Taxation reform welcome, but wider scope is needed

Optimal reforms should extend beyond a price-based excise tax and be inclusive of fuel economy

Clean Air Asia welcomes the Philippine Senate’s passing of reforms to the taxation of petroleum products and automobiles. These reforms have the potential to significantly reduce wasteful consumption of fossil fuels in the transport sector, air pollution and greenhouse gas emissions, and alleviating rapid motorization by utilizing revenues for projects that improve mass transport systems in the country.

Senate Bill 1592, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act, which proposes amendments to select provisions of the National Internal Revenue Code of 1997, increases the automobile excise tax and the petroleum excise tax. The automobile excise tax reform, which is based on price brackets, is primarily aimed at equitably raising revenues, while the petroleum excise tax reform supports climate change mitigation by raising funds for climate-resilient infrastructure to address congestion and improve urban air quality.

The Senate version proposes staggered petroleum excise tax rates adjusted gradually in the next three years, albeit lower than that of the House version. While the House version approved a diesel taxation of P3 per liter for 2018, P2 per liter for 2019, and P1 per liter for 2020, the Senate version lowers this to P1.75 for the first year, P2 for 2019, and P2.25 for 2020.

The Senate version also seeks to lower the excise tax on liquid petroleum gas (LPG), which is commonly used for cooking, to P1 per liter each year, while the House version approved a P3, P2, and P1 scheme. The automobile excise tax also covers all diesel or gasoline-powered four (or more) wheeled vehicles, excluding buses, trucks, cargo vans, and jeepneys, and exempting hybrid vehicles and purely electric vehicles.

“We support the government’s taxation reforms, and we support the utilization of a portion of the revenue from the automobile and fuel excise tax to fund transport projects; however, optimal reforms should extend beyond a price-based excise tax and be inclusive of fuel economy,” said Clean Air Asia Deputy Executive Director Glynda Bathan-Baterina.

Fuel economy generally refers to distance travelled per liter of fuel used. Fuel economy policies encompass various types of policy, such as regulatory standards (e.g. fuel economy or CO2 emission standards), vehicle fuel economy labeling to inform consumers about the vehicle performance and energy efficiency rating, and fiscal measures such as taxation and incentives to influence consumer behavior.

While Clean Air Asia recognizes that the price-based progressive tax will improve overall fuel economy and increase tax revenues, it also finds that the impact on fuel economy improvement could be significantly increased by directly linking the tax to vehicle fuel consumption instead of price only. “In addition to much-needed improvements to fuel economy, it will also help to further bolster government revenues.”  Ms Bathan-Baterina said greater incentives for hybrid and electric vehicles were also needed.

The policy paper “Evaluation of Excise Tax Reform for New Vehicle Registrations and Fuel in the Philippines” prepared by Clean Air Asia with support from United Nations Environment, (to be released in December 2017) highlights these challenges: Because the vehicle excise tax is based on vehicle price only and not vehicle fuel consumption, the link to fuel economy is indirect, which makes it harder for consumers to see the value in buying less fuel-consuming cars.

Conversely, the fuel excise tax reform directly incentivizes the purchase of more efficient cars; however, increases in fuel excise are likely to be minor compared with the impact of increased crude oil prices over time, particularly in the longer term. The paper concludes that it is therefore likely that the biggest effect on improvements to future new fuel economy will not be triggered by the reforms, but rather by the projected increase in crude oil prices, which is forecast to reach 60 percent by 2020 and more than 120 percent by 2030 compared with 2015, according to the International Energy Agency.

In 2015, motorization in the Philippines was 2.5 times higher than 2000 levels at 138 vehicles per thousand inhabitants, based on official vehicle registration data from the Land Transportation Office and population data from the National Statistics Office. Car density is only at 119 cars per thousand inhabitants. The US has about 800 cars per thousand inhabitants, while Thailand and Malaysia about 400 cars per thousand inhabitants. Increasing GDP per capita will further increase disposable incomes, providing households with money to buy cars.

In Metro Manila, the high density of private vehicles has caused severe congestion on major roads and access roads. According to Japan International Cooperation Agency (JICA), cars consume 78 percent of road space. Without intervention, it is estimated that by 2030, the motorization level in Metro Manila will reach levels at which traffic is at a standstill.

“It is critical for the Philippines and other ASEAN Member Countries to adopt progressive fiscal and non-fiscal fuel economy policies in order to encourage more efficient vehicles,” said United Nations Environment Programme Officer Bert Fabian at a gathering of ASEAN member states on November 28 for the 3rd ASEAN Fuel Economy Platform Forum, organized by GIZ and hosted by the Philippines Department of Transportation to discuss the ASEAN Light-Duty Vehicle Fuel Economy Roadmap.

“We ae working with many countries worldwide as part of the Global Fuel Economy Initiative (GFEI), which aims to double the fuel economy of all light-duty vehicles in the stock by 2050 by reducing fuel consumption by 50 percent from 8.3 Lge/100km in 2005 to 4.2 Lge/100km.”

The Philippines’ light-duty vehicle fleet is about 8 Lge/100km on average, and the introduction of increased excise tax rates can support such goals. However, to encourage consumers to buy more fuel-efficient cars, taxation should have a fuel consumption component. It is likely that the effect on purchases of cheaper and eventually more efficient cars will be relatively small. Within the same price category, it provides no incentives to opt for vehicles with improved fuel efficiency.

The 3rd ASEAN Fuel Economy Platform Forum was aimed at improving fuel economy knowledge in ASEAN through open debates, sharing lessons learned and exchanging solutions, gathering stakeholder input on the goals and recommendations of the ASEAN LDV fuel economy roadmap, and increasing coordination and cooperation among government and research stakeholders for the advancement and implementation of fuel economy policies in the region.