The Opportunity Cost of Climate Mitigation Policy Promoting Renewable Power Generation in the Philippines Angga Pradesha Senior Research Analyst Environment and Production Technology Division (EPTD) IFPRI, Washington DC Presentation given at the 40th International Association for Energy Economics (IAEE) Conference Marina Bay Sands, Singapore Tuesday, June 20, 2017

Outline Motivation Objectives Models Scenario design Simulation results Conclusion and Policy Recommendation

MOTIVATION

Economic Growth, Energy and GHG Philippines showing favorable economic condition in past few years - could potentially reach high income level status in 2040 Energy - key for economic growth, especially in developing countries that undergo structural transformation process Energy security target– relying less on imported energy (coal) Philippines - made commitment to reduce 70% of GHG emission by 2030 (INDC 2015)

Green Growth Strategy Higher cost of electricity Capital constraints Deterring structural transformation Household welfare reduction Energy Security (coal) Reduction in GHG Health externalities Green job growth Financial compensation from abroad

OBJECTIVES

Research Questions What would be the optimal pathway to promote renewable power generation under strong economic growth? How this would impact the economy and vulnerable groups? How much it would cost? How much the benefits?

Models

Philippine Dynamic Computable General Equilibrium (Phil-DCGE) model 61 sectors Agriculture (15) Mining (3) Food industries (12) Other industries (15) Petroleum (2) Electricity (9) Transportation srv. (3) Other Services (2) 5 factors Labor Land Capital (3) 30 households By region (3) By location (2) By quintile (5)

Macroclosures Balance Closure Fixed foreign savings Mobile factors Flexible Gov. saving

TIMES Model Technology database: Constraints: Energy supply, targets, taxes, subsidies, externalities   Technology database: Techno-economic attributes Technology deployment & annual activities, power generation by fuel types End-use energy demand, demand elasticity, discount rate, time period, time slices Energy consumption, import/export of energy, marginal prices of energy Marginal electricity price, emission trajectories, least cost solution to meet energy demand Environment: Emission coefficients, targets

Linkages Electricity demand Philippine-TIMES Philippine- DCGE MODEL   Philippine- DCGE Electricity demand Electricity supply (generation share) Electricity price

Scenario Design

Simulation Scenarios SIM1 50 percent renewable share under conservative view SIM1 50 percent renewable share under optimistic view SIM2 SIM1 + Foreign transfer to government to cover welfare loss (Carbon income from abroad) SIM3 SIM2 + Foreign transfer to government to cover welfare loss (Carbon income from abroad) SIM4 SIM4 + Higher domestic investment share SIM5

Simulation Results

Baseline Power Mix *Ravago, Fabella, and Alonzo (2016). Generation share by fuel type in 2040 (%) Plausible future* Phil-DCGE TIMES Coal 57 57.0 57.4 Natural gas 16 15.7 15.2 Conventional (hydro and geothermal) renewable 24 23.7 24.5 Variable renewable (Biomass, wind and solar) 1 1.6 1.0 Others (diesel and heavy fuel oil)) 2 2.0 1.3 Total 100 *Ravago, Fabella, and Alonzo (2016).

Baseline GDP and Power Demand *Danao and Ducanes (2016).

50 percent renewable share Generation share by fuel type (%) Baseline TIMES result (50% renewable share) Phil-DCGE result Fossil fuel-based 74.5 50.0 49.6 Coal 57.4 34.7 35.0 Gas 15.2 13.6 Diesel 0.8 0.0 0.5 HFO 1.1 Renewable 25.5 50.4 Hydro 11.0 11.3 11.5 Geothermal 13.5 16.2 17.1 Solar 0.2 19.1 18.6 Wind 0.4 3.0 2.7 Biomass Total 100

Capital Demand and GDP

Factors reallocation

Economywide Wages

Welfare impact

Imported Energy and Real Exchange Rate

GHG Reduction and Health Co-benefit CO2 EMISSION IN 2040 SIM1 - 63 MT CO2 SIM2 - 62 MT CO2 ELECTRICITY FROM COAL IN 2040 -70 TERAWATT HOURS HEALTH COST PARAMETERS* 100% pollution control installed 70 Billion x US$0.0105 = US$0.73 Billion (PHP 32 Billion) 0% installed 70 Billion x US$0.1258 = US$8.76 Billion (PHP 385 Billion) *Gunatilake, Ganesanm and Bacani (2014)

Foreign Transfer and Export Demand

Foreign Transfer and Labor Demand

Policy Response and Macro Performance

Policy Response and Labor Demand

Conclusion and Policy Response

Conclusion Allocating more investment into renewable energy sector could potentially reduce economic growth up to 0.5 percent in 2040 Lower economic growth coupled with deindustrialisation could drive down household income and reduce economic welfare up to PHP 350 Billion Improve energy security given less imported coal is needed to produce electricity Reduce carbon emission by 65 million tons and provide health co-benefit up to 385 billion in 2040

Policy Response Large foreign inflow as compensation for reduced carbon emissions could potentially drive the economy to suffer from Dutch disease effect Increasing investment activity could negate the effects by absorbing the financial inflow into productive activities in the traded sector In total, the net welfare, reflected by total absorption could increase by PHP 155 billion

THANK YOU!

Projection on Income per capita Source: A. M. Balisacan. Powering the Future: Promoting Energy for Inclusive Growth. (EPDP presentation)