Philippines: Selected Issues
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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
15 Dec 2022
eISBN:
9798400227561
ISBN:
9798400227561
Language:
English
Keywords:
price volatility; coordination requirement; fuel price responsiveness; price certainty; emissions price; Energy prices
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This Selected Issues Paper discusses the potential role of carbon pricing in climate mitigation strategy for the Philippines. The paper provides guidance on the choice between carbon taxes and emissions trading systems (ETSs) and their design. Overall, carbon taxes have significant practical, environmental, and economic advantages due to ease of administration, price certainty which promotes investment, the potential to raise significant revenues, and coverage of broader emissions sources. Carbon pricing schemes are gaining momentum worldwide, including in Asia.

Abstract

This Selected Issues Paper discusses the potential role of carbon pricing in climate mitigation strategy for the Philippines. The paper provides guidance on the choice between carbon taxes and emissions trading systems (ETSs) and their design. Overall, carbon taxes have significant practical, environmental, and economic advantages due to ease of administration, price certainty which promotes investment, the potential to raise significant revenues, and coverage of broader emissions sources. Carbon pricing schemes are gaining momentum worldwide, including in Asia.

Addressing Climate Change Mitigation in the Philippines: Role of Carbon Pricing1

This Selected Issues Paper discusses the potential role of carbon pricing in climate mitigation strategy for the Philippines. The paper provides guidance on the choice between carbon taxes and emissions trading systems (ETSs) and their design. Overall, carbon taxes have significant practical, environmental, and economic advantages due to ease of administration, price certainty which promotes investment, the potential to raise significant revenues, and coverage of broader emissions sources. Carbon pricing schemes are gaining momentum worldwide, including in Asia.

A carbon price rising to US$50 per tonne in 2030 in the Philippines is modelled for illustration. This policy reduces carbon dioxide emissions 13 percent below baseline levels with half of the reductions coming from the power generation sector. It also raises revenues equivalent to about 1 percent of GDP. Elements of a comprehensive strategy to enhance the effectiveness and acceptability of carbon pricing, as well as alternatives like tradable performance standards, are also briefly discussed.

A. Introduction

1. Limiting global warming to 1.5o to 2oC requires cutting global carbon dioxide (CO2) and other greenhouse gases (GHGs) 25–50 percent below 2019 levels by 2030, followed by a rapid decline to net zero emissions near the middle of this century (Figure 1). If these emissions reductions are not achieved, it will likely put temperature goals irreversibly beyond reach. For example, under a business as usual (BAU)2 scenario to 2030, GHG emissions would need to fall by a (highly unrealistic) 95 percent from 2030 to 2040 for a 1.5oC pathway.

Figure 1.
Figure 1.

Global GHG Emissions, Nationally Determined Contributions and Temperature Targets

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Source: IMF staff estimates using the IMF-WB Climate Policy Assesment Tool and IPCC, 2022.Note: exclude land use and land use change emissions.

2. Observed global warming to date of 1.2oC is caused by human factors and Philippines is vulnerable to warming given its exposure to natural disasters and long coastline. Warming is already causing a wide range of climate impacts including heatwaves, droughts, floods, hurricanes, higher sea levels, and swings between climate extremes, and the frequency and severity of these impacts will rise as the planet heats up. Moreover, the risks of tipping points in the global climate system (e.g., runaway warming from release of methane and carbon in the permafrost, collapse of major ice sheets causing dramatic sea level rises, shutting down of ocean circulatory systems, destruction of the natural world) rise exponentially with warming above 1.5oC.3 Philippines will likely experience a drier dry season, a wetter wet season, and a more prominent northeast monsoon season—typhoons will likely increase in severity and frequency, while sea level rise will put coastal areas at a high risk of flooding and erosion.4

3. Philippine’s Nationally Determined Contribution (NDC) currently specifies an unconditional target of cutting GHGs 2.7 percent below baseline levels in 2030 or 75 percent below, conditional on external support. The unconditional target of 2.7 percent is likely to be achieved in the BAU (see below), whereas the 75 percent target is highly ambitious. Hence there is significant uncertainty about the Philippines’ overall objective. Setting a mid-century ‘net zero’ target and then aligning the unconditional target with long-run GHG neutrality would alleviate uncertainty about the Philippines’ mitigation objectives, giving certainty to firms and households on its overall emissions trajectory. In choosing a revised emissions target for 2030, Philippines will need reliable information on: (i) BAU emissions projections at economywide and sectoral level; and (ii) the costs of cutting emissions below BAU levels. Both are sensitive to assumptions about underlying factors (e.g., income elasticities for energy products, future BAU energy prices, fuel price responsiveness). This paper presents analysis based on a spreadsheet tool that is parameterized to the mid-range of the broader energy modelling literature on these factors.5

4. Achieving a substantial reduction in emissions will require carbon pricing. Many other countries in the Asian region have either implemented, or are considering, some form of pricing (see below). In the Philippines the Department of Finance is studying the feasibility of pricing, especially a carbon tax, and there is an existing project with the World Bank under the Partnership for Market Readiness on the formulation of an Emission Trading System (ETS). Comprehensive carbon pricing provides across-the-board incentives to reduce energy use and shift to cleaner energy sources and is a critical price signal for redirecting investment to clean technologies. There are many technical issues however in the choice between carbon taxes and ETS. This paper discusses the main issues and how other countries are addressing them and presents an extensive quantitative assessment of the emissions, fiscal, and economic impacts of carbon pricing.

5. Carbon pricing would raise the price of carbon intensive fuels and might be timed to progressively phase in as global energy prices recede from their peak levels. Global gas, coal, and oil prices increased about 700, 180, and 110 percent respectively between mid-2020 and mid-2022 with the recovery in global energy demand, weak energy investment, and disruptions following the Russian invasion of Ukraine. Introducing carbon pricing on top of already high energy prices would be politically very difficult. Projections however suggest that much of the recent price surges will likely be reversed as demand and supply adjust over time. Phasing in a $75 carbon price on top of these projected (albeit very uncertain) prices would imply 2030 gas and oil prices that are 42 and 12 percent below mid-2022 levels, while coal prices would be 30 percent higher (Figure 2). Indeed, without carbon pricing (or related measures), the impact of higher baseline energy prices is limited, because the price increases are not expected to be permanent and the price of (less CO2 intensive) gas has increased sharply relative to coal causing switching to the latter.

Figure 2.
Figure 2.

Trends in International Energy Prices

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Source: IMF staff estimates.Notes: prices in real 2021 US$, deflated by respective IMF projections. Axes adjusted for comparable percentage increases compared to 2015–20 averages. Carbon tax starting at $10 in 2022 and rising to $75 in 2030 is assumed on top of IMF (2021) baseline assuming elastic supply (this assumption is likely reasonable for coal and gas, although possibly less so for oil). Natural gas prices are a weighted average of natural gas in Europe, North America (Henry Hub) and LNG market (Japan). Coal prices are a weighted average of domestic sectoral coal prices in China, India, and the US. Oil prices are an average of Brent, Dubai Fateh, and West Texas Intermediate.

