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THE JOURNAL OF ENERGY

AND DEVELOPMENT

Akihiro Watabe,

“Biofuel Expansion in the Philippines:


Impacts of Tax Credits and
Blend Mandate on the Economy,”
Volume 40, Number 1

Copyright 2015
BIOFUEL EXPANSION IN THE PHILIPPINES:
IMPACTS OF TAX CREDITS AND BLEND
MANDATE ON THE ECONOMY

Akihiro Watabe*

Introduction

A long with the recent worldwide expansion of biofuels, the Philippines


enacted the Biofuels Act of 2006 (Act) in January 2007 that mandates the use
of bioethanol in gasoline and biodiesel for achieving sustainable economic devel-
opment. Regarding bioethanol blended gasoline, the Act states that the 5-percent

*Akihiro Watabe, Professor of Economics at Kanagawa University, Japan, holds a Ph.D. in


regional science (specialization in regional economics and environment) from the University of
Pennsylvania, a M.S. in industrial engineering and management sciences from Northwestern
University, and a B.S. in industrial engineering from Seikei University, Japan. The author has been
a visiting scholar, fellow, lecturer and scientist at The East-West Center (Honolulu), RAND
Corporation, Asian Institute of Technology (Bangkok), Resources for the Future, Inc., and Unitec
Institute of Technology (Auckland). His recent research focuses on energy and environment policies
for sustainable economic growth. His articles have appeared in The Journal of Energy and
Development, Managerial and Decision Economics, Journal of Institutional and Theoretical
Economics, International Review of Law and Economics, Journal of Environmental Economics
and Management, and Journal of Clean Technology and Environmental Sciences, as a sampling.
This paper was developed from the project on the economic and environmental assessments of
the Philippine biofuels policy funded by the Institute of Energy Economics, Japan (IEEJ). The author
would like to thank Rosemarie Gumera, Ruby de Guzman, Andresito Ulgado, Kaoru Yamaguchi,
and members of the Philippine National Biofuels Board, along with the staffs of the Philippine
Department of Energy and Sugar Regulatory Administration and participants of the Philippine
Energy Modeling Seminars for their valuable comments and suggestions. Dr. Watabe also thanks the
Philippine Department of Energy, Sugar Regulatory Administration, and San Carlos Bioenergy Inc.
(SCBI) for providing data, assistance, and their hospitality. The views expressed in this paper are
those of the author and should not be attributed to IEEJ, the Philippine Government, or SCBI.

The Journal of Energy and Development, Vol. 40, Nos. 1 and 2


Copyright Ó 2015 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
51
52 THE JOURNAL OF ENERGY AND DEVELOPMENT

blend rate (E5) must be enacted within the two years from the Act taking effect and
the 10-percent blend rate (E10) must be enacted within four years from the Act’s
effective date. In 2012, the Philippine Department of Energy (DOE) promulgated
the National Renewable Energy Program (NREP) for 2011–2030 to expand the
long-term utilization of bioenergy in the country. NREP specifies the blend rates of
bioethanol as E10 from 2012 to 2015 and E20 from 2016 to 2030. It also drafts E85
as the targeted rate in 2030; however, that is not the required rate.1
The statistics show that the percentage increase in motor vehicle registration in
the Philippines has been almost proportional to the growth rate of the gross do-
mestic product (GDP) since 2000,2 and the gasoline demand from 1990 to 2010
exhibits a similar trend to GDP.3 In the meantime, the Philippines has been ex-
periencing sound economic growth since the 1990s. Even after the world recession
in 2008, Philippine GDP has been expanding at the annual average growth rate of
about 6 percent and it is also projected that GDP will continue to grow at the
average annual rate of between 5 to 7 percent for at least the next several years.4
Given these facts and the blend rate scheme proposed by NREP, the demand for
bioethanol is expected to increase throughout the period of NREP (through 2030).
Meanwhile, there are issues surrounding supplying sufficient bioethanol to meet
demand. Most importantly, the Act regulates the use of imported bioethanol for
use in biofuel.5 Specifically, the locally produced bioethanol must be utilized for
the biofuel and the importation of bioethanol shall be allowed only to the extent
that it would address a local supply shortage, despite the fact that the total local
production capacity of bioethanol in 2010 neither met the demand for bioethanol
nor the expected future demand for bioethanol under NREP.6 As part of the so-
lution, the Act implements tax credits as financial incentives for the investment in
bioethanol manufacturing. Tax credits apply to exemptions from the specific tax
on local or imported biofuel components of the blend per liter of volume and from
the value-added tax (VAT) on the sale of raw materials used in biofuel production,
but are not limited to feedstocks.7
The biofuel tax credit—the specific tax credit in the Philippines—reduces the
biofuel price, while the tax credit, as a subsidy, would distort the social welfare
and reduce tax revenues. Although there is much debate regarding tax credits on
biofuels, these type credits have been implemented by the United States, Brazil,
and other countries in Asia and Europe. Each country implements different forms
of the tax credits with different rates, so it is apparent that the effects of tax credits
on the economies as well as the environment, such as carbon dioxide (CO2) emis-
sions, differ among the nations.8 In particular, the effects of the tax credits on the
economy would be quite different between industrialized and developing coun-
tries; thus, it is important to examine them on a country basis.
The purpose of this paper is, therefore, to examine the impacts on the Philip-
pine economy of the exemptions from the specific tax and the VAT with the blend
scheme proposed by NREP. The impacts on the Philippine economy will be evaluated
BIOFUELS IN THE PHILIPPINES 53

by the value added (VA) associated with production activities to supply the biofuel by
utilizing locally produced bioethanol to the market.
The remainder of this article is organized as follows. In the next section we
provide the framework of the VA estimation model followed by a discussion of the
assumptions and the data used in the estimation model. The results of the analysis
are provided in the subsequent section and, last, we offer our paper’s final findings
and conclusions.

