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Carbon Footprint, Inclusive

Growth and the Fuel Mix Debate in
the Philippines

Geoffrey M. Ducanes, Sarah Lynne S. Daway,
Majah-Leah V. Ravago, Raul V. Fabella

August 16, 2017 | Energizing Economic Growth, F1 Hotel
Introduction
§ Backdrop: RP’s INDC pledge to reduce CO2
emissions by 70% by 2030
§ Primary goal: Contextualization of discussions
§ We show that
§ RP is quite “blameless in stratosphere”
§ CO2 emissions and lower energy prices are
necessary for manufacturing growth
§ Manufacturing growth is the key to more inclusive
growth
§ High pledge might come at the cost of growth and
poverty reduction
RP has a very small carbon footprint…
2014 per capita CO2 emissions (metric tons)
Philippines 1

Angola 1.1

Congo 1.11

Dijbouti 1.63

Singapore 8.6

Japan 10.1

Canada 15.9

USA 16.5

Source: EU-EDGAR, WB Country Classification, UNFCC as cited in Sen. Sherwin Gatchalian’s
power point presentation at the Stratbase-ADRI workshop, 26 Aug 2016.
…Even among countries of a similar level
of development…
Per capita CO2 emissions in 2011
Metric Tons
2.5 2.4

2.0 1.7
1.6
1.5 1.3 1.4
1.0
1.0 0.9 0.9 0.7
0.5 0.5
0.5

0.0

Source: The World Bank, World Development Indicators, 22 July 2016
…And even when compared with Asian
countries when they were at the same level of
development.
Per capita CO2 emission in year of comparable
development level
4.5 4.1
4.0 3.6
3.5
3.0 2.7
2.5 1.9 1.8 1.8
Metric tons

2.0
1.5 0.9
1.0
0.5
0.0
Philippines Singapore Malaysia Republic of Thailand China Indonesia
(2011) (1968) (1976) Korea (1991) (2004) (2008)
(1982)

Source of basic data: Enerdata http://www.enerdata.net/
68% of total CO2 emissions come from more
developed economies.
CO2 emissions (% of total world emissions)
100%
90% Rest of the World: 166 countries including the Philippines
80% France, Ukraine, Iran, Mexico, Australia, South Africa, Poland,
70% Indonesia, Brazil, Saudi Arabia
60%
50%
40% USA, China, Russia, Japan, India, Germany, United Kingdom,
30% Canada, South Korea, and Italy
20%
10%
0%
1996
1997
1990
1991
1992
1993
1994
1995

1998
1999

2011
2000
2001
2002
2003
2004

2006
2007
2005

2008
2009
2010

2012
2013
2014
TOP 10 contributors NEXT 10 contributors Rest of the World (166 countries)

Source of basic data: http://www.enerdata.net/
RP’s share of renewables at 35% exceeds
those of almost all of the top 10 CO2 emitters.
Shares of CO2 emissions and renewables,
%
80
1990-2014
CO2 Emissions Share
70
Renewables Share
60

50

40

30

20

10

0

Source of basic data: Enerdata http://www.enerdata.net/
Average electricity, energy consumption and
CO2 emissions by sector, 1990-2014

Average&Electricity&Consump?on&& Average&Energy&Consump?on&& Average&CO2&Emissions&&
Other& Other& Agriculture&
Agriculture& Industry&
Agriculture& Others& Industry& 1.90%&
2.95%& 1.77%& 1.83%& 1.38%& 1.40%&

Other&
Commercial& Industry&
Commercial& Manufacturi 13.43%&
7.81%& 20.22%&
ng&
Commercial& Manufacturi 20.31%&
27.15%& ng&
34.43%& Residen?al& Manufacturi
17.40%& ng&
10.61%&
Residen?al&
34.70%&

Residen?al& Transport&
33.55%& Transport& 32.56%&
0.15%& Transport&
36.43%&

Sources of basic data: DOE Energy Balance Table and Enerdata
Some empirical evidence

§ Manufacturing growth versus CO2 emissions and
industrial electricity prices
üEvidence from cross-country panel regression
§ Manufacturing growth and poverty reduction
üEvidence from cross-country panel regressions
üEvidence from the Philippines, Vietnam and China
Manufacturing growth, CO2 emissions
and industrial electricity prices

§Higher CO2 emissions and lower electricity prices
encourage faster manufacturing growth.