6. The paper is organized as follows. Section B discusses the rational for carbon pricing and issues in the design of, and choice between, carbon taxes and ETSs.6 Section C provides a quantitative assessment of carbon pricing in the Philippines.

B. Carbon Pricing: Rationale, Instrument Choice, and Design Issues

Rationale

7. Ideally carbon pricing would be the centerpiece of Philippines’ mitigation strategy. The most important rationale for carbon pricing is that, if comprehensively applied, it promotes (by reflecting the cost of carbon emissions in the prices of fuels, electricity, and goods) the full range of behavioral responses across households, firms, and sectors for reducing energy use and shifting toward cleaner energy sources. It also ensures the incremental reward for reducing emissions by an extra tonne (the carbon price) is equated across responses, striking a cost-effective balance. In contrast, other mitigation instruments in and of themselves, like emission rate standards and clean technology subsidies, promote a narrower range of behavioral responses. These instruments could be combined in packages that could promote a wider range of responses from pricing—but not all of them (e.g., regulations cannot induce people to drive less). The policy combination would also be more administratively complex and less cost effective (See Box 1).

Behavioral Responses Promoted by Alternative CO2 Mitigation Policies

Comprehensive carbon pricing promotes the following responses:

  • Power generation: shifting (both in terms of new investment and the daily dispatch mix) from coal to natural gas, from these fuels to renewables, and perhaps to nuclear and fossil generation with carbon capture and storage;

  • Industry: reducing CO2 and electricity intensity (e.g., through alternative heating sources other than coal, enhanced recycling of scrap metal) and output levels;

  • Transportation: shifting to more efficient internal combustion engine (ICE) vehicles, from ICE vehicles to electric (or other zero emission) vehicles, and reducing vehicle miles travelled; and

  • Buildings: reducing CO2 intensity, electricity intensity, and energy demand (e.g., through energy efficient construction, improving the energy efficiency of appliances).

Non-pricing mitigation instruments promote a narrower range of behavioral responses or lagged rather than immediate responses. Even within a sector, these instruments do not promote the full and immediate range of behavioral responses, for example:

  • Renewable portfolio standards and feed-in tariffs for renewables only promote shifting from fossil to renewable generation,

  • Emission rate regulations, or feebates, for new vehicles reduce emissions from the on-road fleet gradually over time as the fleet turns over (e.g., they do not accelerate retirement of old vehicles) and they do not reduce vehicle miles travelled; and

  • Incentives for net zero new buildings reduce emissions from the building stock very gradually (given that typically less than 2 percent of the building stock is replaced each year).

A combination of non-pricing measures across sectors, and across new and existing capital, promotes a wider range of responses. But promoting cost effectiveness can be challenging—for example, regulatory approaches would require deep and liquid credit trading markets across firms, programs, and sectors.

In practice, non-pricing mitigation instruments will be used to complement and reinforce carbon pricing. Although less efficient, non-pricing instruments may have greater acceptability as they avoid significant and politically sensitive increases in energy prices—unlike carbon pricing, they do not involve the pass through of carbon tax revenues or allowance rents into energy prices. Non-pricing instruments like feebates may have a key role in kick-starting de-carbonization of hard-to-abate sectors, particularly transportation and buildings. Policymakers need to strike a balance between carbon pricing (the most efficient but perhaps most politically challenging instrument) and other (less efficient but frequently more acceptable) reinforcing instruments.

8. Carbon pricing has other attractions as it:

  • Provides the critical price signal for mobilizing innovation into, and deployment of, clean technologies;

  • Mobilizes a valuable source of revenue, which can be used to help meet climate, social, or broader fiscal objectives; and

  • Generates domestic environmental co-benefits, such as a reduction in local air pollution mortality (though other mitigation instruments can produce similar benefits).

9. There is increasing momentum for carbon pricing globally and in the Asian region, though there are large cross-country differences in coverage rates and prices. Figure 3 summarizes carbon pricing schemes operating in 45 countries, accounting for national and sub-national pricing initiatives and, for EU countries, the EU ETS—see Annex 1 for further details on pricing schemes. At the national level, 21 carbon taxes and 6 ETSs have been implemented. There are also many sub-national pricing schemes, the largest being California’s ETS. Major pricing initiatives were recently launched in China and Germany, prices in the EU ETS are currently around $70 per tonne, and Canada has committed to an equivalent US$140 price by 2030. Other countries in Asia with carbon pricing include Indonesia, Japan, Korea, and Singapore while carbon pricing is under consideration in Thailand and Vietnam. GHG emissions subject to (national and sub-national) carbon pricing however, vary, from below 30 percent in some cases to over 70 percent in others (e.g., Canada, Germany, Korea, Sweden) while economywide average prices in 2021 varied from below $5 to $115 per tonne (Sweden). 28 percent of global GHGs are formally subject to pricing and the average price across schemes is $20 per tonne.

Figure 3.
Figure 3.

National or Regional Carbon Pricing Schemes, 2021

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Sources: WBG, 2022; IMF staff calculations; and government websites.Notes: EU ETS includes Norway, Iceland and Liechtenstein. Prices are emission weighted averages between schemes at national, sub-national and, if applicable, EU level. At present, China’s system takes the form of a tradable emissions intensity standard with no fixed cap on emissions.

Instrument Choice and Design Issues

10. Carbon taxes (generally under the purview of finance ministries) are easier to administer than ETSs (generally under the purview of environment ministries). Carbon taxes can be integrated midstream (i.e., after fuel refining and processing) into collection procedures for existing fuel taxes and extended to other fossil fuels—fuel taxes are well established in the Philippines (as they are in over 160 countries) and are among the easiest of all taxes to collect. All but one of the 21 existing national carbon taxes are applied midstream (Annex 1). ETSs typically require more sophisticated administration as new capacity is required to monitor both downstream emissions and emissions trading markets. Usually there is a pilot phase to establish emissions measurement, reporting and verification systems, allowances exchange platforms, and to simulate trading. ETSs may have more limited coverage as they have often been applied to large power and industrial firms,7 though ETSs can also be applied midstream to transportation and building fuel suppliers (e.g., these sectors are covered in the German and Korean ETSs and are proposed for inclusion in the EU ETS). Although in principle carbon pricing should comprehensively cover CO2 emissions across all fuels and sectors, in practice pricing emissions from coal, or from the power and industrial sectors, are usually the biggest priorities as they account for the bulk of emissions reductions under economywide pricing (see below).

11. In their pure forms, carbon taxes provide certainty over emissions prices while emissions are determined by market forces, and vice versa for ETSs. Certainty over emissions is attractive if policymakers want to meet an emissions target in a future year but price uncertainty can deter private innovation in, and adoption of, clean technologies, especially those (e.g., renewables plants) with high upfront costs and long-range emissions reductions. Indeed, allowance prices in ETS schemes in California, the EU, and Korea have shown significant volatility to date (Figure 4). ETSs can however be combined with price stability mechanisms like price floors which can help to provide robust incentives for clean technology investments.8 Carbon taxes may need periodic adjustment to maintain progress on emissions goals, so in practice differences between the two approaches may be less pronounced.

