## 1. Downside Risk and Policy Scenarios

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### Overview and near-term outlook
- Philippines’ economic recovery accelerated in 2022Q1, but risks are tilted to the downside.
- Growth: expected to slow to 5 percent in 2023.
- Inflation: risen sharply, surpassing the high end of the government target range of 3.0 percent ± 1.0 percentage point since March.
- Current account: deficit expected to widen further in 2022 as the trade gap broadens, driven mainly by high global commodity prices.
- Financial conditions: tightened, raising external and domestic borrowing costs while government debt increased due to pandemic-related spending.
- Downside risks: intensifying spillovers from Russia’s war in Ukraine, a deepening global slowdown, and a surge in COVID-19 cases from more deadly variants.

### Integrated Policy Framework (IPF) and modelling approach
- IPF: jointly considers monetary, exchange rate, macroprudential and capital flow measures and their interactions.
- Key finding: optimal policy combinations depend on a country’s initial conditions, financial frictions, and the nature of shocks.
- Model specification:
  - Estimated linearized variant of Adrian et al, 2021; expands New Keynesian open-economy models to include financial frictions capturing EM financial stress episodes.
  - Includes a nonlinear balance sheet channel for capital flow and exchange rate pressures.
  - Allows exchange rate fluctuations to affect domestic financial conditions to account for foreign currency mismatch.
  - Includes an indexation mechanism to proxy imperfect monetary policy credibility.
- Estimation: model estimated using Philippine data and Bayesian techniques; policy rules not formally optimized—scenarios used to compare policy outcomes.

### Initial conditions and key frictions
- Economy: fundamentally sound despite 2020 contraction; negative output gap expected to close in 2022.
- Exchange rate: in line with fundamentals; large reserve buffers.
- Monetary framework: Bangko Sentral ng Pilipinas has a credible inflation targeting framework and instruments to anchor expectations.
- Fiscal space: government retains some fiscal space.
- Frictions and characteristics:
  - Currency mismatches increase vulnerability through unhedged foreign currency debt and default risk.
  - Effectiveness of intervention depends on FX market depth/liquidity.
  - Dominant currency pricing (DCP) constrains exchange rate as automatic stabilizer.

### Philippine-specific financial exposure and FX market features (exact figures)
- Cross-border exposures: 10 percent of bank assets and 6 percent of liabilities.
- Banks’ foreign currencies: 18 percent of assets and 20 percent of liabilities.
- Non-financial corporates (NFCs): represent around 80 percent of bank lending.
- FX market liquidity: turnover in the Philippine peso was less than 1 percent of global OTC FX turnover in April 2019 (net-net basis).
- Trade invoicing (DCP prevalence): between 2014 and 2019, around 92 and 87 percent of exports and imports respectively were priced in US dollars.

### Role, potential benefits, and risks of foreign exchange intervention (FXI)
- Potential role: FXI can limit exchange rate and inflationary pressures, easing the inflation-output trade-off for interest rate policy and attenuating impacts on UIP risk premium and private borrowing spreads—particularly where FX market is shallow/illiquid and reserves are large.
- Benefits larger when: inflation expectations risk de-anchoring or exchange rate pass-through to inflation is high.
- Risks and operational considerations:
  - FXI can deplete official FX reserves or lead to costly accumulation of reserves.
  - Requires clear operational framework: triggers tied to market conditions and exposure/resilience, effectiveness under FXI budget constraint, asymmetry capture between appreciation/depreciation, and operationalizability.
  - Program design should include communication, governance, modalities, transparency, and accountability.
  - FXI should be aligned with monetary policy stance and expected fiscal actions.
- Historical note: Philippines does not publish FXI data; estimates show periods of active intervention (e.g., 2005-2010).

### Scenario design and policy combinations
- Policy combinations considered for each scenario:
  - (i) monetary policy interest rate;
  - (ii) monetary policy interest rate and FXI;
  - (iii) monetary policy interest rate and fiscal policy;
  - (iv) monetary policy interest rate, FXI and fiscal policy.
- Fiscal policy response assumed:
  - 0.5 percent of GDP of government spending in each of the first and second years;
  - withdrawn in subsequent years for a cumulative 1.8 percent of GDP fiscal stimulus over 5 years.
- Domestic interest rate policy:
  - follows a Taylor-rule type reaction to the output gap and expected inflation; additional shocks capture aggressive policy responses.
- FXI policy rule:
  - central bank intervenes to partially offset nominal exchange rate movements; interventions directly impact central bank FX reserves.

### Scenario 1 (risk-off, cost-push driven tightening) — key model responses and magnitudes
- No FXI:
  - Nominal exchange rate depreciation: 10 percent.
  - Core inflation: increases by 150 basis points relative to baseline.
  - Monetary policy tightening: around 130 basis points.
  - Real policy interest rate: initial fall because policy rate rises less quickly than inflation.
  - Output gap:
    - Policy interest rate only: widens to about -2.5 percent after 4 quarters.
    - With fiscal policy: widens to -2.1 percent after 4 quarters.
- With FXI:
  - Nominal exchange rate depreciation reduced from 10 percent to 4 percent.
  - Core inflation impulse response peak: around 115 basis points above baseline.
  - Policy rate impulse response peak: around 80 basis points above baseline.
  - Output gap:
    - Policy interest rate with FXI: widens to about -2.1 percent after 4 quarters.
    - Policy interest rate with FXI and fiscal policy: improves to about -1.7 percent after 4 quarters.
  - FX reserves impact:
    - Cumulative loss of foreign exchange reserves: 2.6-2.8 percent of GDP in the first four quarters.
    - FXI gradually reversed from the fourth quarter as shocks prove temporary.
    - Cumulative loss after 20 quarters: 0.9 percent of GDP.

### Scenario 2 (higher exchange-rate pass-through) — key model responses and magnitudes
- No FXI:
  - Nominal exchange rate depreciation: 10 percent.
  - Core inflation: peaks at 2.25 percent in the fourth quarter relative to baseline.
  - Policy interest rate peaks: around 2.6 percent.
  - Output gap:
    - Interest rate policy only: widens to -3.2 percent.
    - Interest rate policy supported by fiscal policy: about -3 percent.
- With FXI:
  - FXI stabilizes exchange rate; because pass-through is stronger, monetary policy tightened more than in Scenario 1 but FXI reduces required interest rate increases.
  - Core inflation peaks: around 1.5 percent above baseline.
  - Nominal policy interest rate tightening peaks: about 2 percent.
  - Output gap:
    - Policy interest rate with FXI: widens to about -2.9 percent after 4 quarters.
    - Policy interest rate with FXI and fiscal policy: widens to -2.6 percent after 4 quarters.
  - FX reserves impact:
    - First 4 quarters loss of foreign reserves: about 3.1 percent of GDP.
    - Cumulative reserves loss after 20 quarters: 0.9 percent of GDP.

### Comparative finding: policy mix and tradeoffs
- Overall: combination of modest fiscal expenditure with monetary tightening and FXI provides the most favorable outcome in reducing output loss; FXI offsets exchange rate shock and removes inflation pressure.
- Fiscal stimulus: the stated stimulus size yields similar inflation outcomes with or without fiscal stimulus; increasing fiscal stimulus would raise inflation and interest rates, crowding out private domestic demand.
- If exchange rate pass-through has increased, FXI stabilizing the exchange rate yields stronger benefits in reducing inflation pressure.
- Variance measure (sum of squared deviations from baseline, over 20 quarters):
  - Interest rate policy only:
    - Scenario 1: Output gap 36.6, Core Inflation 14.0
    - Scenario 2: Output gap 55.0, Core Inflation 27.3
  - Interest rate and fiscal policy:
    - Scenario 1: Output gap 25.0, Core Inflation 14.4
    - Scenario 2: Output gap 15.4, Core Inflation 27.4
  - Interest rate and FXI policy:
    - Scenario 1: Output gap 26.6, Core Inflation 6.9
    - Scenario 2: Output gap 47.9, Core Inflation 12.5
  - Interest rate, FXI and fiscal policy:
    - Scenario 1: Output gap 17.3, Core Inflation 7.6
    - Scenario 2: Output gap 35.4, Core Inflation 13.2

### Fiscal sustainability and debt implications
- Fund’s DSA framework and IPF model indicate government debt remains sustainable when fiscal support is deployed in the scenarios.
- Channels raising the debt ratio: increased fiscal expenditure, lower GDP, tax losses (from lower nominal GDP applied to baseline tax ratio), and higher interest rates.
- Valuation: exchange rate depreciation increases peso value of foreign debt (about 30 percent of the debt stock).
- Inflation pass-through assumed one-for-one to the GDP deflator, increasing nominal GDP and lowering the debt ratio.
- Both scenarios imply a similar increase in the debt ratio relative to baseline; debt ratio lower in scenario 2 largely due to higher inflation effect on GDP deflator.
- Sensitivity: results sensitive to assumptions; varying them can cause debt to peak higher, but debt eventually declines due to transitory shocks and envisaged stimulus size. Results would differ with larger fiscal stimulus or unanchored inflation expectations.

### Key channels and empirical evidence on FXI and pass-through
- FXI effectiveness depends on FXI effectiveness and exchange rate pass-through to inflation.
- Empirical findings cited:
  - Guinigundo 2019: BSP intervention mainly in spot market and effective at containing same-day exchange rate volatility; larger/sustained interventions significant in managing large fluctuations.
  - Blanchard, Adler and de Carvalho-Filho 2015: a 1 percent of GDP intervention results in an appreciation that is 1.5 percent less than it would have otherwise been (comparison between intervening and non-intervening flexible exchange rate countries).
- Exchange rate pass-through estimates:
  - Scenario 1: a 1 percent real depreciation leads to approximately 0.06 ppt increase in core inflation.
  - Authorities’ estimates: a 1 percent nominal depreciation leads to a 0.06 ppt increase in headline CPI after one year, rising to 0.08 ppt after two years.
  - Forbes et al 2020: pass-through slightly below 0.1 for a 1 percent nominal depreciation.
  - Guinigundo 2017: short-run pass-through 0.037; long-run pass-through 0.393.

