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The Price of Pollution: Tax as a Flexible Green Policy Tool in ASEAN

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20 Jul The Price of Pollution: Tax as a Flexible Green Policy Tool in ASEAN

ASEAN’s economy is expected to grow at an estimated 5.1 percent annually, but its energy demand and greenhouse gas (GHG) emissions will also increase by 67 percent by 2030.

To counteract this trend, in December 2017, the Philippines ratified a coal tax in December 2017, after 40 years of subsidies. The coal tax was championed by Senate Finance and Climate Change Committee Chairwoman Senator Loren Legarda.

Singapore has meanwhile opted for a broader carbon tax on GHG emitters, starting in 2019. Speaking at our 5th Singapore Dialogue on Sustainable World Resources (SDSWR) in May, Senator Legarda praised Singapore’s carbon tax, and said it should serve as an example for other ASEAN countries.

These pioneering tax laws reflect growing ESG (environmental, social and governance) considerations in public policy.

Though the Philippines’ coal tax and Singapore’s carbon tax seem cursorily similar, nuanced differences do exist. What are they, and what takeaways might there be for other ASEAN countries looking to taxation as a green policy tool?

Tax consumers or producers?

The trickle-down effect of Singapore’s blanket carbon tax to consumers is comparatively greater than the Philippines’ coal tax. The average Singaporean household expects 2.1 to 4.3 percent increase in electricity bills post-tax. The Philippines? Merely 0.17 percent.

This is because the Philippines tax incisively targets operational – and not fuel – costs of electricity producers. Furthermore, all price hikes are subject to the Energy Regulatory Commission (ERC)’s approval. Singapore’s is far less targeted.

Higher consumer impact might incentivise Singaporeans to save electricity, disproportionately reducing emissions due to suboptimal energy conversion efficiency.

However, too high an impact on consumers will backfire. In 2008, British Columbia’s direct carbon tax resulted in consumers simply “buying their way out”, thus maintaining emissions level.

Singapore’s carbon tax sits in moderation between the Philippines and Canada in degree of burden on consumers.

Speaking at our 5th SDSWR, Indonesia National Development Planning Minister Bambang Brodjonegoro said his country is also considering a carbon tax like Singapore’s. However, ASEAN countries must consider the tax burden on consumers. They need to balance supply- and demand-side strategies, optimising target industries and taxation levels appropriate to their own economic context and price elasticity.

Coal or carbon tax?

Those eyeing taxation as a green policy tool must also decide legislative breadth, based on their countries’ energy mix, national priorities and robustness of the renewables sector.

A narrower coal tax makes sense for a country like the Philippines, where 48 percent of energy comes from coal, and combating negative externalities is a national priority. The S$2.45 billion tax revenue can be invested to subsidise and boost competitiveness of renewables, and mitigate coal-induced agricultural, public health and labor productivity costs.

Countries like Singapore, which face no urgent pollution threats, and where the energy mix is predominantly natural gas (95.2 percent), might opt for a broader, more rigorous carbon tax that also covers oil and gas to reduce emissions.

Furthermore, coal tax merely incentivises transition to “clean” high-efficiency coal and other non-renewables such as gas and oil. This is a viable “baby step” for ASEAN countries where renewables are undeveloped and underinvested. An example is coal-dependent Vietnam, where wind, solar and biomass account for only 0.4 percent of energy output.

A blanket carbon tax places pressure on non-renewables more broadly, helping renewables to grow. For Indonesia, where renewables already account for 12 percent of the energy, this is a more appropriate strategy to give renewables a necessary push.

A flexible policy tool

The flexibility and customisability of taxation do make it an attractive and effective green policy tool. However, ASEAN countries keen on leveraging taxation as a green policy tool, perhaps even in conjunction with carbon trading scheme and subsidies, must consider the consumer-producer and coal-carbon dilemmas, based on and in alignment with their national contexts.

Sources:

Raising the Philippine Coal Tax Makes Economic Sense [Institute for Energy Economics and Financial Analysis, 30 Nov 2017] (PDF)

What will a coal tax hike mean for the Philippines? [Eco-business, 16 Jan 2018]

Singapore’s carbon tax: What does it entail? [The ASEAN Post, 5 Jul 2018]

The Economy-wide Impact of a Uniform Carbon Tax in ASEAN [Ditya A. Nurdianto and Budy P. Resosudarmo, Journal of Southeast Asian Economies, 2016]

The Goldilocks dilemma of Singapore’s carbon tax [Eco-business, 26 Apr 2018]

Philippines: Enhancing Resilience and Transitioning to a Low Carbon Economy [Philippines Department of Finance]