Figure 4.
Figure 4.

Allowance Price Volatility in ETSs

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Sources: World Bank, Carbon Prices Dashboard 2022; CarbonCredits.com, Carbon Prices Today; Korea Exchange, Market Data System; and IMF staff calculations.

12. Revenue raising and using practices may differ across instruments, with carbon tax revenues more likely to be used in general budgets and ETS revenues more likely to be earmarked for environmental purposes. Revenues have been fully used for general purposes in 16 carbon tax schemes and partially or fully earmarked for environmental spending in only five cases (Annex 1). In the early phases of ETSs (e.g., EU, Korea), allowances have been freely allocated to affected firms to help build support for the program and address competitiveness concerns (see below)—however, where free allowances are granted to power generators this can result in large windfall profits as firms may have greater scope for passing allowance prices forward in higher consumer prices.9 In other ETS cases (e.g., California, Germany) allowances have been auctioned from the start. Where allowances in ETSs are auctioned, the revenues are more often earmarked for environmental spending—this applies, at least partially, in five of the seven ETS schemes (Annex 1).

13. There is much at stake in terms of economic efficiency in how carbon pricing revenues are used. Productive uses of revenues can produce large gains in economy efficiency which can help to offset the negative effects of higher energy prices on economic activity. For example, using revenues for public investments for Sustainable Development Goals (e.g., in health, education, infrastructure) strengthens the economy. Earmarking revenues for environmental investment can be efficient if such investments are fully integrated in robust public investment management systems. In contrast, returning revenues in universal or targeted lump-sum transfers to households or firms forgoes efficiency benefits (See Annex 2 for further discussion).

14. In principle, a carbon tax and ETS—if applied to the same sectors, with the same price, and prior to allocation of revenues—would impose the same distributional burdens across household income groups. This is because a carbon price generally has the same impact on the price of fuels, electricity, and other consumer goods regardless of whether it takes the form of a tax or an ETS. Distributional burdens, when measured against households’ annual consumption, are mildly regressive (i.e., imposing a slightly larger burden relative to consumption on lower income households than wealthier households) in some cases,10 though the opposite applies, including for the Philippines (see below).

15. An ETS does not provide the same opportunities for addressing efficiency and distributional objectives as carbon taxes if allowances are freely allocated or auction revenues are earmarked. Under carbon tax schemes revenues generally accrue to the general budget (Annex 1). In contrast, under ETSs with free allowance allocations the policy rents are instead reflected in windfall profits for firms receiving those allocations and ultimately the rents may accrue to shareholders and workers in these industries (the former at least are concentrated in higher income households). Revenue from allowance auctions in the German ETS are used for transition assistance to vulnerable households, workers, and regions which largely forgoes efficiency benefits but has helped to enhance the overall acceptability of the ETS.

16. Political economy is a major factor in determining the choice between carbon pricing instruments and their respective designs. ETSs may be more feasible politically than taxes, especially where permits are freely allocated to affected firms. Such firms may wield significant political power due to effective coordination and lobbying of policymakers. Some jurisdictions have progressively reduced free allocations (e.g., 30 percent of allowances in the EU ETS were freely allocated in 2020 compared with 80 percent in 2013). To some degree, carbon taxes can be designed to mimic the effect of free allocation by using revenues for targeted relief to firms.

17. As with all taxes, carbon taxes can be politically challenging to implement, though revenue recycling, communications strategies, and identification of key stakeholders can build support. While carbon taxes (and broader reforms of energy prices) have sometimes faced political backlash from affected firms and citizens, the same can be said for many other reforms to fiscal systems. Additionally, ETSs are not necessarily more or less popular politically with households (e.g., Australia’s ETS was repealed in 2014 in response to opposition). However, what does appear to be important for ensuring the durability of carbon tax is effective and inclusive communication alongside pragmatic use of revenues. The anticipation of negative distributional outcomes may create public opposition to carbon pricing and makes the design of targeted support measures (e.g., for low-income households) critical, underscoring the need for thorough analysis (e.g., to quantify the targeted measures required).

18. Under a carbon tax, the government can align the price trajectory with emissions targets, while alignment can be automatic under an ETS. Carbon tax trajectories can be set equal to price paths needed to bring emissions in line with mitigation targets, which can be inferred with some confidence for the near to medium term from estimates of future BAU emissions and the responsiveness of emissions to pricing.11 Periodic forward-looking adjustment of tax rates can maintain alignment with emissions goals. For an ETS, price alignment is automatic if the emissions cap is set to meet a country’s mitigation commitment (e.g., the EU ETS cap is reduced by 2.2 percent a year in line with 2030 emissions targets for the power/industrial sector).

19. Carbon taxes are more compatible with reinforcing mitigation instruments and variants of them may be more practical for other sectors beyond energy. Overlapping instruments (e.g., feebates) that reinforce some of the mitigation responses of pricing will be needed for hard-to-abate sectors like transportation and buildings. When combined with a carbon tax, these instruments reduce emissions without affecting the tax rate. In contrast, under a pure ETS with emissions fixed by the cap, overlapping instruments reduce the emissions price without affecting emissions. As discussed in Annex 3, carbon tax variants can also be extended to broader emissions sources like forestry.

20. ETS may have their own appeal, however. ETSs help achieve emissions targets with more certainty, are a more natural instrument where mitigation policy is under the purview of environment ministries, and free allowance allocation may help to garner industry support.

21. In principle, ETSs and carbon taxes exist on a continuum and can theoretically be designed to replicate each other. For example, an ETS with a price floor and/or a price ceiling makes the ETS look more like a carbon tax, loosening the quantity restriction on emissions (and hence the emissions certainty) to enhance price certainty within the system. However, in practice, the choice between ETSs and carbon taxes remains substantive, with the choice usually determining key design choices of the carbon price instrument (e.g., whether it is midstream or downstream, raises revenues, or fixes emissions quantities or prices). Table 1 provides a summary comparison of carbon taxes and ETSs.

Table 1.

Philippines: Summary Comparison of Carbon Taxes and ETSs

article image
Source: IMF staff. Green indicates an advantage of the instrument; orange indicates neither an advantage or disadvantage; red indicates a disadvantage of the instrument.

22. Under a hybrid approach, an ETS could address emissions from the power and industry sector and the carbon tax could address emissions from the transportation and building sectors. These hybrid approaches have been used elsewhere—for example, in the EU power and industry sectors, emissions are covered by the EU-wide ETS while several member states (e.g., Denmark, Finland, France, Ireland, Portugal, Sweden) have applied national carbon taxes to the transportation and building sectors. Cost effectiveness would require aligning carbon prices across tax rates and ETSs, for example by setting a trajectory of price floors under the ETS equal to the trajectory of carbon tax rates. It would generally not make sense to apply a carbon tax and ETS to the same emissions base as this would duplicate administration and the tax may simply lower the price of emissions allowances without affecting emissions (if they are fixed by the cap).