Estimation of the Value Added

The Philippines utilizes only sugarcane as the feedstock for bioethanol. As in


other Asian countries where cassava is a major source of bioethanol, DOE is
advancing cassava and sweet sorghum as new feedstock for bioethanol. However,
as it is still in the planning stage, time will be needed before a new feedstock can
be utilized.
The expectations are that the expansion of local bioethanol production will
stimulate the economy by increasing incomes of sugarcane farmers, creating new
employment opportunities in sugarcane farms, generating new investment in bio-
ethanol manufacturing, and yielding additional surpluses in the vehicle fuel market.
Therefore, the impact of sugarcane-based bioethanol on the economy can be eval-
uated by how much value added will be generated by expanding bioethanol pro-
duction from the status quo. We will consider the VA generated by production
activities from sugarcane cultivation to the biofuel supply.9 In other words, we will
estimate the VA of the farmers who supply sugarcane to bioethanol distilleries, the
VA of bioethanol distilleries that supply bioethanol to oil companies, and the VA
of oil companies that blend bioethanol into gasoline and distribute the biofuel to
the market. The effect of the local bioethanol production on the economy will be
measured by the ratio of the projected GDP and the total VA under NREP.
In estimating the VA, we assume that the quantity of bioethanol to be produced
is equivalent to the demand for bioethanol. Thus, the VA estimation is based on
the projected demand for bioethanol under NREP. Meanwhile, the local produc-
tion capacity of all existing bioethanol distilleries will not fulfill the demand
for bioethanol unless new bioethanol distilleries will be constructed during the
2013–2030 time frame. Therefore, as is stated in the Philippine biofuels policy, we
assume that bioethanol distilleries will be constructed properly and in time to meet
the demand for bioethanol year by year.10 Accordingly, the required capital in-
vestment to meet the bioethanol demand will be projected in estimating the VA of
bioethanol distilleries.
To examine the impacts of the tax credits, we will estimate the VA of retaining
and removing the tax credits. The tax credits apply to the specific tax and the VAT.
The specific tax credit applies to local or imported biofuels components of the
54 THE JOURNAL OF ENERGY AND DEVELOPMENT

blend per liter of volume, but the gasoline fuel component shall remain subject to
the prevailing specific tax rates. The specific tax on the leaded premium gasoline
is Philippine peso (Php) 5.35 per liter and that on the unleaded gasoline is Php 4.35
per liter.11 These tax rates are retained in a biofuel price and the amounts of the
taxes levied on the biofuel depend on how much the leaded premium gasoline and
the unleaded gasoline are blended in the biofuel. So, we calculate a weighted
average of the projected demands for the leaded premium gasoline and the un-
leaded gasoline to estimate how much each gasoline is blended in the biofuel. The
exemption from the 12-percent VAT applies to the sale of raw materials used in
the biofuel production, but not limited to feedstock such as sugarcane and others.
Hence, the supplies of bioethanol for the biofuel as well as of sugarcane will be
applied to the VAT exemption. The exemption from the VAT will directly affect
the VA of sugarcane farmers and bioethanol distilleries given the projected de-
mand for bioethanol. Meanwhile, the exemption from the specific tax will affect
the demand for biofuel through the change in a biofuel price.
The specific tax credit lowers the biofuel price at a mandated blend rate. In-
creasing the blend rate may either increase or decrease the biofuel price depending
on the relative prices of bioethanol and gasoline.12 Although the future oil price is
uncertain, we will use the time-series data on the leaded premium and unleaded
gasoline prices from 1980 to 2011 to predict the future gasoline prices during
2013–2030. For the bioethanol price, we assume that it depends on a sugarcane
price that is affected by the domestic and world sugar prices. Sugar prices are
uncertain; however, the Philippine Sugar Regulatory Administration (SRA) sta-
bilizes the price of domestic sugar by controlling the sugar supply as producers
must get authorization by SRA to deliver sugar to the market. Hence, given the
current price of sugarcane, the time-series data on the domestic sugar price from
1990 to 2012 is used to predict the sugarcane price from 2013 to 2030.
It also should be noted that utilizing sugarcane for biofuel affects its price as
well as the prices of other crops through the competition of land use.13 However, in
the Philippines there are sufficient idle lands available for sugarcane cultivation so
that the expansion of the land is neutral to the land-use patterns of sugarcane for
food supply and other crops.14
Now, a change in a biofuel price affects the biofuel demand through the price
elasticity of the demand. There are previous studies that estimated the price ela-
sticity of gasoline demand in the Philippines. R. McRae15 estimated that the price
elasticity is 0.391 and R. Tateishi16 estimated it is 0.213.17 In addition, our esti-
mation shows that the price elasticities of the leaded premium gasoline and the
unleaded gasoline are 0.41 and 0.22, respectively (see the next subsection on
“Projection of Bioethanol Demand”). Assuming that the price elasticity of the
gasoline demand is almost the same as the biofuel demand, the impact of the price
change by the specific tax credit on the demand for biofuel will be examined by
the selected values of the price elasticity. The biofuel demand is inelastic from the
BIOFUELS IN THE PHILIPPINES 55

