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With carbon pricing, Train Law can help reduce pollution

With carbon pricing, Train Law can help reduce pollution
Historically, when we burn coal or use petroleum products, we generally do not pay for the actual price of the carbon emissions brought about by these fossil fuels

 One of the things that the Tax Reform for Acceleration and Inclusion (Train) Law does is put a price on carbon.

Carbon pricing aims to reflect the actual cost of carbon by integrating the cost of the pollution into a fuel’s price. Historically, when we burn coal or use petroleum products, we generally do not pay for the actual price of the carbon emissions brought about by these fossil fuels. However, carbon pricing is a commonly used climate change policy, utilized by many states in the United States, countries in the European Union, and even Mexico.

Although Train’s coverage is broad, it also contains a form of carbon pricing. It imposes higher taxes on coal and petroleum products, the largest sources of CO2 in the Philippines, on a per-ton or per-liter basis. Taxation on these products began this year, and will continue to grow through 2020.

So, if we treat the Train tax rates purely as a carbon pricing mechanism, with a price per ton of CO2, what is the equivalent carbon rate? Doing some back-of-the-envelope calculations, I came up with this list of prices per ton of CO2 using the 2020 tax rates per commodity:

Commodity

Php per ton of CO2

USD per ton of CO2 
(1 USD = 50 Php)

Coal

Php 80

1.60

LPG

Php 2,000

40

Diesel

Php 2,235

45

Gasoline

Php 4,742

95

Bunker

Php 2,015

40

There is an obvious variation between the carbon taxes across the fuels. We have coal in the low end, taxed at rates comparable to the carbon tax of Mexico ($3.50) and the US Northeast’s cap-and-trade system ($2.15-$3.00). On the other end of the spectrum, we have the tax on gasoline, which, in terms of a price on carbon, is closer to Sweden’s ($150-$170).

Though not explicitly a carbon tax, Train acts in a similar way to a carbon tax. The law incorporates some of the costs of carbon pollution into the price of the commodities taxed. This sends a price signal to consumers to pollute less. This could have effects on the electricity and transport sectors.

Effect on the electricity sector

Despite the increase in the cost of importing it, coal will still likely be a significant part of the Philippines’ energy mix for the next 10 to 15 years. The industry as a whole has invested heavily in the past 7 years on coal, with an additional 2,500 MW in new power plant capacity. Because those assets are already up and running, it is in the best interest of the plant owners to keep them running, even at low margins. This is in addition to the fact that the Train tax on coal is not significant enough to send a price signal to the market that will shift right away from coal.

However, Train gives renewable energy an area to grow, specifically in the small island grids not connected to the main Philippine grid. Small island power grids, commonly known as SPUG (Small Power Utility Group) areas, are generally powered by diesel, bunker, and other petroleum-based fuel generators. Currently, on-grid electricity users subsidize the cost of electricity in SPUG areas through the missionary electrification charge. Now, with Train’s tax on petroleum products, this tax will be passed on to subsidizing on-grid users.

To avoid increasing electricity rates for the on-grid consumers, SPUG areas should consider shifting to renewable energy and microgrid technologies. Renewable energy and battery technology have become cheaper and better in the last 10 years and promise to continue to improve in the future.

Effect on the transportation sector

Train’s incentives for a low carbon transport sector is obvious from several of its key provisions. Diesel, gasoline, and LPG – all land transport fuels – are taxed a relatively high rate per ton of carbon generated, even higher compared to other countries with carbon pricing policies. 

On top of that, there is now a much higher excise tax on automobiles. This excise tax is halved for hybrid vehicles, and inapplicable to electric vehicles. This creates an incentive to purchase hybrid or electric vehicles. Though the excise tax on automobiles does not apply to trucks, cargo vans, buses, and jeepneys, the higher price on petroleum-based fuel might spur the transition to low-carbon hybrid and electric forms of mass transportation.

All in all, the Train Law may be an effective climate policy in terms of reducing carbon pollution. It puts a price on carbon pollution and may be the key to low carbon innovation in the Philippines. However, significant complementary policies must first be implemented to enable this low carbon innovation. – Rappler.com 

Juan Antonio Oposa is a lawyer specializing in renewable energy. 

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