### Policy guidance, caveats, and suggested further work
- Policy guidance:
  - Monetary policy should be first line of defense against persistent inflationary pressures.
  - Exchange rate should remain flexible and act as shock absorber following fundamental shocks.
  - In relatively shallow FX market, under sharp and volatile depreciation related to risk-off or disorderly financial conditions, FXI may alleviate inflation and reduce some pressure on monetary policy—particularly if pass-through is stronger than expected.
  - Monetary policy combined with fiscal stimulus limits deterioration in output gap but raises inflation and interest rates, crowding out private domestic demand; justification for fiscal support stronger when growth deteriorates significantly.
- Cautions and limitations:
  - IPF tools require caution in real-time decision-making; deployment should follow a clear framework and cost-benefit assessment.
  - Must balance macroeconomic/financial stabilization benefits against market development costs and unintended consequences (moral hazard, speculation).
  - FXI should not support a misaligned exchange rate or substitute for warranted monetary/fiscal adjustment.
  - Models may not reflect all tradeoffs or practical challenges (e.g., FXI sterilization).
- Further work recommended:
  - Incorporate fiscal considerations more fully into IPF analysis.
  - Explore multilateral implications and global financial backstops.
  - Extend intertemporal tradeoff analysis.
  - Add government debt module and macroprudential policies.
  - Explicitly model FXI costs and sterilization feasibility.
  - Calibrate model parameters with empirical analysis of pass-through and FXI effectiveness.
  - Better quantify financial and trade frictions affecting DCP.

*Italic: Prepared by IMF staff (Kaili Chen, Leni Hunter, Cheng Hoon Lim, Jesper Linde, Hou Wang) — excerpt from “Application of the Integrated Policy Framework to the Philippines,” November 8, 2022.*

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### Fiscal consolidation, tax reform, and revenue mobilization

### Fiscal consolidation objective and tax effort
- Objective: rebuild fiscal space and bring debt below indicative threshold of 60 percent of GDP.
- National government tax-to-GDP ratio: improved by almost 3 percentage points of GDP in 2010–19 to 14 percent in 2020 and 14.1 percent in 2021.
- Tax effort: estimated at 75 percent as of 2021.
- Scope to raise tax-to-GDP ratio by at least 3 percentage points in the near to medium-term.
- Medium- to long-term target: raise at least 20 percent of GDP through taxes to meet the UN Social Development Goals by 2030.

### Comprehensive Tax Reform Program (CTRP) — measures and effects
- Notable measures: higher excise taxes on alcohol, tobacco and fuels (including coal); revamped passenger car taxation; new taxes on sugar-sweetened beverages; reduced labor income taxes with higher threshold; increased taxation of capital income; reduced CIT rate and improved governance of incentives; improved VAT design (immediate crediting of input tax on capital goods).
- Packages:
  - TRAIN (2018): simplified personal income tax, broadened VAT base.
  - TRAIN 2+ (2020) / sin tax reforms: increased excise taxes.
  - CREATE (2021): reduced corporate income tax rate—20 percent for MSMEs, 25 percent for other companies.
- CREATE’s CIT reduction partially offset revenue gains from TRAIN, weakening CTRP revenue sustainability.
- Further measures awaiting approval: PIFITA and Real Property Valuation and Assessment Reform Act (limited expected yields).

### PIT reform options
- Top marginal PIT rate: 35 percent.
- Opportunities:
  - Broaden base by removing exemptions (bonuses, 13th salary, loyalty awards, in-kind benefits), pensions and various social security/health benefits; limit deductions.
  - Improve enforcement of 8-percent flat tax for small/micro businesses and prohibit regime movement via anti-avoidance.
  - Harmonize and reduce tax rates across capital income categories; remove unnecessary exemptions (e.g., long term government securities).
  - Progressivity without rate changes: switch from deduction to credit method so basic exemption value remains equal for all taxpayers.
- Historical note: 2018 TRAIN reduced effective PIT rates for most; statutory top rate rose from 32 to 35 percent, but effective rate dropped 1.6 percentage points except for incomes >12 million pesos.

### CIT, incentives, and BEPS priorities
- CIT productivity (2020, pre-CREATE): less than 0.1 percent of GDP revenue per percentage point of rate.
- Investment tax incentives cost: on average 0.7 percent of GDP in revenue foregone during 2013-2019.
- CREATE: consolidated governance to Fiscal Incentives Review Board but extended tax holiday duration from six to seven years.
- Recommendation: abolish tax holidays; incentivize investment via cost-based mechanisms (expensing capital spending).
- Cross-border tax priorities: anti-earnings stripping rule, strengthened transfer pricing capacity aligned with BEPS and Two Pillar Solution.

### VAT findings and reform options
- VAT rate: 12 percent (ASEAN average 9 percent).
- C-efficiency (2020): 0.35 (compared to 0.66 Cambodia, 0.71 Thailand).
- VAT on imports effective rate: 7.8 percent (65 percent efficiency).
- Revenue potential: bringing C-efficiency to around 0.6 would nearly double VAT collections (over 7 percent of GDP).
- Measures: eliminate widespread exemptions/zero-ratings, extend VAT to digital goods/services, real property, financial services; adopt anti-avoidance rules; strengthen VAT administration.
- Distributional considerations: rely more on consumption taxes to capture remittances and informal consumption; offset regressivity via progressive income taxes and direct transfers.

### Excise taxation and vehicle taxation
- Excise collection increased significantly post-TRAIN and 2020 sin tax reforms, reaching Asia-Pacific average.
- Vehicle taxation: shift since 2003 to ad valorem on car value—aligns with ability to pay but compromises Pigouvian objectives and enforcement; pick-ups and motorcycles untaxed under ad valorem excise.
- Recommendation: review vehicle tax treatment, consider environment tax (one-off registration or excise coupled with recurrent circulation tax) accounting for CO2 emissions and congestion; assess revenue impact before implementation.

### Excise taxes and specific revenue measures
- Authorities’ selected 2023 measures: adjustments to mining fiscal regime; extending VAT to digital goods/services; new excise on single-use plastic bags; adjusting tax on pre-mixed alcoholic beverages.
  - Combined estimated additional revenue: 20.3 bn peso (or 0.08 percent of GDP) annually.
- Enhanced property valuation: estimated yield 18-26 bn pesos (0.8-0.11 percent of GDP) accruing to local governments.
- Further recommendations: excise on telecommunication services; excise taxation on energy products; eliminate motorcycle exemptions; introduce recurrent motor vehicle tax; improve tax administration (transfer pricing, fuel marking, e-receipts).
- Caveat: without broad VAT base, meaningful revenue mobilization will be difficult; avoid measures with negligible revenue or enforcement difficulties.

*Italic: Prepared by Sarwat Jahan and Artur Swistak; summary reflects content of the specified chapter.*

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### Carbon pricing, TPS/feebates, and climate policy instruments

### Carbon pricing rationale and modeled scenario
- Carbon pricing advantages: ease of administration, price certainty, revenue potential, broad coverage.
- Modeled illustrative scenario: carbon price rising to US$50 per tonne in 2030.
  - Emissions impact: reduces CO2 emissions 13 percent below baseline levels (with half reductions from power generation).
  - Revenue: raises revenues equivalent to about 1 percent of GDP.
- Observed energy price shocks (mid-2020 to mid-2022):
  - Global gas prices increased about 700 percent.
  - Coal prices increased about 180 percent.
  - Oil prices increased about 110 percent.
- Political economy: phase-in suggested as global energy prices recede.

### Quantitative carbon price illustration (CPAT/sectoral results)
- Price path example: starts at $20 per tonne in 2023 and rises $4.3 per year to reach $50 per tonne in 2030.
- Emissions in 2030: CO2 emissions drop to 144 million tonnes (13 percent below IMF staff BAU).
- Sectoral contributions to 2030 emission reductions:
  - Power: 52 percent
  - Transportation: 17 percent
  - Industry: 19 percent
  - Buildings: 12 percent
- Power sector: renewable share would rise to more than 40 percent in 2030 (authorities’ target: 30 percent; current share: 21 percent).

### Fiscal, health, and macro impacts of $50 carbon price
- Revenues in 2030: 1.05 percent of GDP ($7.0 billion) (accounting for base erosion of pre-existing fuel taxes).
  - Revenue composition: about 44 percent from road fuels and 37 percent from coal.
- Local air pollution co-benefits (2023–30): saves 10,400 premature fatalities.
- Economic cost: about 0.2 of GDP in 2030; GDP growth impact in 2030 about negative 0.4 percent of GDP.
  - Using 75 percent of revenues on public investment yields net impact positive 0.1 percent (depends on fiscal multipliers).
- Energy price effects in 2030 under $50 carbon price:
  - Coal: 59 percent above BAU levels.
  - Natural gas: 21 percent above BAU levels.
  - Electricity: 4 percent above BAU levels.
  - Gasoline: 13 percent above BAU levels.
- Additional charges from $50 carbon tax:
  - Coal: $4.7/GJ.
  - Natural gas: $2.8/GJ.
  - Gasoline: $0.11/liter.
- Production cost increases for selected industries in 2030 (relative to BAU):
  - Non-metallic industries (notably cement): 8 percent.
  - Iron and steel: 4 percent.
  - Chemicals: 3 percent.

### Competitiveness, household impacts, and revenue recycling
- Competitiveness options for EITE industries: thresholds, output-based rebates, free allowance allocations—each reduces revenue and mitigation incentives.
- Average household burden: 1.5 percent of consumption.
  - Half of burden indirect from general consumption price rises.
  - Relative electricity price burden higher for higher income groups due to space cooling.
- Revenue recycling examples:
  - Fully compensating bottom 10, 20, 30 percent uses 7, 11 and 20 percent of revenues respectively.
  - Example mix: 25 percent revenues for targeted unconditional cash transfer (bottom four consumption deciles; coverage 75 percent; leakage 25 percent) and 75 percent for public investment:
    - Bottom two deciles: net benefits about 5-10 percent of consumption.
    - Top three deciles: net worse off by about 1 percent of consumption.