23. Carbon taxes or ETSs would allow countries to participate in internationally coordinated pricing regimes, for example among Southeast Asian countries. International price coordination facilitates a scaling up of carbon pricing by addressing concerns about competitiveness and policy uncertainties that can deter countries when they act unilaterally. Pricing might be established initially for the power and industry sectors, given that most emissions reductions would come from these sectors. International price coordination requirements would be most naturally met through a carbon tax but ETSs could be accommodated (as they are under the prototype federal pricing requirements in Canada) by underpinning the ETS with a floor price or by setting caps to generate expected domestic emissions prices in line with international pricing requirements.12

Tradable Emission Rate and Feebate Alternatives for Power and Industry

24. A tradeable performance standard (TPS) for the power and industry sectors would not raise revenue but would address competitiveness concerns and promote many of the behavioral responses of carbon pricing. Under this approach, the government could set a required CO2 emission rate per unit of output for each major industry, and power generation, and all firms within the industry are required to meet the industry standard—though firms can fall short of required standards if they buy sufficient credits from other firms that exceed those standards. Indeed, credits could be tradable across the firms in different industries, which will promote a common credit price and equalization of incremental abatement costs across industries. A TPS can promote the same behavioral responses to reduce emissions intensity as under carbon pricing, but it does not promote the same consumer demand response because there is no pass through of carbon tax revenue or allowance rents into higher prices for electricity and industrial products. IMF staff calculations suggest that about 77 percent of the emissions reduction in the power sector under carbon pricing in Philippines would come from reductions in emissions intensity and 23 percent from a reduction in electricity demand. Canada has successfully implemented a federal TPS (applying for the industrial sector and where provincial/territorial polices for industrial emissions are not applied.)13

25. Feebates are the fiscal analogue of a TPS. Feebates apply a sliding scale of fees on firms in an industry with emission rates above a pivot point emission rate for the industry and a sliding scale of rebates for firms with emission rates below the pivot point.14 If the pivot point—which is determined by the government—is set equal to the industry average emission rate, and updated over time, the feebate will be approximately revenue neutral. Feebates automatically promote cost effectiveness within an industry without the need for trading markets as all firms face the same incremental reward for reducing emissions—the emissions price in the feebate. Furthermore, emission prices can be harmonized across different feebate schemes to promote cost-effectiveness across industries. Like TPSs, feebates do not charge the average firm for their remaining emissions and therefore do not promote consumer demand responses.

26. The pros and cons of feebates versus TPSs are mostly analogous to those for downstream taxes and ETSs. Feebates:

  • Provide certainty over the emissions price, while regulations provide certainty over the industry-wide average emissions rate;

  • Are automatically cost effective across firms within industries and across industries (if feebate prices across schemes are harmonized), while tradable emission rate standards require liquid credit trading markets with a significant number of market traders to be cost effective;

  • Are compatible with overlapping policies as they provide ongoing incentives for all firms (regardless of whether they are paying fees or receiving rebates) to cut emissions.

Again, however, TPSs can be made more feebate-like by combining them with out-of-compliance fees, and subsidies for going beyond standards, and for firms not participating in credit trading.

C. Quantitative Assessment of Carbon Pricing in the Philippines

27. The quantitative assessment of carbon pricing is based on the Climate Policy Assessment Tool (CPAT). CPAT is a spreadsheet-based model providing projections of fuel use and GHG emissions for the major energy sectors in 188 countries. The impacts of carbon pricing and other mitigation policies depend on their proportionate impacts on future fuel prices and the price responsiveness of fuel use in different sectors. The former is based off international energy price forecasts (Figure 2) while the latter is parameterized to the mid-range of existing modelling literature and empirical evidence on fuel price elasticities. The model is linked to input-output tables and household expenditure surveys15 to infer impacts on production costs in different industries, consumer prices, and burdens on household income groups. CPAT, which was developed jointly by IMF and World Bank staff, is widely used in IMF surveillance, cross-country, and technical assistance reports (see Annex 4 for more details). The analysis here is focused on CO2 emissions from fossil fuel use in the power, industry, transport, and building sectors.

28. According to BAU projections, Philippines will meet its unconditional GHG target in 2030 but fall well short of its conditional target. IMF staff project GHG emissions will increase 27 percent from 234 million tonnes in 2021 to 297 million tonnes in 2030 (i.e., 32 percent lower than the authorities’ projection). The emissions increase is driven by a large projected increase in GDP (75 percent) over the period, though there is some offsetting decline in the energy and agricultural intensity of GDP.16 The unconditional and conditional NDC targets are 380 and 97 million tonnes CO2 equivalent for GHGs respectively. These are inferred from the authorities’ projections of BAU GHG emissions in 2030 reduced by 2.71 and 75 percent respectively. If Philippines were to follow most other countries and adopt a net zero emission target by mid-century,17 a 2030 target aligned with this long run goal would be in the order of 180 million tonnes of GHG.18

Figure 5.
Figure 5.

GHG Emissions Projections and Targets

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Source: IMF staff estimates.

29. The analysis here focuses on pricing limited to CO2 emissions from the power, industry, transport, and building sectors. The model cannot price emissions from the agricultural sector (the main source of GHGs beyond the energy sector) because methane and nitrogen oxide emissions from the sector are not directly monitored, new capacity would be required to implement charges on (larger) farms, and competitiveness concerns are severe for this sector. An illustrative carbon price starting at $20 per tonne in 2023 and rising $4.3 per year to reach $50 per tonne in 2030 is considered—this price is broadly in the middle of the price range of existing carbon pricing schemes (Figure 3). The policy could either represent a carbon tax, which would add a charge in proportion to carbon content to existing fuel excises and apply similar carbon charges to other fuels. Or it could represent an ETS which is imposed on top of existing fuel taxes, encompassing firms in the power and industry sectors and suppliers of fuels for other sectors.

30. The illustrative carbon price would reduce CO2 emissions in 2030 to 144 million tonnes (13 percent below IMF staff projections of BAU CO2 emissions) with more than half of the reduction in the power sector. Power, transportation, industry, and buildings account for 52, 17, 19 and 12 percent of the emission reductions respectively. Within the power sector, reductions in output account for one third of the emission reductions and switching from fossil fuels, primarily coal to renewables, accounts for two-thirds of the reduction (Figure 6)19. Indeed, the reform would raise the renewable share in electricity generation to more than 40 percent in 2030—well above the authorities’ current target of 30 percent and the current renewable share of 21 percent.

Figure 6.
Figure 6.

