We need to make companies pay for pollution

In a recent meeting, newly appointed finance secretary Ralph Recto stressed the need for the Philippines to seriously study carbon pricing instruments, with the intended aim of reducing emissions through a combination of carbon taxation and an Emissions Trading System (ETS). Curiously, the lower House is also tackling a proposed bill that seeks to put a price on carbon while at the same time strengthening carbon accounting and reporting mechanisms in the government.

There is certainly reason to look at these systems; after all, the region is catching up with Indonesia and Singapore leading the way in imposing carbon taxes, and the Philippines is also positioning itself as some sort of “climate leader,” if our posturing in global loss and damage discussions were any indication. But what exactly are these instruments?

Carbon pricing essentially means putting a price on carbon emissions. This is operationalized through different systems such as taxation, and through an ETS. High carbon-emitting industries have limits set by the government according to their ongoing emissions levels. When companies exceed their allotted carbon budgets, they’re required to pay the set price of carbon emitted, expressed in metric tons. In an ETS, they can buy “credits” from companies having a surplus due to lower emissions. This effectively makes carbon a traded commodity and government regulators see this system as a way to make companies find ways to reduce their emissions – something that most of them won’t do voluntarily.

The devil, however, is in the details. While such schemes have been in place in some countries for decades, the bigger goal for which this mechanism has been formulated (significantly reducing emissions) has not been met. The EU ETS, for example, took 20 years to build up and only started working effectively in the past five years.

Several safeguards also need to be in place. For an ETS to be effective (i.e. to drive down emissions in a cost efficient way), an adequately high CO2 price is required. Low prices would not have any impact on reducing emissions, and can lead to a situation akin to musical chairs – companies are trading carbon, but no emissions reduction is actually taking place. In some cases, large companies wouldn’t mind paying for their extra emissions if the revenue streams from their carbon-heavy operations dwarf any payment anyway. This transforms any carbon pricing as a paid license to pollute more. Likewise, there must be safeguards to ensure that liability isn’t passed on to consumers.

One cannot leave neoliberal market forces to define the pricing of carbon alone, which means that market-based schemes like an ETS and carbon taxes, etc. must be part of a robust regulatory framework on carbon emissions reduction – which needs to be driven by an ambitious national decarbonization blueprint. Unfortunately, the country has neither of these necessary foundations that would provide vital grounding for such mechanisms today.

But there is a third foundation which the government must invoke if they are serious about driving corporate transition: climate justice. It must be a central element, with the country and many communities among the least responsible yet most vulnerable to the climate crisis. In an ETS, for example, the costs of climate impacts must be reflected in the carbon price. Revenues must also be used to support adaptation. Moreover, the country’s emissions reduction framework should mandate a strong system on climate reporting and corporate due diligence on climate impacts, as well as disclosure on carbon emissions across the full life cycle of their products. Corporate transition plans must set significant and time-bound emissions reductions targets. In turn, the Philippine government must also demand all these from oil and gas companies – the biggest corporate climate polluters – and the governments of the countries in which they’re domiciled.

Reduction needs to be reflected in the Philippines’ climate ambition – which currently sets a mere 2.71 percent of the 75 percent reduction targets in the Nationally-Determined Contributions – as unconditional, which means reduction that the government is required to do through policies that shift away from fossil fuels.

A further souring point is the fact that the government is aggressively promoting liquefied natural gas (LNG), an expensive fossil fuel. The potential exorbitant costs and economic consequences were already flagged by the IEEFA, which stated that it could “risk binding the country to a costly, volatile energy future.”

How an ETS will function in these circumstances is anyone’s guess, but one thing is for sure: the country needs to ramp up its ambition and be more serious with fossil fuel phaseout and corporate transition before committing to a mechanism that, if not regulated properly, will only lead to a system where polluters don’t pay for their crimes. Rather, they would simply pay (or be paid) to pollute more. With the current state of play, the Philippines is definitely not ready for a carbon market, let alone managing its own low-carbon future free from the profiteering interests of fossil fuel companies, whose bottom line is to maintain business as usual.

In this regard, having a bad emissions trading system – one that lacks a robust regulatory framework grounded on climate justice – might be worse than having none at all. Without strong regulation, a government-mandated ETS will only succumb to market forces. An ETS that loses its soul – emissions reduction and transitioning away from fossil fuels for the sake of those who are most impacted – will be nothing more than legitimized greenwashing.

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