### TPSs, feebates, and instrument comparisons
- TPS: tradable performance standard sets CO2 emission rate per unit of output; firms meet standard or buy credits; promotes emissions intensity reductions but not consumer demand response.
- Feebates: sliding fees/rebates around a pivot emission rate; revenue-neutral if pivot updated; promote cost-effectiveness within industry without trading markets.
- Comparative points:
  - Feebates provide emissions price certainty and automatic within-industry cost-effectiveness.
  - TPSs require liquid credit markets to be cost-effective; can be combined with out-of-compliance fees to be more feebate-like.
- CPAT projections and scope: focuses on CO2 from fossil fuels in power, industry, transport, buildings; excludes agricultural methane/nitrous oxide pricing.

### Implementation guidance and priorities
- Key elements to move reform forward:
  - Balance carbon pricing with other sectoral instruments (feebates, TPSs).
  - Recycle revenues to boost economy (reduce distortionary taxes or fund productive investments) and ensure equitable distribution.
  - Public investments in clean infrastructure and market reforms to encourage competition and clean energy investment.
  - Just transition measures for vulnerable groups and policies to limit impacts on industrial competitiveness.
  - Phase reforms progressively with stakeholder consultations and public information campaigns.

*Italic: International Monetary Fund, Philippines chapter (content unit 24).*

---

### CPAT, data, and annex highlights

### CPAT model and data inputs
- CPAT: spreadsheet-based projections for fuel use and CO2 emissions by major energy sector for 188 countries.
- Inputs: IEA fuel use and emissions, GDP projections from IMF forecasts, international energy price forecasts (average of IEA and IMF), fuel price elasticities (typical range -0.5 to -0.8), carbon emissions factors from IEA.
- Caveats: excludes international aviation and maritime fuels; abstracts from mitigation actions beyond recent fuel use/prices; does not capture full general equilibrium or international price response to large reforms.

### Annex highlights
- Annex I: national/subnational carbon pricing schemes; revenue/rent accounting (excludes revenue loss from erosion of prior fuel tax bases).
- Annex II: economic importance of using carbon pricing revenues productively—most cost-effective is ETS with auctioned allowances or carbon tax with revenues used to cut distortionary taxes.
- Annex III: forestry, agriculture, waste pricing design—feebates for forestry; agricultural methane sources (rice, livestock) and mitigation trade-offs; limited scope for waste methane pricing.
- Annex IV: CPAT documentation and parameterization notes; typical fuel price elasticities and data sources.

*Italic: Source: IMF staff analysis in the Philippines chapter of the referenced IMF PDF.*

### 1. Downside Risk and Policy Scenarios _________________________________________________ 13

### 1. Downside Risk and Policy Scenarios

### Overview and near-term outlook
- Philippines’ economic recovery accelerated in 2022Q1, but the outlook remains uncertain with risks tilted to the downside.
- Growth is expected to slow to 5 percent in 2023.
- Inflation has risen sharply, surpassing the high end of the government target range of 3.0 percent ± 1.0 percentage point since March.
- The current account deficit is expected to widen further in 2022 as the trade gap broadens, driven mainly by high global commodity prices.
- Financial conditions have tightened, raising external and domestic borrowing costs at a time when government debt has increased significantly due to pandemic-related spending.
- Downside risks include intensifying spillovers from Russia’s war in Ukraine, a deepening global slowdown, and a surge in COVID-19 cases from more deadly variants.

### Integrated Policy Framework (IPF) and modelling approach
- The IPF jointly considers monetary, exchange rate, macroprudential and capital flow measures and their interactions.
- Key finding: optimal policy combinations depend on a country’s initial conditions, financial frictions, and the nature of shocks.
- The model used is an estimated linearized variant of Adrian et al, 2021:
  - Expands New Keynesian open-economy models to include financial frictions that capture features of EM financial stress episodes.
  - Includes a nonlinear balance sheet channel for capital flow and exchange rate pressures.
  - Allows exchange rate fluctuations to affect domestic financial conditions to account for foreign currency mismatch.
  - Includes an indexation mechanism to proxy imperfect monetary policy credibility.
- The model is estimated using Philippine data and Bayesian techniques. Policy rules are not formally optimized; scenarios are used to compare policy outcomes.

### Initial conditions and country characteristics (relevant frictions)
- The Philippine economy is described as fundamentally sound despite the 2020 contraction; the negative output gap is expected to close in 2022 following strong GDP growth in 2021 and the first half of 2022.
- The exchange rate is in line with fundamentals and there are large reserve buffers.
- The Bangko Sentral ng Pilipinas has a credible inflation targeting framework and instruments to anchor expectations; government retains some fiscal space.
- Key frictions and characteristics:
  - Currency mismatches on borrowers’ balance sheets increase vulnerability to exchange rate depreciation through higher unhedged foreign currency debt and default risk.
  - The depth and liquidity of the foreign exchange market matter: intervention is less likely to succeed in a deep and liquid FX market but may have traction in a shallow illiquid market.
  - Dominant currency pricing (DCP) constrains the exchange rate’s role as an automatic stabilizer because exports are often priced in dollars and foreign demand may be insensitive to local exchange rate movements.

### Philippine-specific financial exposure and FX market features (exact figures)
- Cross-border exposures represent 10 percent of bank assets and 6 percent of liabilities.
- Foreign currencies represent 18 percent of assets and 20 percent of liabilities for banks.
- Banks’ direct cross-border exposure is relatively low and mostly to service foreign workers; dollarization is moderate.
- Non-financial corporates (NFCs) represent around 80 percent of bank lending, implying indirect bank exposure to international spillovers through NFCs.
- The FX market experiences periods of liquidity tightening, evidenced by spikes in the bid-ask spread and exchange rate volatility (sharp spike at the onset of the pandemic).
- According to BIS data referenced, turnover in the Philippine peso was less than 1 percent of global OTC FX turnover in April 2019 (on a net-net basis).
- Between 2014 and 2019, around 92 and 87 percent of exports and imports respectively were priced in US dollars (DCP prevalence).

### Role, potential benefits, and risks of foreign exchange intervention (FXI)
- Analysis suggests a possible role for FXI in the Philippines given:
  - Moderate currency mismatch in banks, but shallowness/illiquidity of the FX market and large FX reserves.
  - FXI can limit exchange rate and inflationary pressures, easing the inflation-output trade-off for interest rate policy and attenuating impacts on UIP risk premium and private borrowing spreads.
  - Benefits of FXI are larger when inflation expectations are at risk of de-anchoring or when exchange rate pass-through to inflation is high.
- Risks and operational considerations:
  - FXI can deplete official FX reserves or lead to costly accumulation of reserves, entailing risks to central banks.
  - A clear operational framework is required, incorporating: triggers that depend on market conditions and exposure/resilience of the economy; effectiveness under the central bank FXI budget constraint; capture of asymmetries between appreciation and depreciation; and operationalizability.
  - Program design components should include communication, governance, modalities, transparency, and accountability.
  - FXI should be aligned with monetary policy stance and expected fiscal actions.
- Historical note: the Philippines does not publish FXI data; estimates (Adler et al 2021) show periods of active intervention in the past (e.g., 2005-2010).

### Scenario-based analysis: two illustrative downside scenarios
- Two scenarios consider near-term risks materializing with increasing severity relative to staff’s baseline; both consider the role of fiscal policy and impacts on government debt but do not consider capital flow measures and macroprudential policy.

- Scenario 1 (risk-off, cost-push driven tightening):
  - Global supply disruptions and elevated commodity prices trigger more persistent price pressures and wage compensation demands that become embedded in inflation expectations (cost-push shocks).
  - This leads to higher inflation, stronger monetary tightening by major foreign central banks, foreign economic contraction, and capital outflows from emerging markets.
  - In stressed and illiquid financial market conditions, the Philippines is subject to a risk-off shock to the UIP premium and domestic risk premium, producing a weaker exchange rate and an increase in the long-term rate.
  - Shocks used in Scenario 1 are listed in Table 1 of the source.

- Scenario 2 (higher exchange-rate pass-through):
  - Builds on the risk-off environment in Scenario 1 but assumes higher exchange rate pass-through to inflation via a steeper import price Phillips curve and larger, more persistent UIP risk premium shocks.
  - Results in about twice the exchange rate pass-through to core inflation as in Scenario 1, producing higher inflation despite similar degrees of depreciation across the two scenarios.
  - This scenario reflects the range of staff estimates for exchange rate pass-through for EMDEs and countries with high USD trade invoicing, indicating potential upside risk to staff’s baseline estimate.

### Key policy channels highlighted for the IPF
- Effectiveness of foreign exchange intervention in leaning against disorderly capital flows and preventing sharp exchange rate movements.
- Degree of exchange rate pass-through to inflation and output (import price Phillips curve slope) critically affects inflation outcomes and the trade-off for monetary policy.
- Importance of calibrating model parameters to Philippine initial conditions and characteristics; results depend on full model specification.
- Capital flow measures and macroprudential policies are noted as better suited to address financial stability risks, but they are not modelled in the scenario exercises.

_Italic: Prepared by IMF staff (Kaili Chen, Leni Hunter, Cheng Hoon Lim, Jesper Linde, Hou Wang) — excerpt from “Application of the Integrated Policy Framework to the Philippines,” November 8, 2022._

### 14.      Each scenario has the following policy combinations: (i) monetary policy interest rate; (ii)

### 14.      Each scenario has the following policy combinations: (i) monetary policy interest rate; (ii)

### Scenario design and policy combinations
- Policy combinations considered for each scenario:
  - (i) monetary policy interest rate;
  - (ii) monetary policy interest rate and FXI;
  - (iii) monetary policy interest rate and fiscal policy;
  - (iv) monetary policy interest rate, FXI and fiscal policy.
- Fiscal policy response assumed:
  - 0.5 percent of GDP of government spending in each of the first and second years;
  - withdrawn in subsequent years for a cumulative 1.8 percent of GDP fiscal stimulus over 5 years.
- Domestic interest rate policy:
  - follows a Taylor-rule type reaction function where the policy rate responds to the output gap and expected inflation;
  - additional monetary policy shocks are added to capture aggressive monetary policy response to high inflation and temporary deviation from the estimated reaction function.
- FXI policy rule:
  - central bank intervenes in the FX market to partially offset nominal exchange rate movements;
  - interventions have a direct impact on the level of central bank FX reserves.

