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Does the Philippines need a new trading system to guide it towards a domestic carbon credit scheme? The authors have a suggestion to get things moving.

World incentives

The past few decades have seen collective actions by governments to slow global warming as the world faces the consequences of climate change. Mitigation efforts have been incentivised by certificates of pecuniary value: carbon credits. The major treaties governing carbon credits are the Kyoto Protocol and the Paris Agreement. The Philippines is among the parties that ratified both treaties, and is internationally bound by their provisions.

In 1997, more than 150 countries signed the Kyoto Protocol. In 2016, the Paris Agreement was signed to strengthen the global response to climate change. The Paris Agreement has superseded the Kyoto Protocol as the principal regulatory instrument, and created a policy of nationally determined contributions (NDCs), a domestic climate action plan to cut emissions. In 2020, the Philippines submitted its first NDC, committing to a 75% greenhouse gas (GHG) emission reduction. Of this, 2.71% is unconditional and 72.29% is conditional on the support or means of implementation for 2020-30.

Carbon markets are seen as part of the solution to climate change. More than two-thirds of countries use carbon markets to meet their NDCs, including Japan and India. The private sector has also initiated efforts such as Global Carbon Council carbon credits, the International Civil Aviation Organisation’s carbon offsetting and reduction scheme for international aviation, and gold standard project certification by the World Wildlife Fund.

Based on the Gold Standard non-profit organisation’s impact registry, there are several Philippines-based corporations with certified projects, in various phases, which avail carbon credits. They include: the 160MW Balaoi wind project; ACEN’s solar project; and the 81MW Caparispisan wind project.

Philippine situation

In the Philippines, carbon credits are still a novel concept. The Philippines has no carbon credit market that considers the GHG baseline or measures GHG emissions of stakeholders.

In the meantime, the Department of Energy (DOE) has established a renewable energy market (REM) under the Renewable Energy Act of 2008. The REM is the platform for trading of renewable energy certificates (RECs) with values equivalent to an amount of power generated from renewable energy resources. It is intended as a facility for mandated participants to comply with renewable portfolio standards obligations, a market-based policy that mandates electricity suppliers to source an agreed portion of their energy supply from eligible renewable energy resources.

RECs v credits

Although geared towards the same end, RECs and carbon credits are not the same. Carbon credits help offset GHG emissions by placing a cap on allowable emissions, while RECs offset electricity use from non-renewable sources by mandating a shift to renewable sources such as solar and wind.

One tradable carbon credit equals one tonne of carbon dioxide or its equivalent of a different greenhouse gas (CO2e) that is avoided, whereas one REC equals one megawatt-hour of electricity delivered to the grid from a renewable energy resource. While carbon credits place a cap on the carbon emissions allowed and actually used globally, RECs directly reduce the carbon footprint by lifting the use of renewables.

EAC alternative

Institutionalisation of carbon credits in the Philippines may require the passage of an enabling law, which may take time. In the meantime, the DOE, the Climate Change Commission and the Department of Environment and Natural Resources may consider establishing an energy attribute certificate (EAC) trading system, distinct from the REM and RECs, to determine how much generation from RE plants is necessary to meet the country’s NDC.

EACs are issued to measure units of energy generated from RE resources with a corresponding specified CO2e reduction. By establishing an EAC registry, the DOE will avoid double counting or double reporting of GHG emission reductions. The EAC registry may be used to monitor the legitimacy of carbon credits through stringent verification processes to ensure that only one certificate is issued for every amount of reduction in GHG emissions. This will encourage more investors to build RE plants in the Philippines and monetise RE generation by selling EACs to global carbon markets. It also presents an opportunity for the Philippine government to earn taxes from the sale of EACs.

As the DOE pushes for 50% share of RE in the Philippines’ total installed capacity by 2040, recognising the reduction of GHG emissions through the EAC platform is a good mechanism for reporting, accounting and monetising RE generation to guarantee reductions in GHG emissions.

Jose M Layug Jr is a senior partner at DivinaLaw in Metro Manila