Written by Karen Andrea D. Torres, 18 July 2008
Whereas the past 20th century witnessed two world wars and the dominance of western nations like the United States of America and select European countries, the 21st century ushered in the emergence of Asian economic powerhouses like China and India.
This latest development also involves a war of global proportion, which — unlike previous world wars marked by use of arms to achieve geopolitical goals — has been caused by careless application of the latest technologies for economic gains.
A major repercussion of this economic race at all cost is global warming, which is not confined to the realm of the environment, but is expected to have a telling effect on the world economy.
Although the Philippines contributes an insignificant amount to this negative externality, global warming is still a major concern for us since the Philippines will not only not be spared from the negative effects of this ecological imbalance, but would even be among the hardest hit, along with all the other poor nations.
The Philippines is an archipelagic country. An increase in sea level will easily flood low-lying areas, subjecting irrigation and drinking water to increased salinity. Our country does not have the scientific nor the economic capabilities to cope with such disruptions.
Adverse climate change is indeed a global problem that requires worldwide efforts, involving what the Kyoto Protocol describes as "common but differentiated responsibilities" among developed and developing nations. The Kyoto Protocol, to which the Philippines is a signatory, sets targets for industrialized signatory countries to reduce greenhouse gas emissions by 5% between 2008-2012 from the 1990 levels. It legally binds nations to meet its set targets through national measures and localized approaches.
At present, there are two popular approaches to curbing this externality: cap-and-trade system and tax- or price-based regimes.
Under the cap-and-trade system, carbon emissions are limited and allowances may be bought and sold in the marketplace, coined as the "carbon market." The Kyoto Protocol operates through three mechanisms: (1) emission trading, (2) clean development mechanism, and (3) joint implementation.
Under emission trading, each nation is assigned a certain number of units in terms of the quantity of carbon it may emit into the atmosphere. Countries with excess allowance can sell the same to nations whose carbon emission has exceeded allowed levels.
The clean development mechanism, on the other hand, grants certified emission reduction credits which can be earned by implementing emission-reduction projects in developing countries. A certificate may be used or sold to other countries to offset a tonnage of carbon dioxide.
Further, in joint implementation, a signatory country may initiate energy-efficient projects in other signatory countries which, in turn, would earn them emission reduction units. This may be used to meet the sponsoring country’s target level of carbon emission.
Though the Kyoto Protocol is the first-ever truly global and organized approach in the combat against global warming, it has been met with much criticism. The main criticisms revolve around such issues as how the allowable units of emission are assigned, the creation of artificial scarcities and monopolies, and potential profiteering by the private sector.
On the other hand, the more feasible solution then seems to be the imposition of a uniform and harmonious carbon tax, which does not entail assignment of carbon emission units to signatory countries and the involvement of private sectors in its implementation.
The idea of using taxes to regulate activities and cure social problems is not new, such as the imposition of excise taxes on socially undesirable goods. The use of taxes is not merely confined to the generation of government revenues, but also to serve as either a deterrent or an initiative to certain undertakings. The use of such corrective taxes was advocated by British economist Arthur Pigou in the early 20th century (previously called Pigovian taxes). Pigovian taxes aim to align private incentives with social costs and benefits.
As with most other taxes, though, this form of indirect tax is expected to impact on the cost of petroleum products. To date, the price of oil has already reached the $145 barrel mark without any slight indication of getting lower.
Inflation in our country reached 11.4% last month, with approximately 40% of the cost of commodities traceable to cost of petroleum. It does not seem advisable, therefore, to adopt additional taxes as a solution to this war against global warming.
Definitely, such measure will be an unwelcome solution to taxpayers who are barely surviving on their meager salaries with their purchasing power steadily declining.
The primary advantage, though, of imposing taxes vis-a-vis the cap-and-trade system is that revenues will flow into the funds of the government rather than into the private sector.
So in order to address the additional burden of taxation, the government can redirect the expenditure of additional revenues to offset this burden, such as relief from other taxes, other forms of fiscal incentives, or provision of other public goods.
A third approach that we can adopt regarding the regulation of carbon emission is to actually do nothing and let the free economy do what it does best — determine the optimal market supply and demand. The continuous rise in the prices of petroleum is brought about by the increase in demand from fast developing nations that outpaces growth of supply. Between 2000 and 2007, the world demand for petroleum rose by nine million barrels a day, whereas supply increased by merely four million barrels a day.
This gap in oil’s supply and demand, along with low interest rates which increases consumption and people’s grim expectations about future supply and demand of oil, pushes prices to historic highs.
If truly what we have here are natural economic conditions, then regulation on oil prices may not be needed since the free market and its competitive forces will put everything into place. What is now a current inelasticity of demand for oil will eventually transform to elasticity in the long run. High prices will force consumers to find alternative means and processes that will lessen their dependence on such a costly scarce raw material.
Prices of oil will remain high and no one expects it to go down within the next five years. Carbon emission from the use of petroleum products is the primary contributor to global warming.
Both are long-term global problems, but a shift in perspective can show that one of these problems may turn out to be the key solution to the other.