### Scenario 1: key model responses and magnitudes
- In the absence of FXI:
  - UIP risk premium shock causes a 10 percent nominal exchange rate depreciation.
  - Core inflation increases by 150 basis points (bp) relative to the baseline.
  - Monetary policy is tightened by around 130 bp (policy rate rise).
  - Initial fall in the real policy interest rate because the policy rate does not rise as quickly as inflation.
  - Contraction in foreign demand weighs on net exports and pushes the output gap negative.
  - Output gap outcomes:
    - When the policy interest rate is used on its own, the output gap widens to about -2.5 percent after 4 quarters.
    - With fiscal policy, the output gap widens to -2.1 percent after 4 quarters.
- When FXI is used:
  - Nominal exchange rate depreciation reduced from 10 percent to 4 percent.
  - Core inflation impulse response peaks at around 115 bp above baseline.
  - Policy rate impulse response peaks at around 80 bp above baseline.
  - FXI improves the policy tradeoff: lower inflation peak and less negative output gap.
  - Output gap outcomes with FXI:
    - Policy interest rate with FXI: output gap widens to about -2.1 percent after 4 quarters.
    - Policy interest rate with FXI and fiscal policy: output gap improves to about -1.7 percent after 4 quarters.
  - FX reserves impact:
    - Cumulative loss of foreign exchange reserves of 2.6-2.8 percent of GDP in the first four quarters.
    - As shocks prove temporary, FXI is gradually reversed from the fourth quarter.
    - Cumulative loss of foreign reserves after 20 quarters is 0.9 percent of GDP.

### Scenario 2: key model responses and magnitudes
- In the absence of FXI:
  - UIP risk premium shock again leads to a 10 percent nominal exchange rate depreciation.
  - Larger exchange rate pass-through causes core inflation to rise more than in scenario 1, peaking at 2.25 percent in the fourth quarter relative to baseline.
  - Policy interest rate peaks at around 2.6 percent.
  - Output gap outcomes:
    - Interest rate policy only: output gap widens to -3.2 percent.
    - Interest rate policy supported by fiscal policy: output gap about -3 percent.
- When FXI is used:
  - FXI stabilizes the exchange rate; because pass-through is stronger, monetary policy is tightened more than in scenario 1 but FXI reduces the extent of required interest rate increases.
  - Core inflation peaks at around 1.5 percent above baseline.
  - Nominal policy interest rate tightening peaks at about 2 percent.
  - Output gap outcomes with FXI:
    - Policy interest rate with FXI: output gap widens to about -2.9 percent after 4 quarters.
    - Policy interest rate with FXI and fiscal policy: output gap widens by less to -2.6 percent after 4 quarters.
  - FX reserves impact:
    - Over the first 4 quarters the loss of foreign reserves is about 3.1 percent of GDP.
    - Cumulative reserves loss after 20 quarters of 0.9 percent of GDP.

### Comparative finding: policy mix and tradeoffs
- Overall result:
  - A combination of modest fiscal expenditure with monetary tightening and FXI provides the most favorable outcome in reducing output loss.
  - FXI offsets the exchange rate shock and removes inflation pressure.
  - A monetary policy and FXI response combined with fiscal stimulus limits deterioration in the output gap.
  - Outcomes for inflation are similar with or without fiscal stimulus, given the stimulus size.
  - Increasing fiscal stimulus would result in higher inflation and higher interest rates, crowding out private domestic demand.
  - If exchange rate pass-through has increased, using FXI to stabilize the exchange rate yields stronger benefits in reducing inflation pressure.
- Variance measure (sum of squared deviations from baseline, over 20 quarters):
  - Interest rate policy only:
    - Scenario 1: Output gap 36.6, Core Inflation 14.0
    - Scenario 2: Output gap 55.0, Core Inflation 27.3
  - Interest rate and fiscal policy:
    - Scenario 1: Output gap 25.0, Core Inflation 14.4
    - Scenario 2: Output gap 15.4, Core Inflation 27.4
  - Interest rate and FXI policy:
    - Scenario 1: Output gap 26.6, Core Inflation 6.9
    - Scenario 2: Output gap 47.9, Core Inflation 12.5
  - Interest rate, FXI and fiscal policy:
    - Scenario 1: Output gap 17.3, Core Inflation 7.6
    - Scenario 2: Output gap 35.4, Core Inflation 13.2

### Fiscal sustainability and debt implications
- Staff estimates using the Fund’s DSA framework in addition to the IPF model indicate:
  - Government debt remains sustainable when fiscal policy support is deployed in the scenarios.
  - Channels raising the debt ratio include increased fiscal expenditure, lower GDP, tax losses (from lower nominal GDP applied to the baseline projection tax ratio), and higher interest rates.
  - Valuation changes considered: exchange rate depreciation increases the peso-denominated value of foreign debt (about 30 percent of the debt stock).
  - Inflation is assumed to pass through one-for-one to the GDP deflator, increasing nominal GDP and lowering the debt ratio.
  - Both scenarios imply a similar increase in the debt ratio relative to the baseline projection, though the debt ratio is lower in scenario 2 largely due to the effect of higher inflation in scenario 2 on the GDP deflator.
  - Results are sensitive to assumptions; varying assumptions can cause debt to peak at higher levels, but debt eventually declines due to the transitory nature of shocks and the envisaged size of the fiscal stimulus.
  - Results would differ with larger fiscal stimulus or if inflation expectations became unanchored.

### Key channels and empirical evidence on FXI and pass-through
- FXI effectiveness:
  - FXI’s ability to support monetary policy depends on the effectiveness of FXI and the exchange rate pass-through to inflation.
  - Guinigundo 2019 (using 2010–2015 data) finds BSP’s intervention is mainly in the spot market and effective at containing same-day exchange rate volatility; larger volumes or sustained interventions are significant in managing large fluctuations in the exchange rate.
  - Blanchard, Adler and de Carvalho-Filho 2015: a 1 percent of GDP intervention results in an appreciation that is 1.5 percent less than it would have otherwise been (comparison between intervening and non-intervening flexible exchange rate countries).
- Exchange rate pass-through estimates:
  - Scenario 1 estimate: a 1 percent real depreciation leads to approximately 0.06 ppt increase in core inflation.
  - Authorities’ estimates: a 1 percent nominal depreciation leads to a 0.06 ppt increase in headline CPI after one year, rising to 0.08 ppt after two years.
  - Forbes et al 2020 estimate for the Philippines: pass-through slightly below 0.1 for a 1 percent nominal depreciation (below emerging markets group estimate of 0.23).
  - Guinigundo 2017: short-run pass-through during inflation targeting period estimated at 0.037; long-run pass-through at 0.393.

### Conclusion, caveats and recommended considerations for policy and future work
- Policy implications and guidance:
  - Monetary policy should be the first line of defense against persistent inflationary pressures.
  - The exchange rate should remain flexible and act as a shock absorber following fundamental shocks.
  - In the Philippines’ relatively shallow FX market, under sharp and volatile exchange rate depreciation related to risk-off or disorderly financial conditions, FXI may alleviate inflation and reduce some pressure on monetary policy—particularly if pass-through is stronger than expected.
  - Monetary policy response combined with fiscal stimulus would limit deterioration in the output gap but at the cost of higher inflation and higher interest rates, crowding out private domestic demand.
  - Justification for additional fiscal support is stronger where growth deteriorates significantly.
- Cautions and model limitations:
  - Use of the IPF framework and tools requires caution given real-time decision-making complexity.
  - Deployment of IPF policies should be guided by a clear framework and assessment of costs and benefits.
  - Macroeconomic and financial stabilization benefits must be balanced against costs in terms of market development and other unintended consequences (e.g., moral hazard, encouraging speculation).
  - FXI should not be used to support a misaligned exchange rate or substitute for warranted monetary and fiscal policy adjustment.
  - Communication of multiple policy instruments may create challenges.
  - Models may not reflect all tradeoffs and sources of uncertainty (e.g., true nature of shocks) and may not fully capture practical challenges such as FXI sterilization.
- Further work and model extensions suggested:
  - Continue incorporating fiscal considerations into analytical work on the IPF.
  - Explore multilateral implications of IPF policies (policy responses of trading partners, availability of global financial backstops).
  - Extend analysis of intertemporal tradeoffs.
  - Add a government debt module and further inclusion of macroprudential policies.
  - Explicitly model costs of FXI and feasibility of sterilization to reflect policy tradeoffs.
  - Support calibration of model parameters with empirical analysis of exchange rate pass-through and FXI effectiveness.
  - Further work to better understand financial and trade frictions, including quantifying factors that mitigate effects of DCP.

*Source: IMF staff analysis in the Philippines chapter of the referenced IMF PDF.*

### 1.      The Philippine authorities are committed to undertaking fiscal consolidation to rebuild

### 1.      The Philippine authorities are committed to undertaking fiscal consolidation to rebuild

### Fiscal consolidation objective and tax effort
- Authorities aim to rebuild fiscal space and bring debt below their indicative threshold of 60 percent of GDP.
- Boosting tax revenue is highlighted as an important part of the medium-term fiscal strategy without reducing productive infrastructure investment and expenditure on priority development areas.
- National government tax-to -GDP ratio: improved by almost 3 percentage points of GDP in 2010–19 to 14 percent in 2020 and 14.1 percent in 2021.
- Tax effort is estimated to be only 75 percent as of 2021, described as among the lowest in Southeast Asia.
- There is room to increase the tax-to -GDP ratio by at least 3 percentage points in the near to medium-term to realize tax potential.
- Medium- to long-term target: work towards raising at least 20 percent of GDP through taxes to meet the UN Social Development Goals by 2030.