studies above, so we select the values ranging from 0.21 to 1.5; i.e., from inelastic
to elastic demand.
Last, in comparison with NREP, we will conduct the analysis for an aggressive
scenario, which uses higher blend rates than NREP. Tables 1 and 2 show the blend
rates of NREP and the aggressive scenario. To proceed with the analysis, we will
first project the demand for bioethanol from 2013–2030, which will be shown in
the next subsection.
Projection of Bioethanol Demand: The demand for bioethanol is obtained by
multiplying the demand for biofuel by a blend rate. The biofuel demand is essen-
tially equal to the demand for gasoline. However, there are the differentials of the
heating values (i.e., the lower and higher heating values) between bioethanol and
gasoline, where the heating values of bioethanol are smaller than those of gasoline.
Hence, the biofuel requires a larger quantity than gasoline to drive vehicles the same
distance; i.e., the higher the blend rate, the more biofuel will be consumed as a
substitute of gasoline. Therefore, we will incorporate the heating values and blend
rates into the derivation of the demand for bioethanol from the gasoline demand.18
We will first estimate the demand for gasoline by an econometric analysis. The
econometric analysis is conducted for both the leaded premium and the unleaded
gasoline. We define the sum of the projected demand for each gasoline as the
demand for gasoline. Following the study by the U.S. Energy Information Ad-
ministration that suggested liquid fuel consumptions are correlated to GDP in
countries outside of the Organization for Economic Cooperation and Development
(OECD), the demand for the leaded premium and unleaded gasoline are estimated,
respectively, by the following equations (1) and (2).19 Time-series data of all
dependent and independent variables in equations (1) and (2) were obtained from
the Philippine official statistical documents.
LPGPRICEt
lnLPGt ¼ a0 þ a1 lnGDPt þ a2 ln þ a3 lnLPGt1 ð1Þ
CPIt
REGPRICEt
lnREGt ¼ b0 þ b1 lnGDPt þ b2 ln þ b3 lnREGt1 ð2Þ
CPIt

Table 1
a
BLEND MANDATE UNDER THE NATIONAL RENEWABLE ENERGY PROGRAM

Year 2013–2015 2016–2019 2030

Blend rate E10 E20 E20/E85

a
E10 = 10-percent blend rate; E2 = 20-percent blend rate; E85 = 85-percent blend rate; E85 in
2030 is not the mandated but targeted rate.
56 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 2
a
BLEND MANDATE OF AN AGGRESSIVE SCENARIO

Year 2013–2015 2016–2020 2021–2025 2026–2029 2030

Blend Rate E10 E20 E30 E60 E85

a
E10 = 10-percent blend rate; E20 = 20-percent blend rate; E30 = 30-percent blend rate; E85 =
85-percent blend rate; and E85 in 2030 is not the mandated but targeted rate.

where LPGt is the leaded premium gasoline consumption in the tth year; LPGt–1 is
the lagged dependent variable of the leaded premium gasoline consumption; GDPt
is the real GDP in the tth year; LPGPRICEt is the leaded premium gasoline price in
the tth year; CPIt is the consumer price index in the tth year; REGt is the unleaded
gasoline consumption in the tth year; REGt–1 represents the lagged dependent
variable of the unleaded gasoline consumption; and REGPRICEt is unleaded
gasoline consumption in the tth year.
The estimation results are given in equations (3) and (4):
LPGPRICEt
lnLPGt ¼ 21:81 þ 0:92lnGDPt  0:41ln þ 0:44lnLPGt1
CPIt
ð8:9Þ ð9:04Þ ð12:0Þ ð7:53Þ
ð3Þ
2
Adjusted R = 0.99 F = 699.1 DW = 1.43 Dh = 1.21; and
REGPRICEt
lnREGt ¼ 12:26 þ 0:49lnGDPt  0:22ln þ 0:71lnREGt1
CPIt
ð 3:23Þ ð3:19Þ ð 5:2Þ ð6:87Þ
ð4Þ
2
Adjusted R = 0.96 F = 12.5.5 DW = 1.78 Dh = 0.49.
The t-statistics of the regression coefficients at the 5-percent level are given in
parentheses below the independent variables. All coefficients are statistically
significant and the regression models are well specified without the serial corre-
lation. Also, the coefficients of LPGRICE/CPI in equation (3) and REGPRICE/
CPI in equation (4) imply the price elasticities of the leaded premium gasoline and
the unleaded gasoline, respectively. Although both kinds of gasoline are inelastic
to price changes, the leaded premium gasoline responds to the price change more
than the unleaded gasoline, which is the expected result.
Denoted by GASOLINEDEMANDt the projected demand for gasoline in the tth
year, we obtain:
BIOFUELS IN THE PHILIPPINES 57