§This is shown using cross-country panel regression
(system GMM) on 50 developing economies with real
GNIs per capita of not more than $10,000 from 1983
to 2013.
Table 2. Two-Step System GMM Results
Dependent variable: Growth rate of manufacturing value-added (averaged over five years)
95%
Standard t- Confidence
Variable Coefficient Error statistic p-value Interval
Manufacturing growth (-1) 0.39 0.04 8.90 0.00 0.30 0.48
CO2 Emissions (-1) 0.23 0.05 4.46 0.00 0.12 0.33
Industrial electricity price -0.96 0.34 -2.82 0.01 -1.64 -0.28
Fixed capital formation (%
GDP) 0.08 0.04 1.84 0.07 -0.01 0.17
Services growth (-1) -0.43 0.09 -4.88 0.00 -0.60 -0.25
ICRG 0.09 0.03 3.25 0.00 0.04 0.15
Exchange rate (-1) 0.17 0.06 2.85 0.01 0.05 0.29
Average manufacturing
tariff 0.03 0.04 0.72 0.47 -0.05 0.11
Initial GDP per capita -1.34 0.43 -3.13 0.00 -2.19 -0.48
Period 2 1.49 2.13 0.70 0.49 -2.78 5.76
Period 3 2.46 1.78 1.38 0.17 -1.12 6.04
Period 4 2.85 1.99 1.44 0.16 -1.14 6.84
Period 5 5.20 1.86 2.80 0.01 1.47 8.93
Period 6 2.26 2.17 1.04 0.30 -2.09 6.61
Number of observations: 149 Number of groups: 50 Number of instruments: 47
Diagnostic Tests
Arellano-Bond test for AR(1) in first differences: Prob > z = 0.097
Arellano-Bond test for AR(2) in first differences: Prob > z = 0.254
Hansen J-test of overriding restrictions: Prob > chi2 = 0.598

Manufacturing growth and poverty
reduction

§A larger manufacturing sector results in higher
poverty reduction than a larger services sector.

§This is shown using cross-country panel regression
on 50 developing economies with real GNIs per
capita of not more than $10,000 from 1983 to 2013.
Two-Step System GMM Results
Dependent variable: Poverty gap and poverty headcount ratio

Poverty gap Poverty headcount ratio
$1.9/day $3.1/day $1.9/day $3.1/day
1 2 3 4
Poverty measure (-1) 0.528 0.685 0.724 0.872
[0.010]*** [0.011]*** [0.012]*** [0.010]***
Manufacturing size -0.063 -0.077 -0.155 -0.059
[0.022]*** [0.029]** [0.036]*** [0.035]*
Services size 0.106 0.145 0.192 0.262
[0.009]*** [0.013]*** [0.033]*** [0.025]***
ICRG -0.042 -0.096 -0.106 -0.258
[0.008]*** [0.006]*** [0.012]*** [0.013]***
Real GNI per capita -0.001 -0.001 -0.001 -0.001
[0.000]*** [0.000]*** [0.000]*** [0.000]***
Period dummies Yes Yes Yes Yes
Number of observations 195 195 195 195
Number of countries 65 65 65 65
Number of instruments 64 64 64 64
AR(2) Arellano-Bond
test 0.753 0.715 0.419 0.423
Hansen p-test 0.477 0.54 0.54 0.582
Robust standard errors in brackets
* significant at 10%; ** significant at 5%; *** significant at 1%

Poverty fell much more sharply in China
and Vietnam the past two decades.
Poverty head count ratio, 1990 to 2010 at $1.90 a day (2011 PPP)
(% of population)
70
60
50
40
30
20
10
0
Philippines China Vietnam
ca. 1990 ca. 1995 ca. 2000 ca. 2005 ca. 2010

Source: The World Bank, World Development Indicators, 22 July 2016
Manufacturing sector-driven growth
appears to be the key.
Average annual growth in sectoral value added, 1990 to 2010
14

12

10

8

6

4

2

0
Philippines China Vietnam
Agriculture Services Industry (Manufacturing)

Source: The World Bank, World Development Indicators, 22 July 2016
Manufacturing has a relatively high median basic pay
per day, low visible underemployment and a large
percentage of workers in permanent status.

