Let’s get the carbon tax right

The Senate version of the tax reform bill is now at the plenary, and I’m glad it finally recognizes the need to raise the excise tax on coal, the dirtiest, and yet the least taxed, among the fossil fuels we depend on. But I’m unhappy it still goes nowhere near the right level of tax for the commodity. Rather than tax it at just P20 per ton, government should be taxing it at something more like P600 per ton. Let’s examine why.

In June, I wrote of our perverse taxation of fossil fuels. The current P10 per metric ton excise tax on mostly imported coal translates to an effective rate of only 0.25 percent (based on a coal price of $80 per metric ton and exchange rate of P50/$1). This is tiny compared to our tax on gasoline of around 10 percent (that is, P4.35 per liter that costs around P45). Our own natural gas from Malampaya is subject to a 60 percent royalty on sales (comprising 72 percent of gross revenues), or an effective tax rate of 43 percent.

In short, imported coal is taxed at a mere 0.25 percent, gasoline at 10 percent, and indigenous natural gas at 43 percent. Coal-fired power plants are estimated to emit 750 grams of carbon dioxide per kilowatt-hour (g/kWh) generated, oil-fired plants emit 660 g/kWh, and gas plants 400 g/kWh. Yet coal, the dirtiest among the fossil fuels, gets taxed extremely lightly, while natural gas, the cleanest, effectively gets taxed the heaviest—opposite to what rational economic taxation would dictate. There is, thus, both great scope and great merit in taxing coal far more heavily than we do now.

In the Senate version of the tax reform bill, diesel and bunker fuel oil will be taxed P1.75 per liter next year, P3.75 in 2019, and eventually P6 by 2020. With current diesel prices of about P34 per liter, this amounts to a tax rate starting at 5, then 11, and ultimately 18 percent—against coal’s 0.5 percent as proposed (P20/metric ton). We can also make the comparison on a per metric ton basis. With a liter being approximately 0.83 kilogram and one ton being 1,000 kilograms, the P1.75 to P6 per liter tax on diesel and fuel oil is the same as P2,108 up to P7,229 per ton—far more than coal’s P10 per ton now, and P20 as proposed.

Japan and South Korea, in keeping with the international clamor for a “carbon tax” on fossil fuels, already tax coal at an equivalent of over P600 and up to P1,322 per metric ton, respectively. If we were to set our coal excise tax at P600 per ton, it would put the rate of taxation at about 15 percent, more commensurate with (but still less than) the proposed rates on diesel and fuel oil. While it yields less than P200 million now, from about 17 million tons of imports per year, the coal excise tax can actually yield more than P10 billion in government revenues, with a tax increase grounded on sound economics.

Won’t this unduly hurt our households and our industries? Based on my calculations, no. Using data from new coal plant applications at the Energy Regulatory Commission, one metric ton of coal would generate an average of 2,519 kWh. Dividing a P600/ton coal tax by 2,519 would mean an addition of P0.24/kWh to power generation cost. But since only 38 percent of Meralco power reportedly comes from coal-fired plants, the average Meralco consumer should see a price increase of only 9 centavos per kWh (i.e., 38 percent of P0.24). A household consuming 400 kWh per month would have its monthly bill go up by P36, or less than 1 percent of its average monthly bill of P3,900 in the first 6 months of this year, based on data from the Meralco website.

As for industry, I have presented data before showing that 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. A P0.24/kWh increase due to a P600/ton coal tax is only 4 percent of the P5.84/kWh industrial rate. Industry costs would rise by only 4 percent of 2.7 percent on the average, or a mere 0.1 percent.

In sum, there would hardly be any price to pay, and a lot of revenues to gain, for a proper carbon tax that would get our environmental directions right. Congress should go for it.

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