Valuation Study

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Impact of Reducing Carbon Emissions

Attributes

Medium: Air

Country: Philippines

Analytical Framework(s): Other

Study Date: 2005

Publication Date: 2006

Major Result(s)

Functional Transfer: Kindly refer to the Computable General Equilibrium (CGE) model employed in the study text.

Study Note: This study assesses the economic and poverty impacts of reducing carbon emissions during the ongoing trade liberalization process in the Philippines by using the latest available data of the Philippine economy. A 35-sector static Computable General Equilibrium (CGE) model linked to a household survey with 39,041 households was employed to simulate the impact of reducing carbon emissions under a liberalized economy. Four policy experiments were undertaken to investigate the following questions: (1) Have tariff reduction measures undertaken between the years 2000 and 2006 resulted in higher carbon emissions for the Philippines? (2) Will the imposition of a carbon tax to restrain carbon emissions be favorable or harmful to firms, households and the government? (3) Are there significant resource reallocation effects that may lead to changes in government finances, household income, consumer prices and poverty structure? Furthermore, this paper implicitly investigates whether the imposition of a carbon tax in the Philippine economy may result in the so-called "double-dividend hypothesis", which states that imposing environmental taxes may provide not only a better environment (first dividend) but also bring about economic efficiency whenever environmental taxes are used to reduce other existing distortionary taxes in the economy (second dividend). Although the literature remains skeptical on the robustness of the hypothesis, it is argued that its validity "cannot logically be settled as a general manner" since its achievement and benefits depends on current conditions as well policy reform being considered.

Study Details

Reference: Erwin L. Corong. 2006. Tariff Reduction, Carbon Emissions and Poverty. EEPSEA Research Report, No. 2006-RR8.

Summary: This study analyzes the economic and poverty impacts of reducing carbon emissions in the Philippines during the ongoing trade liberalization process. Simulation results indicate that tariff reductions reduce the cost of imported inputs thereby benefiting the outward-oriented and import-dependent manufacturing sector. However, tariff reductions reduce the cost of imported fossil fuels resulting in a marginal increase in carbon emissions. The economic cost of reducing carbon emissions by imposing a 100 peso carbon tax during the trade liberalization process is minimal. This is because the reduction in consumer prices as a result of tariff reductions outweighs the increase in production cost from the imposition of the carbon tax. The national poverty headcount falls as a result of tariff reductions. Moreover, the national poverty headcount decrease additionally, albeit marginally whenever the generated carbon tax revenue is recycled back to the economy--especially when used to reduce direct income taxes imposed among households rather than on reducing indirect taxes on goods and services.

Site Characteristics: The experiments conducted in this paper were designed to capture the changing policy landscape in the Philippines. Initially, the economy-wide impacts of tariff reductions between the years 2000 and 2006 were assessed with the foregone tariff revenues being compensated by an increase in household direct income taxes as historical data on government's budget confirm this policy. This paper goes a bit further by exploring the possibility of imposing a 100 peso carbon tax owing to the increasing worldwide pressure, even among developing countries to reduce carbon emissions. In the same vein, the possibility of using the generated carbon tax revenue to offset the foregone tariff revenue and reduce other distortionary taxes (income tax imposed on households or indirect tax on goods and services) was likewise considered.

Comments: Two important considerations are worth noting with respect to the Philippine case. First, the Philippines like most developing economies has virtually inexistent environmental control on carbon emissions. Second and perhaps more important distinction is the tax structure which relies heavily on tariff revenue which accounts for roughly 20 per cent of total government revenue. While important from the government's revenue position, tariffs create additional distortions in the form of higher consumer prices which greatly affects the poor.

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