Table 3. Measures of quality of employment by sector

Median Visible Workers in
basic pay underemployment permanent
Sector per day rate status (%)
Agriculture 150 21.0 66.9
Manufacturing 315 8.3 74.0
Other
Industry 300 8.2 48.5
High-skill
services 576 2.8 87.1
Other Services 250 8.4 76.5
Total 250 11.9 72.0
Source: 2013 Labor Force Survey

Manufacturing is much more accessible to
lower-skilled or less-educated workers...
Table 4. Distribution of first-time workers by Sector and by Education

HS HS College College Total first-time
Sector undergrad grad undergrad grad Total workers
Agriculture 78.6 14.9 4.5 2.0 100.0 108,172
Manufacturing 36.3 50.1 8.1 5.5 100.0 67,193
Other Industry 49.5 28.8 13.3 8.4 100.0 38,143
High-skill services 0.7 9.7 11.1 78.5 100.0 78,394
Other Services 28.7 41.2 15.5 14.6 100.0 443,357
Total 34.8 34.2 12.6 18.4 100.0 735,259
Source: 2013 Labor Force Survey

…And lower-income households.

Table 5. Distribution of first-time workers by Sector and by HH per capita income
quntile
1st 2nd 3rd 4th 5th Total first-time
Sector Quintile Quintile Quintile Quintile Quintile Total workers
Agriculture 58.0 22.6 13.5 5.3 0.5 100.0 108,172
Manufacturing 19.8 19.6 29.5 22.0 9.1 100.0 67,193
Other Industry 20.7 25.3 22.6 24.7 6.7 100.0 38,143
High-skill
services 1.3 9.3 12.3 24.4 52.7 100.0 78,394
Other Services 18.3 17.0 22.8 20.9 20.9 100.0 443,357
Total 22.6 17.7 20.9 19.3 19.5 100.0 735,259
Source: 2013 Labor Force Survey

Implication: The 70% reduction
pledge appears to be quite high.
INDC Pledges
Philippines 70%
Angola 35%
Congo 55%
Djibouti 40%
Singapore 36%
South Korea 37%
Canada 30%
*EU 40%
India 25%
Japan 26%
Russia 75%
China 65%
USA 28%
CO2 Emissions Absolute Reduction Relative to BAU (Chen and Zeckhauser, 2016).

Absolute CO2 Emissions Reduction
Country Reduction Target
(%) Year
Base year CO2 reduction Conditionalities
(in MtCO2)
based on Chen and Zechauser
Philippines 70%
INDC
2030 BAU (2000- 108.74 Mitigation contribution
conditioned on the extent of
is
2030) financial resources, including
technology development & transfer,
and capacity building, that will be
made available to the Philippines
Congo 55% 2035 2000 - Yes.

Angola 35% 2030 2005 -14.42 Yes.

Djibouti 40% 2030 BAU -1.44 Yes..
Singapore 36% 2030 2005 -36.37 Not specified
EU 40% 2030 1990 544.49
South Korea 37% 2030 BAU (850.6) 133.87 Not specified
Canada 30% 2030 2005 205.62 Not specified
India 20-25% 2020 2005 1228.74 Yes.