GASOLINEDEMANDt ¼ LPGt þ REGt

The biofuel must provide the same heating value as gasoline. Denoted by
BIOFUELt the projected demand for biofuel in the tth year, we obtain:
GASOLINEDEMANDt GASCAL
BIOFUELt ¼
ð1BLENDRATEÞGASCALþBLENDRATEBIOETHCAL
where GASCAL represents the average lower heating value of the leaded premium
gasoline and the unleaded gasoline in kilocalories (kcal) per liter, BIOETHCAL
represents the lower heating value of bioethanol (kcal per liter), and BLENDRATE
represents a blend rate of bioethanol.20 Using the projected demand for biofuel
obtained above, the projected demand for bioethanol in the tth year is given as:
BIOETHANOLt ¼ BIOFUELt  BLENDRATE:

Assumptions and Data for the Value-Added Estimation

This section discusses the assumptions and the data used for estimating the VA.
Based on the projected demand for bioethanol, being equivalent to the quantity of
bioethanol to be produced, we realize specific production activities necessary in
producing biofuel; i.e., how much sugarcane needs to be harvested, how much
funds should be invested in bioethanol manufacturing, and how much gasoline
should be blended in biofuel.
Sugarcane-based bioethanol is produced either directly from sugarcane juice
extracted from harvested cane or from molasses. In the Philippines, about 65
percent of bioethanol is produced by the direct utilization of sugarcane juice and
the remainder from molasses.21 Immediately after the amendment of the Act, the
two local bioethanol distilleries of San Carlos Bioenergy Inc. (SCBI) and Green
Future Innovation Inc. (GFI)—currently the two largest bioethanol distilleries
in the Philippines with the annual production capacities of 30 million liters and
54 million liters, respectively—were constructed and began operating with the
direct utilization of sugarcane juice.
Now, as stated above, it is assumed that bioethanol distilleries will be con-
structed over the period of NREP in order to keep the equilibrium condition of
demand and supply. For the production method for existing and new bioethanol
distilleries, we assume that the direct utilization of sugarcane juice is employed.
The reason is that the data are only available for the direct utilization, the majority
of sugarcane is produced by this production method, and both SCBI and GFI
employ it. The data on sugarcane farming, bioethanol manufacturing, and the
distribution of biofuel were provided by DOE, GFI, SCBI, SRA, and official
documents of the Philippine government. The unavailable data are replaced by the
58 THE JOURNAL OF ENERGY AND DEVELOPMENT

hypothetical data recommend by DOE and SRA. The following subsections dis-
cuss the important assumptions for the VA estimations in details.

Sugarcane Farmers
Sugarcane Productivity: There are two types of sugarcane—plant cane and
ratoon cane. In every crop year, on average about 30 percent of sugarcane is
harvested from plant canes and the remainder from ratoon canes. The average
production costs of a plant cane and a ratoon cane were Php 59,565 per hectare and
Php 47,830 per hectare, respectively, in the crop year 2005–2006. The productivity
of sugarcane harvested from both canes is 65 tons per hectare.22 On the other hand,
the Philippine Roadmap of sugarcane harvest aims to increase the productivity of
sugarcane from 65 tons per hectare to 75 tons per hectare, thereby making the po-
tential productivity greater than 80 tons per hectare.23 Thus, it is assumed that the
productivity of both types of canes, tonnage per hectare, increases by 2 percent
annually until 2030. The production costs will be adjusted by the information rate.
Sugarcane Price: We obtain the sugarcane price by the benchmark against
sugar prices at mill sites with a correction factor. The correction factor is the
average sugar yield in 50-kilogram (kg) bags per ton of cane in 2009–2010 (i.e.,
1.8 kg) multiplied by the 65-percent farmers’ share of the sugar produced.24 The
average composite price in the crop year 2009–2010 was Php 1,560 per 50-kg bag;
therefore, the sugarcane price in the crop year 2009–2010 is equal to Php 1,825.20
per ton (i.e., 1825.20 = 1,560 * 1.8 * 0.65). Assuming that the fluctuations of the
sugarcane price and the sugar price at mill sites are similar to one another, the
sugarcane price after the crop year 2009–2010 will be projected by the time-series
data of the sugar price at mill sites.
Employment and Wages: 1.5 workers per hectare are employed by farmers for
sugarcane cultivation.25 The annual wage is calculated as Wage = Daily Wage * 26
days * 12 months, where the daily wage of the agricultural plantation is available
from the government’s Current Regional and Annual Minimum Wage Rates in the
Philippines.26
Personal Income Taxes: For big farms of more than 10 hectares, workers are
generally different from farmers. However, for small farms of less than 10 hect-
ares, the farmers are usually the workers themselves. Workers on the small farms
with large families are, most of time, not paying personal income tax since they
have no declared employers. Furthermore, after taking out tax exemptions due to
the number of dependent children, their net taxable income would be zero. Em-
ployers’ declarations where workers’ salaries are declared as part of operating
costs, are the ones obliged to pay their personal income taxes. Hence, it is assumed
that workers on farms 10 hectares or greater in size are paying personal income
taxes and workers of farms less than 10 hectares are not paying the taxes. Farmers
who provide sugarcane to bioethanol distilleries are exempt from the VAT under
BIOFUELS IN THE PHILIPPINES 59