Contribution of Sectors and Power Generation Fuels to CO2 Reductions Under Carbon Pricing, 2030

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

31. A $50 carbon price could potentially raise revenues of 1.05 percent of GDP ($7.0 billion) in 2030 (accounting for the base erosion of pre-existing fuel taxes). About 44 and 37 percent of the revenue would come from new charges on road fuels and coal respectively (Figure 7).

Figure 7.
Figure 7.

Projected Fiscal Revenues

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Source: IMF staff estimates.Note: estimates account for the erosion in tax bases for pre-existing fuel taxes.

32. Cumulated over 2023–30, the carbon price would save 10,400 premature fatalities from local air pollution exposure (Figure 8). About half of the avoided deaths are people over the age of 65 years (who are more likely to have pre-existing conditions).

Figure 8.
Figure 8.

Cumulative Averted Deaths from Reduced Air Pollution by Age Group

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Source: IMF staff estimates.

33. The carbon tax would impose a modest economic cost on the Philippines, equivalent to about 0.2 of GDP in 2030 but half of these costs would be offset by domestic environmental co-benefits (Figure 9). Economic costs reflect pure mitigation costs, primarily the annualized costs of using cleaner but more expensive technologies instead of fossil-based technologies (net of any savings in lifetime energy costs).20 Some 87 percent of the domestic environmental co-benefits reflect lower local air pollution deaths and a 13 percent reduction in traffic congestion and accident externalities.21 The negative impact of carbon taxation on GDP can be offset by revenue recycling. For example, the impact on GDP growth in 2030 is about negative 0.4 percent of GDP, and more than offset by using 75 percent of revenues on public investment, bringing the net impact to positive 0.1 percent. The estimate of the impacts on GDP depends on the fiscal multiplier used.

Figure 9.
Figure 9.

Economic Costs and Benefits

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Source: IMF staff estimates.

34. A $50 carbon price has the most impact on coal and natural gas prices and moderate e impact on prices for electricity and road fuels. Coal and natural gas prices increase by 59 and 21 percent above BAU levels in 2030, while electricity and gasoline prices increase by 4 and 13 percent respectively.22 Coal, however (and to some extent natural gas), is an intermediate input used by firms rather than directly consumed by households. Broadly speaking, price increases for the Philippines from a $50 carbon price would be in line with those of comparator countries (Table 2).

Table 2.

Philippines: Impact of a $50 Carbon Price on Energy Prices in Selected Countries, 2030

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Source: IMF staff estimates. Note: baseline energy prices are projected based on international energy price forecasts shown in Figure 2 and on an assumption that current taxation (excise, VAT, other taxes) are not expanding. Carbon tax is assumed on top of existing taxation.

35. Pre-existing fuel taxes in Philippines are equivalent to carbon charges of 1, 45, and 154 per tonne of CO2 on coal, natural gas, and gasoline respectively in 2030. A $50 carbon tax would add additional carbon charges equivalent to $4.7/GJ for coal, $2.8/GJ for natural gas, and $0.11/liter for gasoline on top of existing taxes. Historically, pre-existing fuel taxes were imposed for fiscal and local environmental reasons, rather than climate mitigation, and ideally should not be scaled back as a carbon tax is phased in as this would undermine the emissions impact of the carbon tax. Or put another way, BAU emissions projections account for current fuel taxes so additional taxation is needed to reduce emissions below BAU levels. Nonetheless, the introduction of carbon pricing provides an opportune time to reform the system of pre-existing fuel taxes to better align tax rates (inclusive of carbon pricing) with the carbon and local environmental costs of fuel use, thereby achieving environmental goals at lowest cost.

36. Carbon pricing increases industrial production costs which may raise competitiveness concerns, especially for energy-intensive, trade-exposed (EITE) industries. Production cost increases have three components. First, industrial firms will incur a direct tax payment, or allowance purchase requirement, for emissions they continue to emit directly. Second, firms will incur abatement costs to the extent they cut emissions, for example, by switching to cleaner (but costlier) technologies and fuels. Third, they incur an indirect payment for carbon charges on emissions embodied in their inputs, especially electricity. At more modest abatement levels, the direct tax payment would be expected to be much higher than the abatement costs. Overall (Figure 10), a $50 carbon price in 2030 would increase production costs for non-metallic industries (most notably cement), iron and steel, and chemicals by 8, 4 and 3 percent, respectively (relative to BAU costs in 2030). More generally, energy costs will increase beyond the energy sector, for example, in the agricultural and fishery sectors.

Figure 10.
Figure 10.

Percent Change in Output Prices for $50 Carbon Tax in 2030

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Source: IMF staff estimates.Note: EITE (Energy Intensive Trade Exposed) industries are highlighted in blue.

37. Policymakers may wish to consider measures to address competitiveness concerns. In the absence of international coordination (see above), there are several unilateral possibilities for competitiveness assistance measures. One is to only impose carbon charges on firms’ emissions above a threshold level (as in South Africa), though this partial exemption effectively lowers the average carbon charge, which undermines mitigation incentives. Another possibility is to return revenues collected from EITE industries in the form of output-based rebates to those industries—operationally, this scheme acts like a TPS or feebate approach discussed above. A further possibility, under an ETS not a carbon tax, is to provide free allowance allocations to EITE industries. One drawback from all these approaches is that they reduce the potential government revenue raised from carbon pricing.

38. The illustrative carbon price imposes a burden on the average household of 1.5 percent of their consumption, though burdens relative to consumption are lower for lower income groups. On average about half of the burden comes indirectly from increases in the price of general consumption goods and these impacts are evenly distributed across households. In contrast, the relative burden from higher electricity prices is higher for higher income groups, for reflecting their greater use of space cooling (Figure 11, panel 1). These estimates overstate the net burden of carbon pricing on households in two regards. First, they ignore partially offsetting domestic environmental benefits, especially local air pollution mortality (information is not available however on the distribution of these benefits). Second, they ignore the benefits from recycling carbon pricing revenues.

Figure 11.
Figure 11.

Burden of Carbon Pricing on Households In percent of consumption, 2030

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

39. Using revenues for targeted transfers and public investment could make the policy both pro-poor and pro-equity. In principle, fully compensating the bottom 10, 20, and 30 percent of the income distribution would use 7, 11 and 20 percent of the carbon pricing revenues (though actual revenue needs would be larger if social protections involve significant leakage to higher income groups) and using a larger proportion could help achieve poverty and equity objectives. For example, using 25 percent of the revenues for a targeted, unconditional cash transfer aimed at the bottom four consumption deciles23 and using 75 percent of the revenues for public investment (with benefits assumed proportional to household income) would make the reform both pro-poor and equity-enhancing. On net, the bottom two deciles are significantly better off from the reform with net benefits amounting to about 5–10 percent of consumption while the top three deciles are worse off on net by about 1 percent of consumption (Figure 11, panel 2). Further studies and extensive consultations with relevant stakeholders and development partners should be done to ensure that the social and economic costs are fully taken into account in the design of carbon pricing schemes.