Japan 26% 2030 2013 Not specified
Russia 70-75% 2030 1990 -162.35 Not specified
China 60-65% 2030 2005 669.78 Not specified
USA 26-28% 2025 2005 1448.75 Not specified

Special thanks to Cuicui Chen for providing the estimates of absolute CO2 reduction
relative to BAU 2030 based on the paper, Chen C. and R. Zeckhauser. 2016. “Collective
Action in Asymmetric World.”
Some Policy Recommendations
Being party to the climate change agreement is beneficial to
the Philippines.
However, we need to clarify the conditionalities that go with
the 70% reduction relative to BAU.
§ Focus on demand-side management
ü Less carbon-dependent transportation
ü More efficient energy use (e.g., shift to led light bulbs)
§ Shift additional charges (FIT, Universal, stranded cost,
Missionary) from Manufacturing/Industry towards Services and
the State Treasury
§ Work for a FIT-in tariff bill bankrolled by the global climate fund
§ Create a truly single market for electricity in the Philippines
§ Let the market decide on the fuel mix (with full implementation
of RCOA)
Salamat po!
Notes on CO2 emissions reduction
estimates relative to BAU emissions from
Chen and Zeckhauser 2016:
* Reduction is in terms of million tons of CO2.
* EU is treated as one party; the same number is used for
Germany, Italy, and UK.
* No data for Congo due to unavailability of population/GDP
projections.
* No data for Japan because 2013 is not observed (base
year) emissions in the carbon emissions dataset.
* GHGs are assumed to be all CO2; GHG projections are not
used because of data limitations.
* CO2 emissions exclude land-use-related emissions.
* Negative entries in the reduction column means that the
country actually increases its emission.


Industrial
electricity price Residential
electricity
Entire sample Without outlier price
1 2 3 4 5 6 7
Manufacturing growth (-1) 0.39 0.37 0.40 0.38 0.37 0.40 0.39
[0.04]*** [0.05]*** [0.04]*** [0.04]*** [0.05]*** [0.04]*** [0.07]***
CO2 emissions (-1) 0.23 0.21 0.24 0.22 0.21 0.23 0.25
[0.05]*** [0.06]*** [0.05]*** [0.05]*** [0.06]*** [0.05]*** [0.07]***
Electricity price -0.96 -0.82 -1.18 -0.97 -0.75 -1.18 -0.77
[0.34]*** [0.37]** [0.38]*** [0.34]*** [0.38]* [0.38]*** [0.43]*
K formation (% GDP) 0.08 0.13 0.09 0.08 0.13 0.09 0.09
[0.04]* [0.04]*** [0.04]** [0.04]* [0.04]*** [0.04]** [0.04]**
Services growth (-1) -0.43 -0.44 -0.42 -0.41 -0.43 -0.41 -0.66
[0.09]*** [0.08]*** [0.09]*** [0.08]*** [0.07]*** [0.09]*** [0.10]***
ICRG 0.09 0.19 0.10 0.09 0.17 0.09 0.11
[0.03]*** [0.06]*** [0.03]*** [0.03]*** [0.06]*** [0.04]** [0.04]***
Exchange Rate (-1) 0.17 0.20 0.14 0.19 0.22 0.17 0.24
[0.06]*** [0.07]*** [0.0711]* [0.05]*** [0.06]*** [0.06]*** [0.09]**
Manufacturing tariff 0.03 0.03 0.02 0.03 0.03 0.03 -0.09
[0.04] [0.05] [0.0444] [0.04] [0.06] [0.05] [0.04]**
Initial per capita GDP -1.34 -2.13 -1.31 -1.30 -2.00 -1.29 -1.95
[0.43]*** [0.76]*** [0.48]*** [0.42]*** [0.78]** [0.54]** [0.42]***
Latin America 2.09 2.04
[0.82]** [0.72]***
Sub-Saharan Africa -0.09 -0.09
[0.58] [0.52]
Tropical area 0.65 0.60
[0.42] [0.47]
Period dummies Yes Yes Yes Yes Yes Yes Yes
Observations 149 149 149 148 148 148 158
Number of countries 50 50 50 50 50 50 53
Number of instruments 47 50 48 47 50 48 49
AR(2) test (p-value) 0.25 0.31 0.25 0.25 0.30 0.25 0.32
Hansen test (p-value) 0.60 0.68 0.64 0.59 0.66 0.61 0.42
Standard errors in brackets
* significant at 10%; ** significant at 5%; *** significant at 1%