Section 6 of Biofuels Act of 2006. Personal income tax is calculated by the annual
wage and the tax rate.27
Property Taxes: Property taxes on real estate differ across the regions. In re-
lation to the data on bioethanol production such as SCBI, we use the property tax
rate in San Carlos, Negros Occidental where real estate is taxed at 1 percent based
on 40 percent of the market value of agricultural land. Agricultural land is valued,
on average, at about Php 1 million per hectare. The land value appreciation is
disregarded.
Lien Share for Workers’ Amelioration Benefit: The total amount of lien is Php
13.43872 per ton of sugarcane harvested, and planters are assigned 65 percent of
the lien share. It is assumed that the share remains unchanged until 2030.

Bioethanol Distilleries
Production Capacity and Productivity: A bioethanol distillery has the annual
production capacity of 30 million liters and 70 liters of bioethanol will be pro-
duced from one ton of sugarcane.28 The economic life of a distillery plant is 20
years and the technology of the plant remains unchanged until the end of the plant
life. This implies that once the plant is constructed, the bioethanol distillery keeps
utilizing the same technology so that the bioethanol productivity and the pro-
duction cost will remain unchanged. Only inflation will affect the cost of the
production.
Capital Expenditures: The capital expenditure for the annual production ca-
pacity of 30 million liters requires Php 3 billion. Some 70 percent of capital ex-
penditure is financed by bank loans with a 10-percent interest rate for 12 years of
the term of repayment and 30 percent of capital expenditure is financed by the
equity with 14-percent minimum return for 20 years.
Depreciation of Capital: The depreciation of the plant is calculated by the
straight line method with no salvage value of capital at the end of the economic life
(i.e., year 20).
Cogeneration: 8 megawatts (MW) are produced by cogeneration and 2.4 MW
are available to local neighboring communities.29 We use the Feed-in Tariff (FIT)
rate of biomass decided in July 2012 (i.e., Php 6.63 per kilowatt hour—kWh) as
the electricity price by cogeneration, and the FIT rate is assumed to be unchanged.
Wastewater Recycling: Wastewater is recycled and there is no liquid discharge
to the environment. The expenditure on wastewater recycling is calculated by the
power consumption on wastewater recycling (i.e., 13 kWh per 1,000 liters of
bioethanol produced) and industrial power rate (i.e., Php 5.55 per kWh in Negros
Occidental).30
Bioethanol Price: Bioethanol prices were Php 47.92 per liter and Php 45.00 per
liter in 2011 and 2012, respectively. Using these prices, the bioethanol price will be
60 THE JOURNAL OF ENERGY AND DEVELOPMENT

estimated afterward, assuming that the bioethanol price varies with the same trend
as the sugarcane price.
Lien Share for Workers’ Amelioration Benefit: 35 percent of lien share is
assigned to distilleries and this share remains unchanged through the simulation.
Corporate Income Tax: The corporate income tax is subject to the Renewable
Energy Act of 2008; i.e., an income tax holiday for the first seven years and 10-
percent corporate income tax afterward.
Employment and Wage: 50 workers are employed by a bioethanol distillery
with the annual production capacity of 30 million liters. The daily wage of non-
agricultural plantation and income tax rates are available from the Current Regional and
Annual Minimum Wage Rates in the Philippines and Tax Information, respectively.31

Oil Companies
Corporate Income Tax: The profit is subject to the corporate income tax of 35
percent.32
Expenditures Related to Gasoline: The composition of the total expenditures for
gasoline is the expenditures for oil importation, import duty, oil refining, and trans-
porting the refined oil from refineries to depots. To derive the total expenditures for
gasoline, we use the retail prices of the leaded premium gasoline and the unleaded
gasoline and the specific taxes levied on both gasolines. The retail price is equal to the
sum of the total expenditure and the specific tax, and, thus, the total expenditure on
either gasoline is obtained by subtracting the specific tax from the retail gasoline price.
The leaded premium gasoline currently is taxed at Php 5.35 per liter and the
unleaded gasoline is taxed at Php 4.35 per liter.33 In estimating the total expenditures
for gasoline, these tax rates are assumed to be constant over time. The import duty
on oil is 3 percent and it is assumed that the rate remains unchanged over time.
Now, there is the uncertainty about the future oil price. In our analysis, we will
use the time-series data of the leaded and unleaded premium gasoline prices to
project their future prices. Meanwhile, to estimate the future import duty, we also
employ the assumption that oil price will be a linear trend based on the time-series
data on oil price.34
Blending Cost: The blending cost is assumed to be negligible and there is no
depreciation on the blending facilities.
Biofuel Price: A biofuel price is calculated by a bioethanol price, the leaded pre-
mium and unleaded gasoline prices, and a blending rate. Let us denote the biofuel price
by PB, the bioethanol price by PE, the leaded premium gasoline price by PP, the un-
leaded gasoline price by PR, and the blend rate by r. Then, the biofuel price is given as:

PB ¼ rPE þ ð1  rÞða1 PP þ a2 PR Þ

where a1 ¼ Leaded Premiun Gasoline Demand


Total Gasoline Demand and a2 ¼ UnLeaded Gasoline Demand
Total Gasoline Demand :
BIOFUELS IN THE PHILIPPINES 61

Total gasoline demand—the denominator in a1 and a2—is the sum of the


leaded premium and unleaded gasoline demands. Thus, the prices of the leaded
and unleaded premium gasoline affect the biofuel price as the weighed sum of the
demand for each gasoline.
Inflation: The costs of sugarcane cultivation and the bioethanol production,
wages, and the industrial power rate will increase at the annual rates of inflation
during the period of NREP. Based on past statistics of the annual average inflation
rate in the Philippines, the annual average inflation rate is assumed to be 3.5 percent.

The Results of the Analysis

Figure 1 depicts the projected demands for gasoline, biofuel under NREP, and
the aggressive scenario without tax credits. The demand for gasoline prior to 2013
is the actual demand and the demand for gasoline after 2013 is the projected one.
Notice that the projected demands for biofuel under NREP and the aggressive
scenario are greater than the projected demand for gasoline. As stated above, this
arises because the demand for biofuel contains bioethanol, which has a lower
caloric value than gasoline. Hence, the replacement of gasoline by bioethanol
requires a larger quantity of bioethanol than gasoline to maintain the equivalent

Figure 1
PROJECTED DEMAND FOR GASOLINE AND BIOFUEL (WITHOUT TAX CREDITS),
2013–2030
(in billion liters)
62 THE JOURNAL OF ENERGY AND DEVELOPMENT

caloric value between the two fuels. Figure 2 shows the projected demand for
bioethanol without tax credits under NREP and the aggressive scenario.35
The results of the analysis under NREP and the aggressive scenario are shown in
tables 3–4 and tables 5–6, respectively. Table 3 displays the rates of the GDP in-
crement under NREP from 2013 to 2030. The results are expressed by the values
in 2012 as the base year. Without tax credits, biofuel expansion itself stimulates the
economy by pushing GDP up by 5.139 percent in 2013 to 9.24 percent in 2030.
With tax credits, the impact on GDP depends on the price elasticity of the biofuel
demand. The price elasticity was exogenously selected from the values of elastic to
inelastic demand as shown in the first column in table 3. The selected values of
inelastic demand cases are based on the previous studies stated above and the result
of our econometric analysis in the subsection “Projection of Bioethanol Demand.”
The results of the analysis show that the more elastic the biofuel demand, the
greater is the impact on GDP. The cases where tax credits can further simulate the
economy are indicated by the gray color cells in table 3. The tax credits will be
effective after 2020 when the demand is elastic. When the demand is inelastic, the
tax credits will be ineffective until 2030 with the price elasticity of 0.5.
The previous studies and our estimation of the price elasticity of gasoline
demand found that the gasoline demand is inelastic, so it seems plausible to

Figure 2
PROJECTED DEMAND FOR BIOETHANOL (WITHOUT TAX CREDITS),
2013–2030
(in million liters)
Table 3
INCREASED RATES OF GROSS DOMESTIC PRODUCT UNDER THE NATIONAL RENEWABLE ENERGY
a
PROGRAM (NREP), 2013–2030
(in percentages)

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021

Blend rates E10 E10 E10 E20 E20 E20 E20 E20 E20
VA without tax credits 5.139 5.253 5.379 6.691 6.865 7.041 7.219 7.399 7.578
VA with tax credits (r = 0.213) 5.030 5.147 5.276 6.506 6.687 6.892 7.080 7.269 7.459
VA with tax credits (r = 0.319) 5.035 5.152 5.281 6.520 6.701 6.907 7.095 7.284 7.474
VA with tax credits (r = 0.500) 5.038 5.156 5.285 6.529 6.710 6.916 7.104 7.293 7.483
VA with tax credits (r = 1.000) 5.054 5.172 5.301 6.570 6.751 6.957 7.146 7.335 7.525
VA with tax credits (r = 1.500) 5.070 5.188 5.317 6.611 6.793 6.999 7.187 7.377 7.568
Year 2022 2023 2024 2025 2026 2027 2028 2029 2030
Blend rates E20 E20 E20 E20 E20 E20 E20 E20 E20
VA without tax credits 7.791 7.972 8.154 8.336 8.518 8.699 8.880 9.060 9.240
VA with tax credits (r = 0.213) 7.688 7.879 8.071 8.263 8.454 8.646 8.837 9.028 9.218
VA with tax credits (r = 0.319) 7.702 7.894 8.086 8.277 8.469 8.661 8.852 9.043 9.233
VA with tax credits (r = 0.500) 7.712 7.903 8.095 8.287 8.478 8.670 8.861 9.052 9.243
BIOFUELS IN THE PHILIPPINES

VA with tax credits (r = 1.000) 7.754 7.946 8.138 8.330 8.522 8.714 8.905 9.096 9.287
VA with tax credits (r = 1.500) 7.797 7.989 8.181 8.373 8.565 8.757 8.949 9.140 9.331

a
r is the price elasticity of the biofuel demand. Years and the price elasticities corresponding to the gray color cells yield higher impacts on GDP by
tax credits over non-tax credits. E10 = 10-percent blend rate and E20 = 20-percent blend rate.
63
64