D. Conclusion: Moving Reform Forward

40. Prospects for an effective and politically acceptable mitigation strategy with carbon pricing as the centerpiece can be enhanced by a comprehensive approach with several key elements. These include:

  • A balance between carbon pricing and other mitigation instruments—especially feebates or TPSs—at the sectoral level that are less efficient than pricing but likely have greater acceptability;

  • Recycling of carbon pricing revenues in ways that boost the economy (e.g., through lowering taxes on work effort or funding socially productive investments), making sure that benefits are equitably distributed across households;

  • Public investments in clean technology infrastructure networks (e.g., grid updates to accommodate renewables) that would not be provided privately;

  • Market reforms to enhance competition and investment in the main energy sectors;

  • Just transition measures to assist vulnerable groups, such as stronger social safety nets or tax reliefs for low-income households, assistance programs for displaced workers and at-risk regions;

  • Measures to limit impacts of carbon pricing on industrial competitiveness;

  • Pricing or similar schemes for GHG emissions beyond the energy sector; and

  • Financial sector support for the low-carbon transition.24

Extensive upfront consultations with stakeholders and information campaigns to inform the public of the rationale for reform (including programs at the Department of Energy to promote renewables, energy efficiency and conservation) can help build political support. Reforms should also be phased in progressively to give households and firms time to adjust. Recent increases in fossil fuel prices, while likely transitory in nature, are at least to some extent another reminder of the need for low-carbon energy transition to shield the economy from recurrent fuel price shocks, but they also underscore the importance of a comprehensive and inclusive approach to reform to protect the vulnerable and gain social and political support.

References

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  • Black S., Chateau J., Jaumotte F., Parry I., Schwerhoff G., Thube S., and Zhunussova K., 2022. “Getting on Track to Net Zero: Accelerating a Global Just Transition in This Decade”. Forthcoming.

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  • Goulder, Lawrence H., Dallas Burtraw and Roberton C. Williams, 1999. “The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting.” Journal of Public Economics, Vol. 72, pp. 329–360.

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  • Heine, Dirk, and Simon Black. 2019. “Benefits Beyond Climate: Environmental Tax Reform in Developing Countries.” In Fiscal Policies for Development and Climate Action, edited by Miria A. Pigato, 1–56. Washington DC. https://doi.org/10.13140/RG.2.2.13910.88646.

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  • IMF, 2019a. How to Mitigate Climate Change. Fiscal Monitor. IMF, Washington, DC.

  • IMF, 2019b. Fiscal Policies for Paris Climate Strategies—From Principle to Practice. IMF, Washington, DC.

  • IMF, 2021. World Economic Outlook, forthcoming International Monetary Fund, Washington, DC.

  • IPCC, 2019. Climate Change and Land: An IPCC Special Report on Climate Change, Desertification, Land Degradation, Sustainable Land Management, Food Security, and Greenhouse Gas Fluxes in Terrestrial Ecosystems. International Panel on Climate Change, Geneva, Switzerland.

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  • Parry, Ian, 2021. “The Critical Role of Feebates in Climate Mitigation Strategies.” In F. Caselli, A. Ludwig, and R. van der Ploeg (eds.), No Brainers and Low-Hanging Fruit in National Climate Policy, Center for Economic Policy Research, London, UK, 217–244.

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  • Parry, Ian, Simon Black, and Karlygash Zhunussova, 2022. Carbon Taxes or Emissions Trading Systems? Instrument Choice and Design. IMF Staff Climate Note. IMF, Washington, DC.

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  • Parry, Ian, Simon Black and Nate Vernon. 2021. “Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies.” Working paper 20/236, International Monetary Fund, Washington, DC.

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  • Parry, Ian and Roberton Williams, 2012. “Moving US Climate Policy Forward: Are Carbon Tax Shifts the Only Good Alternative?” In Robert Hahn and Alistair Ulph (eds.), Climate Change and Common Sense: Essays in Honor of Tom Schelling, Oxford University Press, 173–202.

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  • Parry, Ian, Dirk Heine, Shanjun Li, and Eliza Lis, 2014. Getting Energy Prices Right: From Principle to Practice. IMF, Washington DC.

  • WBG, 2022. Carbon Pricing Dashboard. World Bank Group, Washington, DC. Available at: https://carbonpricingdashboard.worldbank.org/map_data.

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  • WBG, 2019. Systematic Country Diagnostic of the Philippines : Realizing the Filipino Dream for 2040. World Bank Group, Washington, DC.

Annex I. Further Details on Carbon Pricing Schemes

Table A1.

Further Details on National, Subnational and Regional Level Carbon Pricing Schemes in Operation

article image
Sources: Parry and others (2022). Note: Revenue/rent excludes revenue loss from erosion of prior fuel tax bases. Values combine national, subnational and regional pricing. Mexico does not include subnational pricing schemes due to lack of coverage data.

Annex II. The Economic Importance of Using Carbon Pricing Revenues Productively

1. Carbon pricing imposes two sources of cost on the economy. First is the cost of the mitigation responses themselves, for example, firms producing with cleaner but more expensive technologies or households using less fuel than they would otherwise prefer. Second is the broader macroeconomic costs. Higher energy prices tend to slightly contract overall economic activity as they increase the general price level, which in turn reduces the real returns to work effort and investment, compounding distortions in factor markets created by taxes on labor and capital income. These costs can be largely offset (or perhaps more than offset in some cases) by using carbon pricing revenues to increase economic efficiency, for example by lowering taxes on work effort or funding productive investments.1

2. A recent assessment for the United States (Figure A1) suggests that an ETS with free allowance allocation and emissions price of $50 per tonne, or the equivalent carbon tax with revenues returned in lump-sum dividends to households2 is about twice as costly—for a given nationwide emission reduction—as a combination of feebates to reduce emission rates. This is because feebates have much smaller impacts on energy prices and therefore have much smaller macroeconomic costs. The most cost-effective policy however is an ETS with allowance auctions, or a carbon tax, with the bulk of revenues used to cut distortionary taxes on labor and business income and increase economic efficiency.

Figure A1.
Figure A1.

Economic Efficiency Costs of Alternative Mitigation Instruments for the United States (US$50/ton Carbon Tax), 2030

Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A003

Source: IMF, 2019a.Note: Policies reduce economywide CO2 emissions 22 percent below BAU.

3. Table A1 provides more discussion of alternative options for the use of carbon pricing revenues in terms of implications for economic efficiency, distributional incidence, administrative burdens, and political acceptability.

Table A1.

Options for Using Carbon Tax Revenues

article image
Source: IMF staff. Note: Green, orange, and red indicate an advantage, neither an advantage or disadvantage, and a disadvantage of the revenue use, respectively.

Annex III. Pricing Schemes for Broader Sources of GHGs

Forestry

1. Ideally, forestry and land use policies would promote the main channels for increasing carbon storage including reducing deforestation, afforestation, and enhancing forest management (e.g., planting larger trees, increasing rotation lengths). To the extent forest coverage is expanded this can, moreover, generate other environmental co-benefits beyond carbon storage such as reduced risks of water loss, floods, soil erosion, and river siltation.