### Comprehensive Tax Reform Program (CTRP) — reforms and effects
- Notable CTRP measures:
  - Restored excise taxation efficiency through higher tax rates on alcohol, tobacco and fuels (including coal); revamped taxation of passenger cars; new taxes on sugar-sweetened beverages.
  - Reduced labor income tax while improving progressivity via a higher threshold (basic personal allowance) and revised tax rates schedule.
  - Increased taxation of capital income.
  - Reduced the CIT rate and improved governance of investment tax incentives.
  - Improved VAT design, including allowing immediate crediting of input tax on capital goods and some base broadening.
- First three CTRP packages and their impacts:
  - TRAIN (2018): simplified personal income tax, broadened VAT base.
  - TRAIN 2+ (2020) / sin tax reform laws: increased excise taxes for selected products.
  - CREATE (2021): reduced corporate income tax rate from 30 percent to 20 percent for micro, small, and medium enterprises (MSMEs) and to 25 percent for other companies.
- CREATE’s reduction in tax revenue partially offset revenue gains from TRAIN, reducing the CTRP’s efficacy in generating a sustainable revenue stream.
- Further reforms prepared and awaiting parliament’s approval: Passive Income and Financial Intermediary Taxation Act (PIFITA), and Real Property Valuation and Assessment Reform Act. The tax yield from these measures is expected to be limited.

### Need for in-depth diagnostic and IMF technical assistance
- A thorough assessment of the tax system is required to identify avenues for improving efficiency, equity, and simplicity.
- An in-depth diagnostic by an IMF Technical Assistance mission could provide granular guidance, including detailed analysis of measures to improve tax administration and their revenue impacts.
- While awaiting such analysis, several high-level recommendations are proposed, building on cross-country comparisons.

### Personal Income Tax (PIT) — findings and reform options
- Current structure:
  - Top marginal PIT rate is 35 percent, at par with Thailand and Vietnam.
  - The Philippines has one of the most progressive PIT systems in ASEAN.
- Opportunities to enhance PIT revenue yield:
  - Broaden the PIT base by removing exemptions including: certain emoluments (bonuses, 13th salary, loyalty awards, in-kind benefits), pensions and various social security and health benefits, and limiting certain deductions (e.g., donations and credits).
  - Expand business income base by improving enforcement of the 8- percent flat tax for small and micro businesses and prohibit movement between tax regimes via anti-avoidance measures.
  - Improve capital income collection by harmonizing and reducing tax rates across income categories (dividends, interests, capital gains, rental income, royalties) as planned and awaiting parliamentary approval.
  - Remove unnecessary exemptions (e.g., long term government securities) and reduced rates (e.g., dividends from resident companies).
- Progressivity enhancement without headline rate changes:
  - Switch PIT computation from a deduction method to a credit method so the value of the basic exemption (zero-rate band) does not increase with income and remains equal for all taxpayers.
- Historical note: The 2018 TRAIN reform reduced effective PIT rates for individuals except those with income exceeding 12 million pesos; the statutory top rate increased from 32 to 35 percent while the effective rate dropped by 1.6 percentage points and reaches pre-TRAIN level only at income level greater than 12 million pesos.

### Corporate Income Tax (CIT) — findings and reform options
- CIT characterized by low revenue productivity and collection:
  - In 2020, before CREATE, CIT raised revenues of less than 0.1 percent of GDP per each percentage point of the rate.
  - Low productivity may indicate a relatively narrow tax base and generous tax incentives; base erosion and profit shifting also likely contributors.
- Investment tax incentives:
  - Global Tax Expenditure Database: investment tax incentives (tax holiday) cost on average 0.7 percent of GDP in revenue foregone during 2013-2019.
  - CREATE consolidated governance of incentives to the Fiscal Incentives Review Board but extended the duration of tax holidays from six to seven years.
  - Availability of preferential 5- percent gross income tax was reduced from infinity to ten years, but investors were offered enhanced deductions after that period.
  - Recommendation: reform incentives by abolishing tax holidays and incentivizing investment through cost-based mechanisms (e.g., expensing of capital spending).
- Cross-border tax architecture:
  - Priorities from BEPS Final Reports and the Two Pillar Solution include introducing rules enabling the Bureau of Internal Revenue (BIR) to counter base erosion and profit shifting—e.g., an anti-earnings stripping rule and strengthened capacity to implement transfer pricing rules.

### Value Added Tax (VAT) — findings and reform options
- VAT performance and weaknesses:
  - VAT rate in the Philippines is 12 percent, higher than the ASEAN average of 9 percent.
  - VAT revenue collection remains significantly below averages for emerging market economies and lower middle-income countries.
  - C-efficiency in 2020 was 0.35 (compared to 0.66 in Cambodia and 0.71 in Thailand), implying the VAT captures only a third of its potential tax base.
  - VAT effective rate on imports is 7.8 percent (65 percent efficiency), but domestic VAT collections are weak relative to the underlying base.
- Revenue potential and reform options:
  - Bringing C-efficiency to the worldwide average for upper middle-income countries (around 0.6) would nearly double VAT collections (over 7 percent of GDP).
  - Measures to achieve this include eliminating widespread exemptions and zero-ratings (including for businesses, senior citizens, and the public), and extending VAT to untapped bases: digital goods and services, real property, and financial services.
  - Improve VAT design by adopting modern anti-avoidance rules and enhancing VAT administration and compliance.
  - Favor base-broadening measures over VAT rate increases due to lower adverse impacts on efficiency and growth.
  - Taxing digital goods and services would boost revenue and improve VAT equity.
- Distributional considerations:
  - High remittance flows underline the need for more reliance on consumption taxes, including VAT, as a proxy for taxing otherwise untaxed remittances and informal consumption.
  - Concerns about VAT’s adverse impact on the poor should be addressed via progressive income taxation and expenditure measures (direct transfers); strengthen social safety nets to subsidize the poor outside the VAT system.

### Excise taxation — developments and vehicle taxation concerns
- Excise tax collection increased significantly following TRAIN (2018) and 2020 sin tax reforms, reaching the Asia-Pacific average in recent years.
- Passenger vehicle taxation:
  - Since 2003 the Philippines shifted from engine-size based taxation to an ad valorem tax on car value.
  - While aligned with ability to pay, the value-based tax compromises Pigouvian objectives (reducing consumption of goods with negative externalities) and ease of enforcement because value is easier to manipulate than engine size or age.
  - Low-value (typically old) cars may be more damaging to environment, infrastructure, and traffic safety than newer cars.
  - Pick-ups and motorcycles are not taxed under the ad valorem excise tax.
  - Recommendation: review tax treatment of vehicles and consider moving towards an environment tax (one-off registration tax or excise, potentially coupled with recurrent circulation tax) that accounts for CO2 emissions and road congestion.
  - An assessment of revenue impact would be needed before implementation.

*Prepared by Sarwat Jahan and Artur Swistak; summary reflects content of the specified chapter.*

### 15.      The Philippines should also explore options for using excise taxes on

### 1phlea2022005 - 15.      The Philippines should also explore options for using excise taxes on

### Excise taxes on telecommunication services
- Excise taxes on telecommunication services are presented as a relatively straightforward and efficient mechanism to tap into a large and relatively inelastic tax base.
- Rationale: In the absence of other measures that capture excess profits in the telecommunication sector, excise taxes can mobilize additional revenue (Matheson and Petit, 2017).

### Specific proposals for revenue mobilization
- Authorities selected several new tax reform measures for implementation in 2023:
  - Adjustments to the mining fiscal regime.
  - Extending the VAT to digital goods and services.
  - A new excise tax on single use plastic bags.
  - Adjusting the tax on pre-mixed alcoholic beverages.
  - Combined estimated additional revenue: 20.3 bn peso (or 0.08 percent of GDP) annually.
- CTRP reform continuation: streamlining capital income taxation (a single 15-percent tax on passive income) and enhanced valuation rules for property tax purposes.
  - Streamlining capital income taxation and phasing out the stock exchange tax and the IPO tax is expected to be revenue neutral.
  - Enhanced valuation of property is estimated to yield 18-26bn pesos (0.8-0.11 percent of GDP); this would accrue to local governments and have no direct impact on national government revenue but might alleviate pressure on transfers to local governments.
- Additional measures under implementation:
  - Further rate increases of sin taxes (excise taxes on alcohol and tobacco, including heated tobacco and vapor products).
  - Digitalization and modernization initiatives to raise additional revenues.
- Other commendable measures from the previous administration that could be considered:
  - VAT base broadening.
  - Upward adjustment of traditional excises.
  - Potential plans to adopt carbon taxation.
- Further refinements recommended:
  - Excise taxation on energy products.
  - Eliminating exemptions on motorcycles.
  - Introducing a recurrent motor vehicle tax.
  - Improving tax administration and tax compliance (enhanced transfer pricing rules, fuel marking, e-receipts).
- Caveats:
  - Without ensuring a broad VAT base, a meaningful revenue mobilization effort will be difficult to achieve.
  - Avoid measures that adversely impact economic efficiency, raise negligible revenue, or are difficult to enforce.

### Concluding remarks on revenue mobilization
- National government tax-to-GDP ratio: 14.1 percent of GDP in 2021.
- Scope to raise revenues: by at least 3 percentage points in the medium-term under VAT, corporate and personal income taxes, and excise taxes.
- Specific reform directions:
  - PIT: base broadening by removing various exemptions; harmonize tax rates across income categories to improve tax collection of capital income.
  - CIT: build on the 2021 CREATE tax package to improve governance of tax incentives; further reform to abolish tax holidays, incentivize investment through cost-based mechanisms, and improve cross-border tax architecture.
  - VAT: eliminate widespread exemptions and zero-ratings; extend VAT to new untapped tax bases; favor base-broadening over rate increases.
  - Excises/TRAIN: tax new products (for example, plastic and telecommunication services); increase breadth of the tax base and avoid unnecessary exemptions; exclude reforms that are difficult to implement or have negligible revenue impact.