Table 4
IMPACT OF THE REDUCTION IN PRODUCTION COSTS WITHOUT TAX CREDITS ON GROSS DOMESTIC
a
PRODUCT IN SELECTED YEARS UNDER THE NATIONAL RENEWABLE ENERGY PROGRAM (NREP), 2013–2030
(in percentages)

Year 2013 2015 2018 2021 2024 2027 2030

Blend rate E10 E10 E20 E20 E20 E20 E20


Non-cost reduction 5.139 5.379 7.041 7.578 8.154 8.699 9.240
Agriculture (5%) 5.155 5.395 7.077 7.617 8.196 8.745 9.289
Agriculture (10%) 5.170 5.411 7.112 7.656 8.238 8.790 9.338
Bioethanol (5%) 5.150 5.391 7.069 7.610 8.193 8.743 9.290
Bioethanol (10%) 5.161 5.403 7.096 7.641 8.232 8.787 9.340
Both agriculture & bioethanol (5%) 5.166 5.407 7.104 7.648 8.235 8.789 9.339
Both agriculture & bioethanol (10%) 5.192 5.435 7.167 7.718 8.316 8.878 9.438

a
E10 = 10-percent blend rate and E20 = 20-percent blend rate.
THE JOURNAL OF ENERGY AND DEVELOPMENT
Table 5
a
INCREASED RATES OF GROSS DOMESTIC PRODUCT UNDER THE AGGRESSIVE SCENARIO, 2013–2030
(in percentages)

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021

Blend rates E10 E10 E10 E20 E20 E20 E20 E20 E30
VA without tax credits 5.139 5.253 5.379 6.691 6.865 7.041 7.219 7.399 9.015
VA with tax credits (r = 0.213) 5.030 5.147 5.276 6.506 6.687 6.892 7.080 7.269 8.849
VA with tax credits (r = 0.319) 5.035 5.152 5.281 6.520 6.701 6.907 7.095 7.284 8.875
VA with tax credits (r = 0.500) 5.038 5.156 5.285 6.529 6.710 6.916 7.104 7.293 8.892
VA with tax credits (r = 1.000) 5.054 5.172 5.301 6.570 6.751 6.957 7.146 7.335 8.970
VA with tax credits (r = 1.500) 5.070 5.188 5.317 6.611 6.793 6.999 7.187 7.377 9.048
Year 2022 2023 2024 2025 2026 2027 2028 2029 2030
Blend rates E30 E30 E30 E30 E60 E60 E60 E60 E85
VA without tax credits 9.283 9.503 9.724 9.944 15.545 15.874 16.201 16.524 22.570
VA with tax credits (r = 0.213) 9.141 9.376 9.612 9.847 15.845 16.216 16.585 16.951 23.325
VA with tax credits (r = 0.319) 9.168 9.403 9.639 9.874 15.933 16.305 16.674 17.040 23.488
VA with tax credits (r = 0.500) 9.185 9.421 9.656 9.891 15.990 16.361 16.730 17.096 23.592
VA with tax credits (r = 1.000) 9.264 9.500 9.735 9.971 16.248 16.618 16.987 17.352 24.065
BIOFUELS IN THE PHILIPPINES

VA with tax credits (r = 1.500) 9.342 9.579 9.815 10.050 16.504 16.874 17.242 17.606 24.532

a
r is the price elasticity of the biofuel demand. Years and the price elasticities corresponding to the gray color cells yield higher impacts on GDP by
tax credits over non-tax credits. E10 = 10-percent blend rate; E20 = 20-percent blend rate; E30 = 30-percent blend rate; E60 = 60-percent blend rate;
and E85 = 85-percent blend rate.
65
66

Table 6
IMPACT OF THE REDUCTION IN PRODUCTION COSTS WITHOUT TAX CREDITS ON GROSS DOMESTIC
a
PRODUCT IN SELECTED YEARS UNDER THE AGGRESSIVE SCENARIO, 2013–2030
(in percentages)

Year 2013 2015 2018 2021 2024 2027 2030

Blend rate E10 E10 E20 E30 E30 E60 E85


Non-cost reduction 5.139 5.379 7.041 9.015 9.724 15.874 22.570
Agriculture (5%) 5.155 5.395 7.077 9.074 9.787 16.011 22.771
Agriculture (10%) 5.170 5.411 7.112 9.132 9.850 16.147 22.972
Bioethanol (5%) 5.150 5.391 7.069 9.063 9.783 16.007 22.775
Bioethanol (10%) 5.161 5.403 7.096 9.110 9.841 16.139 22.979
Both agriculture & bioethanol (5%) 5.166 5.407 7.104 9.121 9.846 16.143 22.975
Both agriculture & bioethanol (10%) 5.192 5.435 7.167 9.226 9.967 16.409 23.376

a
E10 = 10-percent blend rate; E20 = 20-percent blend rate E30 = 30-percent blend rate; E60 = 60-percent blend rate; and E85 = 85-percent blend
rate.
THE JOURNAL OF ENERGY AND DEVELOPMENT
BIOFUELS IN THE PHILIPPINES 67

