates during its daily operations or production processes.
In contrast, an emissions trading system will mean that the Climate Change Commission – a government body mandated to compute carbon emissions in each sector – would have to allocate spending for the hiring of consultants to count the carbon to be paid per sector, for third party verification to check the accuracy of the recorded emissions, as well as for personnel recording the emissions, he said.
Across Southeast Asia, only Singapore has implemented a carbon pricing scheme, while Thailand is likely to follow suit, after announcing in June that its carbon tax will be effective in 2025.
The Philippines has no explicit form of carbon pricing. Under the new Low Carbon Investment Act of 2023 approved by the climate change committee of the lower house of Congress earlier this month, the government will implement a cap and trade scheme based on the European Union Emissions Trading System. Companies will be issued credits that allow them to continue to pollute up to a certain “cap” or limit that is periodically reduced.
Entities with surplus emissions will be able to purchase offsets, while those with lower emissions could sell their excess allowances.
In January this year, the finance department said it will also look into the development of a carbon tax, but the government so far has not committed to directly pricing carbon under such a mechanism.
Tongson’s, as well as the WWF Philippines’ recommendation, is for the government to build on an existing law, known as the Tax Reform for Acceleration and Inclusion (TRAIN) measure, which implements added excise taxes on petroleum and coal. The legislation has been effective since seven years ago.
Speaking to Eco-Business on the sidelines of the event, Tongson said: “Let’s just build on what we already have…The regulatory oversight and the system are already there. We do not need to create additional bureaucratic measures like the cap and trade scheme, which will cost a lot.”
“It is easy to come up with new legislation…But the government might not have the money to implement it,” he suggested.
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It is easy to come up with new legislation…But the government might not have the money to implement it.
Edgardo Tongson, sustainable finance lead, WWF Philippines
House of representatives legislator Anna Victoria Veloso-Tuazon and co-author of the low carbon economy bill, told Eco-Business in an email exchange after the conference that lawmakers are open to including a carbon tax component in the bill.
A World Bank report commissioned by the department of finance, which will look into the inflationary effects of Article 6, the crediting mechanism of the Paris Agreement that sets out how countries can pursue voluntary cooperation and trading of carbon credits to meet their national climate targets, is still pending.
The report will reference the WWF Philippines study and also look at the impacts of the emissions trading system, a carbon tax, or a hybrid version of both.
“While we wait for the results of the study, we will work with what we have by empowering the private sector to pursue more intensive decarbonisation efforts through the voluntary carbon market and a decarbonisation fund that can help move the needle,” she said.
In her keynote speech, Veloso-Tuazon called on business leaders and the private sector to tap on the viable and cost-competitive deals made available under the bill and accelerate the pace of decarbonisation.
Carbon taxes can be ‘politically difficult’
Despite the potential revenues generated by a carbon tax mechanism, higher prices could unintentionally affect low-income households.
Quoting his study, Tongson said that if coal, natural gas and refined oil are taxed, the iron and steel, cement and transport sectors will be most impacted, given that they are the largest consumers of these products. Additional costs could be passed on to consumers and end-users, he said.
“Implementing a new tax can be politically difficult, especially if it is perceived to increase costs for consumers and businesses,” he said. “Policymakers have to recognise these tradeoffs and arrive at a balanced and fair tax policy.”
The chart show the inflationary impact of a carbon tax in the Philippines. For electric power generation, transmission and distribution (12th row), the bars show the impacts when carbon tax increases by under US$3 (blue bar), US$15 (orange bar), US$35 (grey bar) and US$55 (yellow bar), according to IEA price scenarios. Prices are projected to inflate by 0.34 per cent, 1.4 per cent, 2.8 per cent and 4 per cent respectively. Other than the first scenario when impact is limited, the other scenarios might lead to cost inflation, which could likely be passed on to consumers, suggested the WWF study. Source: Measuring the Macroeconomic Effects of Carbon Prices Using Input-Output Analysis
For example, Tongson cited continuous protests that the Philippines’ public utility modernisation programme has faced. Jeepney drivers and operators are against the phasing out the iconic mode of public transport to give way to newer but more expensive vehicles powered by low-emission Euro 4 engines, or those that produce no emissions at all, such as electric ones.
Outside of the Philippines, French president Emmanuel Macron scrapped a fuel tax hike in 2018 after weeks of nationwide protests, noted Tongson.
A carbon tax also has no direct emissions cap, unlike an emissions trading system. This will allow sectors to continue polluting if the taxes are not set high enough over time, Tongson added.
But a tax, if priced correctly, will internalise costs and encourage firms to shift to cleaner fuels. Markets react to higher costs by looking for cheaper fuel alternatives in order to reduce costs and achieve higher profits. The results, manifested in the amount of carbon reduction, will depend on how markets will react. “That will be hard to predict,” Tongson said.