### Box 1 — VAT on Digital Services: design challenges and country experiences
- IMF (2021) estimate revenue potential in Asia at around 0.04-0.11 percent of GDP from expanding VAT to digital services.
- Key design considerations:
  - Ensure the expanded VAT captures the ‘digital’ base comprehensively and is easy to administer.
  - Adjustments related to the destination principle and mechanisms to capture services provided by non-residents.
  - Critical design choices: scope of services subject to VAT and the collection method used.
- Country experiences (selected examples of thresholds, scope, and collection methods):
  - Australia (2017): AUS$75,000 threshold; intangible supplies; vendor collection model; Reverse Charge for B2B: Yes.
  - Bangladesh (2019): BDT 30 million threshold; streaming/download media and web-based services; collection by local payment provider; Reverse Charge for B2B: Yes.
  - India (2017): No threshold for nonresidents; definition includes automated internet-mediated services; vendor collection model; Reverse Charge for B2B: Yes.
  - Indonesia (2020): Annual revenue 600m IDR or 50m monthly/12,000 users annually; vendor collection model; Reverse Charge for B2B: Yes.
  - Japan (2015): JYP 10 million per annum; e-books, streaming, apps, cloud-based services; vendor collection model; Reverse Charge for B2B: Yes.
  - Singapore (2020): Global annual turnover of at least SDG 1 million; downloadable digital content, subscription media, software; vendor collection model; Reverse Charge for B2B: Yes.
  - Thailand (September 2021): THB 1.8m per annum; incorporeal property delivered through the internet; vendor collection model; Reverse Charge for B2B: Yes.
  - Vietnam (2020): None threshold; downloads/streaming, apps, e-learning, SaaS, gaming; collection by local payment provider; Reverse Charge for B2B: Yes.
- Collection models vary between vendor collection and collection by local payment providers; many jurisdictions apply reverse charge for B2B.

### Addressing climate change mitigation: Role of carbon pricing (selected findings)
- Carbon pricing is emphasized as a centerpiece of mitigation strategy due to ease of administration, price certainty, ability to raise significant revenues, and broad coverage.
- Modeled scenario: A carbon price rising to US$50 per tonne in 2030:
  - Reduces carbon dioxide emissions 13 percent below baseline levels (with half the reductions from the power generation sector).
  - Raises revenues equivalent to about 1 percent of GDP.
- Observed international energy price shocks (mid-2020 to mid-2022):
  - Global gas prices increased about 700 percent.
  - Coal prices increased about 180 percent.
  - Oil prices increased about 110 percent.
- Timing and political economy:
  - Carbon pricing might be phased in as global energy prices recede from peak levels to ease political difficulties.
  - Example projection: Phasing in a $75 carbon price on top of projected prices implies 2030 gas and oil prices that are 42 and 12 percent below mid-2022 levels, while coal prices would be 30 percent higher.
- Carbon tax illustrative design:
  - A carbon tax starting at $10 in 2022 and rising to $75 in 2030 is used in modeling assumptions.
- Philippine NDC and targets:
  - Unconditional target: cutting GHGs 2.7 percent below baseline levels in 2030.
  - Conditional target: 75 percent below baseline in 2030, conditional on external support.
  - The unconditional 2.7 percent target is likely to be achieved in BAU; the 75 percent target is highly ambitious.
- Policy guidance:
  - Setting a mid-century ‘net zero’ target and aligning the unconditional target with long-run GHG neutrality would reduce uncertainty and provide clearer signals to firms and households.
  - Reliable information needed: BAU emissions projections and costs of cutting emissions below BAU.
  - Carbon pricing provides broad incentives to reduce energy use and shift to cleaner energy sources and should be considered alongside other instruments and safeguards.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1phlea2022005.pdf*

### Box 1. Behavioral Responses Promoted by Alternative CO

### Box 1. Behavioral Responses Promoted by Alternative CO

### Mitigation policies — behavioral responses promoted by comprehensive carbon pricing
- Power generation:
  - shifting (both in terms of new investment and the daily dispatch mix) from coal to natural gas, from these fuels to renewables, and perhaps to nuclear and fossil generation with carbon capture and storage;
- Industry:
  - reducing CO2 and electricity intensity (e.g., through alternative heating sources other than coal, enhanced recycling of scrap metal) and output levels;
- Transportation:
  - shifting to more efficient internal combustion engine (ICE) vehicles, from ICE vehicles to electric (or other zero emission) vehicles, and reducing vehicle miles travelled;
- Buildings:
  - reducing CO2 intensity, electricity intensity, and energy demand (e.g., through energy efficient construction, improving the energy efficiency of appliances).

### Limitations and roles of non-pricing mitigation instruments
- Non-pricing instruments promote a narrower range of behavioral responses or lagged rather than immediate responses:
  - Renewable portfolio standards and feed-in tariffs for renewables only promote shifting from fossil to renewable generation.
  - Emission rate regulations, or feebates, for new vehicles reduce emissions from the on-road fleet gradually over time as the fleet turns over (e.g., they do not accelerate retirement of old vehicles) and they do not reduce vehicle miles travelled.
  - Incentives for net zero new buildings reduce emissions from the building stock very gradually (given that typically less than 2 percent of the building stock is replaced each year).
- A combination of non-pricing measures across sectors, and across new and existing capital, promotes a wider range of responses but cost effectiveness can be challenging (e.g., regulatory approaches would require deep and liquid credit trading markets across firms, programs, and sectors).
- In practice, non-pricing mitigation instruments will be used to complement and reinforce carbon pricing. Non-pricing instruments:
  - may have greater acceptability as they avoid significant and politically sensitive increases in energy prices—unlike carbon pricing, they do not involve the pass through of carbon tax revenues or allowance rents into energy prices;
  - may be key in kick-starting de-carbonization of hard-to-abate sectors, particularly transportation and buildings.
- Policymakers need to strike a balance between carbon pricing (the most efficient but perhaps most politically challenging instrument) and other (less efficient but frequently more acceptable) reinforcing instruments.

### Additional attractions of carbon pricing (paragraph 8)
- Provides the critical price signal for mobilizing innovation into, and deployment of, clean technologies;
- Mobilizes a valuable source of revenue, which can be used to help meet climate, social, or broader fiscal objectives;
- Generates domestic environmental co-benefits, such as a reduction in local air pollution mortality (though other mitigation instruments can produce similar benefits).

### Momentum, coverage, and prices of carbon pricing globally and in Asia (paragraph 9)
- At the national level:
  - 21 carbon taxes and 6 ETSs have been implemented.
- Sub-national schemes also exist (largest being California’s ETS).
- Major recent initiatives launched in China and Germany.
- Prices in the EU ETS are currently around $70 per tonne.
- Canada has committed to an equivalent US$140 price by 2030.
- Other countries in Asia with carbon pricing include Indonesia, Japan, Korea, and Singapore; carbon pricing is under consideration in Thailand and Vietnam.
- GHG emissions subject to (national and sub-national) carbon pricing vary from below 30 percent in some cases to over 70 percent in others (e.g., Canada, Germany, Korea, Sweden).
- Economywide average prices in 2021 varied from below $5 to $115 per tonne (Sweden).
- 28 percent of global GHGs are formally subject to pricing and the average price across schemes is $20 per tonne.

### Instrument choice and design issues — administration and scope (paragraphs 10–12)
- Carbon taxes:
  - Generally under the purview of finance ministries.
  - Easier to administer than ETSs; can be integrated midstream into collection procedures for existing fuel taxes.
  - All but one of the 21 existing national carbon taxes are applied midstream.
- ETSs:
  - Generally under the purview of environment ministries.
  - Require more sophisticated administration (monitoring downstream emissions and emissions trading markets), pilot phases to establish MRV systems and trading platforms.
  - Often applied initially to large power and industrial firms, though ETSs can also be applied midstream to transportation and building fuel suppliers (e.g., German and Korean ETSs, proposed for inclusion in the EU ETS).
- Priority in practice is often pricing emissions from coal, or from the power and industrial sectors, as they account for the bulk of emissions reductions under economywide pricing.

### Price versus emissions certainty (paragraph 11)
- Carbon taxes:
  - Provide price certainty; emissions are determined by market forces.
  - May need periodic adjustment to maintain progress on emissions goals.
- ETSs:
  - Provide emissions certainty if the cap is set to meet targets.
  - Price volatility has been observed in ETS allowance prices (California, EU, Korea).
  - ETSs can be combined with price stability mechanisms like price floors to support clean technology investment.

### Revenue use, efficiency, and distributional implications (paragraphs 12–15)
- Revenue practices differ by instrument:
  - Carbon tax revenues more likely to be used in general budgets.
  - ETS revenues more likely to be earmarked for environmental purposes.
- Empirical patterns:
  - Revenues have been fully used for general purposes in 16 carbon tax schemes and partially or fully earmarked for environmental spending in only five cases.
  - In early ETS phases, allowances have often been freely allocated to affected firms; auctioned allowances are more often earmarked for environmental spending (applies, at least partially, in five of the seven ETS schemes).
- Economic efficiency:
  - Productive uses of revenues (e.g., public investments in health, education, infrastructure) can produce large gains in economy efficiency and offset negative effects of higher energy prices.
  - Earmarking revenues for environmental investment can be efficient if integrated in robust public investment management systems.
  - Returning revenues in universal or targeted lump-sum transfers foregoes some efficiency benefits.
- Distributional burdens:
  - In principle, a carbon tax and an ETS—if applied to the same sectors, with the same price, and prior to allocation of revenues—would impose the same distributional burdens across household income groups.
  - Distributional burdens, when measured against households’ annual consumption, are mildly regressive in some cases, though the opposite applies, including for the Philippines.

