Who’s afraid of the coal tax?

I welcome the substantial hike in the excise tax on coal in the Senate-approved version of the Tax Reform for Acceleration and Inclusion (TRAIN) bill. But I wish the senators went even further. For decades, it 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.

I’ve said it here before, and I’ll say it again: There will be much gain (in government revenues) and little pain from raising taxes on coal up to 60 times what we have now, or from P10 to P600 per ton. It’s grounded on sound economics and environmental sustainability, as it would have coal users internalize the costs they impose on society via pollution and climate-change-inducing carbon emissions (see “The case for the carbon tax,” 10/17/17). But this eminently justifiable tax is being opposed by some, based at best on needless fears on its expected burden on the public and the economy, and at worst on vested interest (like involvement in the coal industry). I will not address the latter, as such self-serving opposition is to be expected, but not respected. But for the
sake of evidence-based policymaking, it’s important to set the record straight on
the main argument being leveled at the long overdue coal tax hike, based on
what I consider to be misplaced fears and
flawed arguments.

A comment I saw in the social media sums it up: “Higher coal tax would mean higher electricity rates, higher production costs, higher prices, higher inflation rate….” Yes, and no. Any tax increase would of course raise certain costs. There is, after all, no such thing as a free lunch. The key question, though, is by how much? The fact is, it would hardly hurt to raise the coal tax up to P600 per ton, which would bring it to the level of carbon taxes already paid in other countries, while aligning it with our taxes on petroleum fuels.

Let’s do the arithmetic. One metric ton of coal generates an average of 2,519 kilowatt-hours (kWh), according to data from applications for new coal plants at the Energy Regulatory Commission. Dividing P600 by 2,519 kWh gives an additional P0.24 per kWh in power generation cost. But less than half (38 percent) of Meralco power reportedly comes from coal-fired plants. Thus, the average Meralco customer would face a price increase amounting to 38 percent of P0.24, or 9 centavos per kWh. For a household using 400 kWh per month, its monthly bill would go up by P36. Data from the Meralco website for January to June of this year yields an average monthly bill of P3,900 for 400-kWh households, which means that the P36 increase amounts to less than 1 percent of the bill. I’ve done the calculations for other monthly consumption levels, and the impact of a P600 coal tax is consistently only 1 percent or below. 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 a P600/ton coal tax drowns out amid the usual monthly variations in a typical household’s electricity bill. In short, it will hardly be felt.

The effect will similarly be minimal for industry. A P0.24/kWh increase due to a P600/ton coal tax is only 4 percent of the P5.84/kWh industrial rate. 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 (“The myth of power and competitiveness,” 3/31/17). All together then, 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.

The Senate actually approved a still timid P100, to be phased up to P300 per ton by 2020, giving the government only P2 billion up to P6 billion in new revenues, rather than the P12 billion a P600/ton tax could bring. They may call it a compromise. I call it a missed opportunity.