2. A national feebate program could cost-effectively promote all responses for increasing carbon storage without a fiscal cost to the government. The policy would apply to landowners— most importantly those at the agricultural/forestry boundary—a fee given by:

[CO2 rental price] × [carbon storage on their land in a baseline period ─ stored carbon in the current period]

3. This scheme would reward all three channels for enhancing carbon storage, either through reduced fees or increased subsidies. Periods here could be defined as averages over multiple years given that carbon storage might be lumpy during years when harvesting occurs. Feebates can be designed—through appropriate scaling of the baseline over time1—to be revenue-neutral in expected terms. And a feebate could be administered based on the registry of landowners used for business tax collection.2

4. Feebates could involve rental payments, rather than large upfront payments for tree planting, given that changes in carbon storage may not be permanent. The problem with one-off, upfront payments is that afforestation may be reversed—for example, a new tree farm receiving an upfront rebate may be subsequently harvested or destroyed (by fires, pests, windstorms), requiring complex, ex-post re-payment procedures to provide adequate incentives for maintaining the land-use change. Feebates have become more practical with advances in monitoring technologies. Forest carbon inventories are estimated through a combination of satellite monitoring, aerial photography, and on-the-ground tree sampling.3

Agriculture

5. Around fourth fifths of methane emissions in the Philippines are from the agricultural sector and these emissions account for about 70 percent of total GHGs from agriculture. Two thirds of agricultural methane emissions are from rice cultivation4 and one-third from livestock operations. The other main GHG from agriculture is nitrous oxide, primarily from soils.

6. Emissions reductions should be balanced by the need to enhance food production and food security, especially in the face of a global food supply shock. The main channel for reducing rice paddy emissions is to reduce water intensity through, for example, periodic draining. Increasing livestock productivity (e.g., through breed switching), and shifting to alternative feed (e.g., with seaweed additive) can reduce methane releases from enteric fermentation and methane/nitrous oxide emissions from manure.

7. Pricing of agricultural GHGs is trickier but could be based on farm-level output or input data, default emissions factors,5 and rebates for farmers demonstrating mitigation actions (e.g., drainage of rice paddies). Revenues from the fee might be recycled to the sector to help address competitiveness concerns.

Waste

8. There is a limited range of behavioral responses to reduce methane emissions from the waste sector. At landfill sites these include collection and flaring of methane leaks and at the consumer/industrial level, they include reducing the demand for packaging and food, enhanced recycling, and composting of organic waste. The case for pricing methane from waste is less compelling than for pricing GHGs from other sectors. For one thing, it is more practical to mimic the effects of a tax with regulation given the very limited number of (readily observable) mitigation responses. In addition, downstream methane taxes would not promote reductions in the supply of waste—these require fiscal or regulatory incentives at the household and industrial level. And the 389 waste sites in the Philippines are publicly managed and it is more natural to set standards, rather than apply taxes, to public enterprises.

Annex IV. Climate Policy Assessment Tool

1. CPAT provides, on a country-by-country basis for 200 countries, projections of fuel use and CO2 emissions by major energy sector.1 This tool starts with use of fossil fuels and other fuels by the power, industrial, transport, and residential sectors2 and then projects fuel use forward in a baseline case using:

  • GDP projections;3

  • Assumptions about the income elasticity of demand and own-price elasticity of demand for electricity and other fuel products;

  • Assumptions about the rate of technological change that affects energy efficiency and the productivity of different energy sources; and

  • Future international energy prices.

2. In these projections, current fuel taxes/subsidies and carbon pricing are held constant in real terms.

3. The impacts of carbon pricing on fuel use and emissions depend on: (i) their proportionate impact on future fuel prices in different sectors; (ii) a simplified model of fuel switching within the power generation sector; and (iii) various own-price elasticities for electricity use and fuel use in other sectors. For the most part, fuel demand curves are based on a constant elasticity specification.

4. The basic model is parameterized using data compiled from the International Energy Agency (IEA) on recent fuel use by country and sector.4 GDP projections are from the latest IMF forecasts.5 Data on energy taxes, subsidies, and prices by energy product and country is compiled from publicly available and IMF sources, with inputs from proprietary and third-party sources. International energy prices are projected forward using an average of IEA and IMF projections for coal, oil, and natural gas prices. Assumptions for fuel price responsiveness are chosen to be broadly consistent with empirical evidence and results from energy models (fuel price elasticities are typically between -0.5 and -0.8). Carbon emissions factors by fuel product are from IEA. The domestic environmental costs of fuel use are based on IMF methodologies.6

5. One caveat is that the model abstracts from the possibility of mitigation actions (beyond those implicit in recently observed fuel use and price data) in the baseline, which provides a clean comparison of policy reforms to the baseline. Another caveat is that, while the assumed fuel price responses are plausible for modest fuel price changes, they may not be so for dramatic price changes that might drive major technological advances, or rapid adoption of technologies like carbon capture and storage or even direct air capture, though the future viability and costs of these technologies are highly uncertain. The model also does not explicitly account for the possibility of general equilibrium effects (e.g., changes in relative factor prices that might have feedback effects on the energy sector), and changes in international fuel prices that might result from simultaneous climate or energy price reform in large countries. Parameter values in the spreadsheet are, however, chosen such that the results from the model are broadly consistent with those from far more detailed energy models that, to varying degrees, account for these sorts of factors.
1

Prepared by Simon Black, Ian Parry, and Karlygash Zhunussova with research assistance from Danielle Minnett. The authors are grateful to Elif Arbatli Saxegaard, Sarwat Jahan, Cheng Hoon Lim, and the Philippine authorities for helpful comments and suggestions.

2

BAU refers to a baseline without new, or tightening of existing, mitigation policies.

3

IPCC (2018, 2021).

5

Philippines does not at present have sectoral emissions targets.

6

This section draws from Parry and others (2022).

7

For administrative reasons, small scale emitters in these sectors are excluded, but their share in emissions is generally modest.

8

These mechanisms can be implemented, for example, through minimum prices when allowances are auctioned (e.g., in the California ETS there is a reserve price for allowance auctions that rises annually at 5 percent in real terms) (see Flachsland and others (2018) for further discussion of price floor mechanisms).

9

Even with free allowances, however, a significant portion of the potential carbon pricing revenues could accrue indirectly to the finance ministry to the extent windfall profits are subject to corporate, and ultimately personal, income taxes.

11

Emissions projections boil down to assumptions about future GDP growth, income elasticities for energy products, rates of technological change (e.g., that improves energy efficiency or the productivity of renewables), and future energy prices.

12

Regional price coordination could also be built up through linking existing ETSs, but there are downsides. Linking (where permits traded under one ETS are allowable under another) would theoretically promote cost effectiveness at the regional level through harmonizing permit prices across countries. However, linking also perpetuates design characteristics (e.g., a carbon price ceiling in one ETS becomes the price ceiling in the linked ETS), reduces the ability of governments to achieve domestic targets, and can create significant administrative complexity and uncertainty.