### Political economy and acceptability (paragraphs 16–17)
- Political considerations:
  - ETSs may be more feasible politically than taxes where permits are freely allocated to affected firms that have political influence.
  - Some jurisdictions have progressively reduced free allocations (e.g., 30 percent of allowances in the EU ETS were freely allocated in 2020 compared with 80 percent in 2013).
  - Carbon taxes can be designed to mimic free allocations by using revenues for targeted relief to firms.
- Durability of carbon taxes depends on:
  - Revenue recycling, communications strategies, and identification of key stakeholders.
  - Effective and inclusive communication and pragmatic use of revenues to address anticipated negative distributional outcomes (necessitating thorough analysis to quantify targeted measures required).

### Aligning prices and emissions targets; compatibility with other instruments (paragraphs 18–19)
- Under a carbon tax:
  - Government can align the price trajectory with emissions targets; tax trajectories can be set equal to price paths needed to bring emissions in line with mitigation targets and periodically adjusted.
- Under an ETS:
  - Alignment of prices with targets is automatic if the emissions cap is set to meet mitigation commitments (e.g., EU ETS cap reduced by 2.2 percent a year in line with 2030 targets for power/industrial sector).
- Interaction with overlapping instruments:
  - Carbon tax variants are more compatible with reinforcing mitigation instruments for hard-to-abate sectors; overlapping instruments reduce emissions without affecting the tax rate.
  - Under a pure ETS, overlapping instruments reduce the emissions price without affecting emissions (unless caps are adjusted).

### ETS appeals and hybrid approaches (paragraphs 20–22)
- ETS attractions:
  - Help achieve emissions targets with more certainty.
  - May be more natural where mitigation policy is overseen by environment ministries.
  - Free allowance allocation may help garner industry support.
- Continuum and hybrid options:
  - ETSs and carbon taxes can be designed to replicate aspects of each other (e.g., ETS with a price floor/ceiling resembles a carbon tax by enhancing price certainty).
  - Hybrid example: ETS addressing power and industry emissions while a carbon tax addresses transportation and building sectors.
  - Cost effectiveness requires aligning carbon prices across tax rates and ETSs (e.g., setting ETS price floors equal to carbon tax trajectories).
  - Applying a carbon tax and ETS to the same emissions base is generally not sensible as it duplicates administration and may lower allowance prices without affecting emissions.

### International coordination and linking (paragraph 23 and footnotes)
- Carbon taxes or ETSs would allow participation in internationally coordinated pricing regimes, facilitating scaling up by addressing competitiveness and policy uncertainty concerns.
- International price coordination would most naturally be met through a carbon tax, though ETSs can be accommodated by underpinning with a floor price or caps to generate expected domestic prices in line with international requirements.
- Linking ETSs has potential to promote regional cost effectiveness by harmonizing permit prices but has downsides:
  - Perpetuates design characteristics (e.g., a price ceiling in one ETS becomes the ceiling in the linked ETS).
  - Reduces ability of governments to achieve domestic targets.
  - Creates administrative complexity and uncertainty.

*Source: IMF staff.*

### 24.      A tradeable performance standard (TPS) for the power and industry sectors would not

### 24.      A tradeable performance standard (TPS) for the power and industry sectors would not 

### TPSs and Feebates: design and behavioral effects
- TPS design:
  - Government sets a required CO2 emission rate per unit of output for each major industry and power generation.
  - Firms must meet the industry standard or buy credits from firms that exceed standards.
  - Credits could be tradable across firms in different industries to promote a common credit price and equalize incremental abatement costs across industries.
  - TPSs promote reductions in emissions intensity similar to carbon pricing but do not induce the same consumer demand response because there is no pass through of carbon tax revenue or allowance rents into higher prices for electricity and industrial products.
  - IMF staff calculations: about 77 percent of the emissions reduction in the power sector under carbon pricing in Philippines would come from reductions in emissions intensity and 23 percent from a reduction in electricity demand.
  - Example: Canada implemented a federal TPS for the industrial sector where provincial/territorial policies are not applied.
- Feebates:
  - Fiscal analogue of a TPS: sliding scale of fees for firms with emission rates above a pivot point and rebates for firms below the pivot point.
  - If the pivot point is set equal to the industry average emission rate, and updated over time, the feebate will be approximately revenue neutral.
  - Feebates automatically promote cost effectiveness within an industry without trading markets because all firms face the same incremental reward (the emissions price in the feebate).
  - Emission prices can be harmonized across feebate schemes to promote cross-industry cost-effectiveness.
  - Like TPSs, feebates do not charge the average firm for remaining emissions and therefore do not promote consumer demand responses.
- Comparative points:
  - Feebates provide certainty over the emissions price; regulations provide certainty over the industry-average emissions rate.
  - Feebates are automatically cost effective across firms within industries (and across industries if harmonized); tradable emission rate standards require liquid credit markets and many market traders to be cost effective.
  - Feebates are compatible with overlapping policies as they provide ongoing incentives for all firms to cut emissions.
  - TPSs can be made more feebate-like by combining them with out-of-compliance fees and subsidies for exceeding standards.

### Quantitative assessment framework and focus
- Model: Climate Policy Assessment Tool (CPAT)
  - Spreadsheet-based projections of fuel use and GHG emissions for major energy sectors in 188 countries.
  - Uses international energy price forecasts, mid-range fuel price elasticities, input-output tables, and household expenditure surveys.
  - Analysis focuses on CO2 emissions from fossil fuel use in the power, industry, transport, and building sectors.
- Scope exclusions:
  - CPAT cannot price agricultural-sector methane and nitrous oxide emissions due to monitoring and competitiveness constraints.

### BAU projections and targets
- IMF staff BAU projection:
  - GHG emissions increase 27 percent from 234 million tonnes in 2021 to 297 million tonnes in 2030 (i.e., 32 percent lower than the authorities’ projection).
  - Drivers: projected GDP increase of 75 percent over the period, partly offset by declines in energy and agricultural intensity of GDP.
- NDC targets:
  - Unconditional NDC target: 380 million tonnes CO2 equivalent.
  - Conditional NDC target: 97 million tonnes CO2 equivalent (inferred from authorities’ BAU reduced by 75 percent).
  - A 2030 target aligned with a mid-century net zero goal would be in the order of 180 million tonnes of GHG.

### Illustrative carbon price scenario
- Price path:
  - Starts at $20 per tonne in 2023 and rises $4.3 per year to reach $50 per tonne in 2030.
  - Could represent a carbon tax (added to fuel excises) or an ETS imposed on top of existing fuel taxes covering power and industry and fuel suppliers.
- Emissions impacts (2030):
  - CO2 emissions drop to 144 million tonnes in 2030 (13 percent below IMF staff projections of BAU CO2 emissions).
  - Sectoral contribution to emission reductions: power 52 percent, transportation 17 percent, industry 19 percent, buildings 12 percent.
  - Within the power sector: reductions in output account for one third of power-sector emission reductions and switching from fossil fuels (primarily coal to renewables) accounts for two-thirds.
  - Renewable share in electricity generation would rise to more than 40 percent in 2030 (authorities’ target: 30 percent; current renewable share: 21 percent).

### Fiscal and health impacts
- Revenues:
  - A $50 carbon price could raise revenues of 1. 05 percent of GDP ($7.0 billion) in 2030 (accounting for base erosion of pre-existing fuel taxes).
  - Revenue composition: about 44 percent from new charges on road fuels and 37 percent from coal.
- Local air pollution co-benefits:
  - Cumulated over 2023–30, the carbon price would save 10,400 premature fatalities from local air pollution exposure.
  - About half of avoided deaths are people over the age of 65 years.
- Domestic environmental co-benefits:
  - About 87 percent of domestic environmental co-benefits reflect lower local air pollution deaths and a 13 percent reduction in traffic congestion and accident externalities.

### Economic costs, GDP impacts, and mitigation of macro effects
- Economic cost:
  - Carbon tax would impose a modest economic cost equivalent to about 0.2 of GDP in 2030; about half of these costs would be offset by domestic environmental co-benefits.
  - Impact on GDP growth in 2030 is about negative 0.4 percent of GDP.
  - Using 75 percent of revenues on public investment brings the net impact to positive 0.1 percent (estimate depends on fiscal multiplier assumptions).

### Price and production-cost effects
- Energy price impacts in 2030 under $50 carbon price:
  - Coal price increase: 59 percent above BAU levels.
  - Natural gas price increase: 21 percent above BAU levels.
  - Electricity price increase: 4 percent above BAU levels.
  - Gasoline price increase: 13 percent above BAU levels.
- Pre-existing fuel taxes (equivalent carbon charges in 2030):
  - Coal: 1 per tonne of CO2.
  - Natural gas: 45 per tonne of CO2.
  - Gasoline: 154 per tonne of CO2.
- Additional charges from $50 carbon tax:
  - Coal: $4.7/GJ.
  - Natural gas: $2.8/GJ.
  - Gasoline: $0.11/liter.
- Production cost increases for selected industries in 2030 (relative to BAU):
  - Non-metallic industries (most notably cement): 8 percent.
  - Iron and steel: 4 percent.
  - Chemicals: 3 percent.
- Components of industrial production cost increases:
  - Direct tax payment or allowance purchase for direct emissions.
  - Abatement costs (switching to cleaner but costlier technologies/fuels).
  - Indirect payment for carbon charges embodied in inputs, especially electricity.

### Competitiveness and policy options for EITE industries
- Competitiveness concerns for energy-intensive, trade-exposed (EITE) industries arise from increased production costs.
- Possible unilateral measures to address competitiveness:
  - Impose carbon charges only on emissions above a threshold level (reduces average carbon charge and undermines mitigation incentives).
  - Return revenues collected from EITE industries as output-based rebates (operationally similar to TPS or feebate).
  - Under an ETS, provide free allowance allocations to EITE industries.
- Drawback: these approaches reduce potential government revenue from carbon pricing.

