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Business community supports coal tax hike as milestone towards cheaper, cleaner electricity

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THE SENATE has recently approved the Tax Reform for Acceleration and Inclusion (TRAIN) bill. This includes a coal excise tax increase from P10 per metric ton to P100 per metric ton in the first year, P200 in the second year, and P300 in the third and next years.

While environmental groups have lauded this development, it appears that prominent voices in the business sector have raised a collective howl of disagreement, saying this is another unwanted development that will derail the economy. Indeed, who would like to threaten our manufacturing resurgence? No less than Trade Secretary Ramon Lopez is saying that the proposed hike in coal excise tax will disrupt the country’s accelerated manufacturing growth target due to the provision resulting to a much higher cost for power.

The Philippine Chamber of Commerce and Industry’s (PCCI) was also quick to say that proposed coal tax’s inclusion in the TRAIN will “send shockwaves through the power sector,” issuing dire warnings that it will “worsen the already poorly situated power cost competitiveness of the country.”

But is it really another classic case of economics versus the environment, or are we looking at vested interests just refusing to show the real facts at hand?

Indeed as former Socioeconomic Planning Secretary Prof. Cielito Habito succinctly asks, who’s afraid of the coal tax? “There will be much gain in government revenues and little pain from raising taxes on coal.”

Coal tax sounds counterintuitive

Actually, it is not just the government that will gain from this, but businesses and the general public alike. Sounds counterintuitive, especially when all we hear is the spin that PCCI, as “the voice of Philippine business recognized by government and international institutions,” cautions about it, that the DTI Secretary warns that it compromises our manufacturing sector, and even Bayan Muna has branded it as anti-poor.

However, the facts belie these claims, because the coal tax is not only necessary for the government’s revenue generation targets, but it is long-delayed, does not actually cause the pain as feared, and is a strategic move so we achieve the much-coveted Holy Grail of “low-carbon growth” — achieving economic growth while improving competitiveness and reducing carbon emissions. How is this so?

There are three reasons to point out:

1) The coal tax is merely a corrective measure.

2) The coal tax does not affect businesses as feared.

3) The coal tax actually incentivizes the shift to cleaner and cheaper power, by shifting the country’s power mix from dirty — and actually expensive — coal.

Firstly, the coal tax is merely a corrective measure.

As pointed out by Prof. Habito, for decades, the excise tax on coal has remained at the ridiculously low rate of P10 per ton, or a tiny 0.2 percent given current prices and exchange rates. Yet other fossil fuels like gasoline have been taxed at around 10 percent, and TRAIN will raise that further.

Secondly, the coal tax does not affect business, and even if it does, it will be marginal. Fearmongers continuously yak about its pass-through effect on consumers.

However, the reality is that the coal tax is not and should not be part of energy payment or operations! It is a tax on the coal plant owner as contained in the “polluter pays” principle. Indeed, the coal tax is a way to internalize the costs coal plant owners impose on society via pollution and climate-change-inducing carbon emissions.

If and when those engaged in the coal business insists in sneaking the coal excise tax increase as a pass-through cost, this will still need to be approved by the Energy Regulatory Commission (ERC). So consumers are actually not affected unless the ERC approves.

We go back to Prof. Habito’s beautiful response to the oft-repeated chorus that “higher coal tax would mean higher electricity rates, higher production costs, higher prices, higher inflation rate”: the arithmetic says that the much-feared price increase shall amount to 38 percent of P0.24, or 9 centavos per kilowatt-hour (kWh). “For a household using 400 kWh per month, its monthly bill would go up by P36, which amounts to less than 1 percent of the bill. Meanwhile, the same Meralco data show that the monthly bill could rise by up to P310 or 7.9 percent above the average in the normal course of the year, from various factors including changes in spot market prices and foreign exchange fluctuations. What this tells us is that the effect of the coal tax…will hardly be felt.”

“The effect will similarly be minimal for industry. Power cost makes up only 2.7 percent of total costs on the average, and less than 2 percent for more than half of our industries. Altogether, average industry costs would rise by only 4 percent of 2.7 percent, or a mere 0.1 percent — far less than cost fluctuations caused by other factors from month to month.”

Encouraging shift to cleaner, cheaper energy

Contrary to what the fearmongers want us to believe, the coal tax hike does not affect businesses!

Thirdly, and this is where it gets most interesting, is that the coal tax actually incentivizes the shift to cleaner and cheaper power, by shifting the country’s power mix from dirty — and actually expensive — coal.

As think tank IEEFA writes, coal and diesel are no longer the cheap option.

Between June 2016 and September 2016, coal price as represented by the Newcastle Coal Index (NEWC) increased 55% from $51 to $74 per metric ton and in September 2017, it hit its 2017-high at of $103.5 per metric ton. That’s a literal doubling of prices in a span of 1.5 years! IEEFA warns that this unforeseen increase in coal prices could result in the Philippines’ current account deficit increasing by $1.75 billion per year by 2021.

A coal-heavy power mix is not sustainable due to coal’s lock-in effects: coal prices are getting more expensive and when more coal plants are built, we simply end up locking out lower-carbon alternatives like renewables.

The coal tax actually incentivizes the Philippines to shift to cleaner and cheaper power, by shifting the country’s power mix from dirty and expensive coal to renewables.

In early 2017, Hawaii — an island state which, similar to the Philippines, must import fossil fuels and has abundant renewable energy resources — switched on a 28 megawatt (MW) solar plant coupled with a battery system that generates, stores, and delivers clean power at P5.63 per kWh ($ 0.11 per kWh), which is already cheaper than coal and oil contracts.

Just a few months later, even lower costs for utility-scale “solar plus storage” was proven: a 100MW solar plant with batteries in Arizona was launched at an unsubsidized price equivalent to approximately P4.63 per kWh (or $0.09 per kWh). And this is already clear in the Philippines too. Meralco is currently underwriting a solar power supply deal for 85 MW at P2.99 per kWh.

Earlier this summer, local solar company Solar Philippines delivered a 5000 MW plan to the country’s electric utilities detailing how solar and battery storage can offer power that is 30% cheaper than any fossil fuel options.

It is becoming clear: the common refrain that renewable energy is too expensive and too unreliable and intermittent just isn’t true anymore. In fact, the opposite is true: coal is not only dirty, it is also the expensive option.

More momentum for renewables

Now, back to the coal excise tax debate.

It is becoming clear, that the gain is not only for the government to raise revenues, but also for businesses and the general public. Raising the coal excise tax, as what the Senate did, is a positive step forward in avoiding coal lock-in.

While the coal lock-in effects is true, the flip side is also true: the more we adopt measures that discourage coal and encourage investment in alternatives like renewables, the more momentum will build toward a low-carbon transition that allows us to achieve economic growth while improving competitiveness and reducing carbon emissions.

As lawyer Atty. Aaron Pedrosa remarks, “it is detestable how coal proponents are threatening the consumers with higher electricity prices once the coal tax is passed, when they have been the ones profiting heavily and without risk because of the incentives shouldered by the citizen. Imposing taxes on coal is tantamount to saying there are no more free rides for coal oligarchs.”

And denying the free ride to the coal oligarchs will ultimately benefit the majority of the business community. The coal tax hike is a positive step environmentally and economically, despite the fact that vested interests want everyone else to believe otherwise.

Marlon Apanada is managing director of Allotrope Partners for the Philippines. He holds a Bachelor’s degree in Environmental Science from Ateneo de Manila University and is a 2017 cohort at Oxford University’s Smith School for Enterprise and the Environment.

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