14

Specifically, firms in an industry would be subject to a fee equal to a CO2 price, times the difference between their CO2 per unit of output and the industry wide pivot point CO2 per unit of output, times the firm’s production level. Elements of feebates are common in vehicle tax systems to promote penetration of cleaner vehicles. See Parry (2021) for a broad discussion of feebates.

15

For Philippines, the input output tables is from Aguiar and others (2019) while the latest household survey (for 2018) is used.

16

This reflects improvements in energy efficiency as new (more efficient) capital gradually replaces older capital and a (standard) assumption that energy and agricultural demand grows by less than in proportion to GDP.

17

136 countries, representing 88 percent of global GHGs, have announced (or intend to announce) net zero targets to be achieved by between 2035 (Finland) to 2070 (India) (see www.climatewatchdata.org/net-zero-tracker).

18

For example, cutting emissions by 60 million tonnes per decade over the next four decades would achieve net zero by 2060 and imply 2030 emissions of about 180 million tonnes.

19

For comparison, coal would account for 39 percent of all fossil fuel CO2 emissions in the Philippines in 2030 in the BAU, natural gas – for another 11 percent.

20

Estimation of economic costs is made under specific assumptions on emissions projections and responsiveness of emissions to carbon pricing (reflecting marginal abatement cost curves) (see Black and others (2022) on the cost methodology). A rough approximation for costs is the integral under the economy-wide marginal abatement cost schedule or one-half the product of the emissions price and the emissions reduction.

21

See Parry and others (2014) on methodologies for quantifying the broad range of environmental impacts of fossil fuel use on a country-by-country basis.

22

Price increases would be 50 percent smaller, and 50 percent larger, under $25 and $75 carbon prices respectively.

23

Assumes coverage rate (proportion of targeted that receive the transfer) of 75 percent and leakage rate (proportion of non-targeted wealthier households that erroneously receive the transfer) of 25 percent. Targeted transfers could however be inefficient if it is prone to mismanagement especially or if the system for local government units is not yet in place.

24

See the 2020 Sustainable Finance Framework and 2021 Environmental and Social Risk Management Framework.

1

A substantial analytical literature has explored these interactions (see, for example, Goulder and others, 1999, and Parry and Williams, 2012).

2

Dividends have no efficiency benefits as they do not increase the real return to work effort or investment.

1

See Parry (2020) for details.

2

Feebates bear some resemblance to environmental services payments programs that were first introduced in Costa Rica (see www.fonafifo.go.cr/en). Costa Rica’s scheme involves payments to develop and maintain forests but does not apply fees for reductions in forest coverage.

4

Methane is released when flooded fields prevent oxygen from penetrating the soil, creating conditions for methane-emitting bacteria.

5

See IPCC (2019).

1

CPAT was developed by IMF and World Bank staff and evolved from an earlier IMF tool used, for example, in IMF (2019a and b). For descriptions of the model and its parameterization (see IMF (2019b Appendix III, and Parry and others. 2021), and for further underlying rationale see Heine and Black (2019).

2

International aviation and maritime fuels are excluded from the model and from computations of fossil fuel subsidies.

3

GDP projections exclude the negate growth effects of global climate change.

4

IEA (2021). Any fuel consumption that could not be explicitly allocated to a specific sector was allocated apportioned based on the relative consumption by sector in a given country.

5

A modest adjustment in emissions projections is made to account for partially permanent structural shifts in the economy caused by the pandemic.

Other IMF Content

Other Publishers

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Cover IMF Staff Country Reports
Philippines: Selected Issues
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2022: Issue 370
Publisher:
International Monetary Fund
ISBN:
9798400227561
ISSN:
1934-7685
Pages:
55
DOI:
https://doi.org/10.5089/9798400227561.002
  • <sup><xref rid="RA003fig01" ref-type="fig">Figure 1.</xref></sup>
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    Figure 1.

    Global GHG Emissions, Nationally Determined Contributions and Temperature Targets

  • <sup><xref rid="RA003fig02" ref-type="fig">Figure 2.</xref></sup>
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    Figure 2.

    Trends in International Energy Prices

  • <sup><xref rid="RA003fig03" ref-type="fig">Figure 3.</xref></sup>
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    Figure 3.

    National or Regional Carbon Pricing Schemes, 2021

  • <sup><xref rid="RA003fig04" ref-type="fig">Figure 4.</xref></sup>
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    Figure 4.

    Allowance Price Volatility in ETSs

  • <sup>Figure 5.</sup>
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    Figure 5.

    GHG Emissions Projections and Targets

  • <sup><xref rid="RA003fig06" ref-type="fig">Figure 6.</xref></sup>
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    Figure 6.

    Contribution of Sectors and Power Generation Fuels to CO2 Reductions Under Carbon Pricing, 2030

  • <sup><xref rid="RA003fig07" ref-type="fig">Figure 7.</xref></sup>
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    Figure 7.

    Projected Fiscal Revenues

  • <sup><xref rid="RA003fig08" ref-type="fig">Figure 8.</xref></sup>
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    Figure 8.

    Cumulative Averted Deaths from Reduced Air Pollution by Age Group

  • <sup><xref rid="RA003fig09" ref-type="fig">Figure 9.</xref></sup>
    View in gallery
    Figure 9.

    Economic Costs and Benefits

  • <sup><xref rid="RA003fig10" ref-type="fig">Figure 10.</xref></sup>
    View in gallery
    Figure 10.

    Percent Change in Output Prices for $50 Carbon Tax in 2030

  • <sup><xref rid="RA003fig11" ref-type="fig">Figure 11.</xref></sup>
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    Figure 11.

    Burden of Carbon Pricing on Households In percent of consumption, 2030

  • <sup><xref rid="RA003fig12" ref-type="fig">Figure A1.</xref></sup>
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    Figure A1.

    Economic Efficiency Costs of Alternative Mitigation Instruments for the United States (US$50/ton Carbon Tax), 2030

Figure 1.

Global GHG Emissions, Nationally Determined Contributions and Temperature Targets
Figure 2.

Trends in International Energy Prices
Figure 3.

National or Regional Carbon Pricing Schemes, 2021
Figure 4.

Allowance Price Volatility in ETSs
Figure 5.

GHG Emissions Projections and Targets
Figure 6.

Contribution of Sectors and Power Generation Fuels to CO2 Reductions Under Carbon Pricing, 2030
Figure 7.

Projected Fiscal Revenues
Figure 8.

Cumulative Averted Deaths from Reduced Air Pollution by Age Group
Figure 9.

Economic Costs and Benefits
Figure 10.

Percent Change in Output Prices for $50 Carbon Tax in 2030
Figure 11.

Burden of Carbon Pricing on Households In percent of consumption, 2030
Figure A1.

Economic Efficiency Costs of Alternative Mitigation Instruments for the United States (US$50/ton Carbon Tax), 2030