### Household impacts and revenue recycling for equity
- Average household burden:
  - Carbon price imposes a burden on the average household of 1.5 percent of their consumption.
  - About half of the burden comes indirectly from increases in price of general consumption goods (evenly distributed across households).
  - Relative burden from higher electricity prices is higher for higher income groups due to greater use of space cooling.
- Revenue recycling options for equity:
  - Fully compensating the bottom 10, 20, and 30 percent of the income distribution would use 7, 11 and 20 percent of carbon pricing revenues respectively (actual needs may be larger due to leakage).
  - Example: using 25 percent of revenues for a targeted, unconditional cash transfer aimed at the bottom four consumption deciles (assumed coverage rate 75 percent, leakage rate 25 percent) and using 75 percent of revenues for public investment (benefits proportional to household income) would:
    - Make the reform pro-poor and equity-enhancing.
    - Leave the bottom two deciles significantly better off with net benefits amounting to about 5-10 percent of consumption.
    - Leave the top three deciles worse off on net by about 1 percent of consumption.
  - Notes: estimates overstate net household burden because they ignore domestic environmental benefits distribution and benefits from revenue recycling.

### Conclusion: elements to move reform forward
- Key elements to enhance prospects for effective and politically acceptable mitigation with carbon pricing as centerpiece:
  - A balance between carbon pricing and other mitigation instruments—especially feebates or TPSs—at the sectoral level that are less efficient than pricing but likely have greater acceptability.
  - Recycling of carbon pricing revenues in ways that boost the economy (e.g., lowering taxes on work effort or funding socially productive investments), ensuring benefits are equitably distributed across households.
  - Public investments in clean technology infrastructure networks (e.g., grid updates to accommodate renewables) that would not be provided privately.
  - Market reforms to enhance competition and investment in the main energy sectors.
  - Just transition measures to assist vulnerable groups, such as stronger social safety nets or tax reliefs for low-income households, assistance programs for displaced workers and at-risk regions.
  - Measures to limit impacts of carbon pricing on industrial competitiveness.
  - Pricing or similar schemes for GHG emissions beyond the energy sector.
  - Financial sector support for the low-carbon transition.
- Implementation guidance:
  - Extensive upfront consultations with stakeholders and public information campaigns can help build political support.
  - Phase reforms in progressively to give households and firms time to adjust.
  - Recent increases in fossil fuel prices highlight the need for low-carbon transition to shield the economy from recurrent fuel price shocks and underscore the importance of comprehensive, inclusive reform to protect the vulnerable.

*International Monetary Fund, Philippines chapter (content unit 24).*

### References

### References and Annexes (1phlea2022005)

### Key literature and data sources
- Primary citations include:
  - Aguiar, Angel, Maksym Chepeliev, Erwin Corong, Robert Mcdougall, and Dominique Van Der Mensbrugghe, 2019. “The GTAP Data Base: Version 10.” Journal of Global Economic Analysis 4: 27.
  - Goulder, Lawrence H., Dallas Burtraw and Roberton C. Williams, 1999. “The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting.” Journal of Public Economics, Vol. 72, pp. 329-360.
  - Heine, Dirk, and Simon Black. 2019. “Benefits Beyond Climate: Environmental Tax Reform in Developing Countries.” In Fiscal Policies for Development and Climate Action, edited by Miria A. Pigato, 1–56.
  - IMF publications cited include IMF, 2019a; IMF, 2019b; IMF, 2021; Parry and others (2021); Parry, Black, and Zhunussova, 2022; Parry, Black and Vernon, 2021.
  - IPCC, 2019. Climate Change and Land: An IPCC Special Report.
  - WBG, 2022. Carbon Pricing Dashboard.
- Data and model inputs referenced:
  - GTAP Data Base Version 10.
  - IEA fuel use and emissions data (IEA (2021)).
  - Carbon emissions factors by fuel product from IEA.
  - Domestic environmental costs of fuel use based on IMF methodologies (see Parry, Black and Vernon (2021)).

### Annex I — Carbon pricing schemes
- Table A1 and Figure references detail national, subnational, and regional carbon pricing schemes and revenue/rent accounting.
- Note: Revenue/rent excludes revenue loss from erosion of prior fuel tax bases. Values combine national, subnational and regional pricing. Mexico excludes subnational schemes due to lack of coverage data.
- Source: Parry and others (2022).

### Annex II — Economic importance of using carbon pricing revenues productively
- Two sources of cost from carbon pricing:
  - Cost of mitigation responses (e.g., cleaner but more expensive technologies; reduced fuel consumption).
  - Broader macroeconomic costs from higher energy prices reducing real returns to work effort and investment.
- Offsetting potential:
  - Using carbon pricing revenues to increase economic efficiency (e.g., lowering taxes on work effort or funding productive investments) can largely or more than offset macroeconomic costs.
- Comparative assessment (United States example, Figure A1):
  - An ETS with free allowance allocation and emissions price of $50 per tonne, or equivalent carbon tax with revenues returned in lump-sum dividends to households, is about twice as costly—for a given nationwide emission reduction—as a combination of feebates to reduce emission rates.
  - Feebates have much smaller impacts on energy prices and therefore much smaller macroeconomic costs.
  - The most cost-effective policy is an ETS with allowance auctions, or a carbon tax, with the bulk of revenues used to cut distortionary taxes on labor and business income.
- Table A1 discusses revenue-use options across dimensions: economic efficiency, distributional incidence, administrative burdens, political acceptability.
- Footnotes:
  - A substantial analytical literature explores these interactions (e.g., Goulder and others, 1999; Parry and Williams, 2012).
  - Dividends have no efficiency benefits as they do not increase the real return to work effort or investment.

### Annex III — Pricing schemes for broader sources of GHGs (Forestry, Agriculture, Waste)
- Forestry
  - Policy goals: reduce deforestation, afforestation, enhance forest management (e.g., planting larger trees, increasing rotation lengths).
  - Proposed instrument: national feebate program applied to landowners at agricultural/forestry boundary with fee = [CO2 rental price] × [carbon storage on their land in a baseline period ─ stored carbon in the current period].
  - Feebates can reward reduced deforestation, afforestation, and improved management via reduced fees or increased subsidies.
  - Feebates can be revenue-neutral in expected terms through appropriate baseline scaling.
  - Feebates could use rental payments rather than large upfront payments to address non-permanence risks (e.g., harvesting, fires, pests).
  - Monitoring advances (satellite, aerial, on-the-ground sampling) make feebates more practical; forest carbon inventories use combined monitoring methods.
  - Feebates resemble environmental services payments programs (e.g., Costa Rica) but differ by applying fees for reductions in forest coverage.
- Agriculture
  - Around fourth fifths of methane emissions in the Philippines are from the agricultural sector and these emissions account for about 70 percent of total GHGs from agriculture.
  - Two thirds of agricultural methane emissions are from rice cultivation and one-third from livestock operations.
  - Main non-methane agricultural GHG: nitrous oxide, primarily from soils.
  - Mitigation options must balance food production and food security concerns (e.g., reduce water intensity in rice paddies via periodic draining; increase livestock productivity; shift to alternative feed such as seaweed additive).
  - Pricing agricultural GHGs could be based on farm-level output or input data, default emissions factors, and rebates for verified mitigation actions; revenues might be recycled to the sector to address competitiveness concerns.
  - Reference for methane process in flooded fields: Methane is released when flooded fields prevent oxygen from penetrating the soil, creating conditions for methane-emitting bacteria. See IPCC (2019).
- Waste
  - Limited range of behavioral responses to reduce methane from waste: collection and flaring at landfill sites; reducing demand for packaging and food; enhanced recycling; composting of organic waste.
  - Pricing methane from waste is less compelling than other sectors because:
    - Regulation can mimic tax effects given the limited observable mitigation responses.
    - Downstream methane taxes do not reduce waste supply; fiscal or regulatory incentives at household and industrial levels needed.
    - The 389 waste sites in the Philippines are publicly managed, making standards for public enterprises more natural than taxes.

### Annex IV — Climate Policy Assessment Tool (CPAT)
- Overview:
  - CPAT provides projections for 200 countries of fuel use and CO2 emissions by major energy sector.
  - It starts with fossil fuel and other fuel use by the power, industrial, transport, and residential sectors, then projects forward in a baseline using:
    - GDP projections;
    - Assumptions about income elasticity of demand and own-price elasticity of demand for electricity and other fuel products;
    - Assumptions about the rate of technological change affecting energy efficiency and productivity of energy sources;
    - Future international energy prices.
  - Current fuel taxes/subsidies and carbon pricing are held constant in real terms in the baseline.
- Impacts of carbon pricing modeled depend on:
  - Proportionate impact on future fuel prices by sector;
  - Simplified model of fuel switching within power generation;
  - Own-price elasticities for electricity and fuel use (fuel demand curves based on constant elasticity specification).
- Data and parameterization:
  - Basic model parameterized with IEA recent fuel use by country and sector.
  - GDP projections from latest IMF forecasts.
  - Data on energy taxes, subsidies, and prices compiled from public, IMF, proprietary, and third-party sources.
  - International energy prices projected using an average of IEA and IMF projections for coal, oil, and natural gas.
  - Fuel price elasticities chosen to be broadly consistent with empirical evidence and energy models; typical fuel price elasticities are between -0.5 and -0.8.
  - Carbon emissions factors from IEA; domestic environmental costs of fuel use per IMF methodologies.
- Caveats:
  - Baseline abstracts from mitigation actions beyond those implicit in recent fuel use and price data, providing a clean comparison to policy reforms.
  - Assumed fuel price responses may not hold for dramatic price changes that could trigger major technological advances (e.g., carbon capture and storage, direct air capture).
  - Model does not explicitly account for general equilibrium effects or changes in international fuel prices from simultaneous reforms in large countries.
  - Parameter values chosen for broad consistency with more detailed energy models.
- Development and references:
  - CPAT was developed by IMF and World Bank staff and evolved from an earlier IMF tool used in IMF (2019a and b). For descriptions of model and parameterization see IMF (2019b Appendix III) and Parry and others (2021); for further rationale see Heine and Black (2019).
  - International aviation and maritime fuels are excluded from the model and fossil fuel subsidy computations.
  - GDP projections exclude the negative growth effects of global climate change.
  - A modest adjustment in emissions projections is made to account for partially permanent structural shifts caused by the pandemic.

*Source: 1phlea2022005 - References (IMF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1phlea2022005.pdf_