assume that the biofuel demand will be inelastic as well. Moreover, the expected
economic growth of the Philippines will increase the household income and the
living standard; thus, vehicle fuels will be considered more of a necessary good for
the Philippine people in the future than today. Hence, the demand for biofuel will
be more inelastic over time. As a result, the tax credits are unnecessary for the
purpose of stimulating the economy although the differentials of the impacts of
retaining and removing tax credits are less than 0.1 percent of GDP. The adverse
effect of the tax credits on GDP arises because the decrease in the biofuel price,
due to the specific tax credit, enlarges the biofuel demand and thereby the bio-
ethanol production; however, the reduction in the tax revenues is not offset by the
VA generated by the increase in the bioethanol production with the specific tax
credit. The inelastic demand for biofuel does not increase the consumption rate
more than the rate of the price decrease.
One should also consider the technological innovation in sugarcane farming
and bioethanol manufacturing rather than tax credits alone. Suppose that through
technological innovation the production costs of sugarcane and bioethanol can be
reduced. In that case, the impacts of the reduction in these production costs (by
5 percent and 10 percent) on GDP are shown in table 4. Although the impact of the
technological innovation on GDP is very small, it can increase GDP by 0.06
percent to 0.2 percent.
Given the blend mandate, the tax credits reduce more tax revenues over the
years of NREP since the blend rate and the expected biofuel demand, that is, the
expected bioethanol quantity, will increase during the period. Also, the tax credits
would not provide a proper incentive to induce technological innovation. Conse-
quently, creating the economic environment to enhance technological innovation
rather than implementing tax credits needs to be reconsidered for Philippine
biofuel policy.
Recall that the blend mandate of NREP requires a sufficient number of
bioethanol distilleries to be constructed during the period of NREP. The faster
way to yield the technological innovation for new bioethanol distilleries that
need to be constructed could be brought about via international collaborations
such as the Clean Development Mechanism (CDM). There were forty-five
CDM projects in 2012 and only two projects among them were biofuel projects.
Regarding Certified Emission Reduction (CER), biofuel projects earned
468,703 CERs, which is about 12.6 percent of the total CERs earned from the
CDM projects.36 Hence, biofuel projects should be enhanced more in CDM
projects.
Tables 5–6 provide the results of the aggressive scenario case. As in the case of
NREP, the instances where tax credits can stimulate the economy more than non-
tax credits are indicated by the gray color cells in table 5. The tax credits will be
effective when the blend rate is set at E60 in 2026, regardless of the values of the
price elasticity. Prior to 2026, however, the tax credits are effective after 2012 only
68 THE JOURNAL OF ENERGY AND DEVELOPMENT

for the elastic demand with the blend of E30. Recall that, given the price elasticity
of vehicle fuel demand in the Philippines, the effectiveness of the tax credits
would not appear until the blend rate of E60.
To meet the demand for bioethanol for E60, a significant number of bio-
ethanol distilleries will have to be constructed during 2026–2030, which would
be a very difficult task for the country. The effectiveness of tax credits also is
examined by improvements in technological innovation (table 6). We have es-
sentially the same result as the NREP case, that is, the reduction in production
costs of sugarcane and bioethanol will be more effective than implementing tax
credits.

Conclusions

We examined the impacts of the biofuel expansion by locally produced sugarcane-


based bioethanol on the Philippine economy under NREP and the aggressive sce-
nario. The impacts on the economy were estimated by the value added of sugarcane
farmers, bioethanol distilleries, and oil companies from 2013 to 2030 based on the
projected demand for bioethanol obtained by the blend rates under NREP and the
aggressive scenario. The Biofuel Act of 2006 regulates the use of the imported
bioethanol for biofuel while encouraging the use of locally produced bioethanol. At
the same time, the Act implements the tax credits on the specific tax that applies to the
exemption from local or imported biofuels components of the blend per liter of
volume and on the value-added tax, which apply to the sale of raw materials used in
the biofuel production in order to induce the investment in bioethanol manufacturing.
We examined the impact of the tax credits on the economy by estimating the
total value added of producing biofuel by retaining and removing the tax credits.
The biofuel expansion of the Philippines can stimulate the economy; however, the
tax credits can hardly be an effective means to further stimulate the economy
under NREP. A possible effectiveness of the tax credits is the case where the
biofuel demand is highly elastic, which appears after 2021. Nonetheless, it is
unlikely to occur when we consider the price elasticity of the vehicle fuel demand,
which is inelastic in the Philippines.
Under the aggressive scenario, the tax credits can be an effective means to
stimulate the economy for the inelastic vehicle fuel demand. The effectiveness of
the tax credits, however, will not appear until 2026 when the blend rate becomes
E60. In such a case, the Philippines must enlarge the production capacity of
bioethanol, which will require a significant amount of capital investment.
Apart from the tax credits, we considered the impact of technological innovation
in reducing production costs of sugarcane and bioethanol. If the technological in-
novation can reduce the production cost of either sugarcane or bioethanol by
5 percent, then the economy will be stimulated, although the amount of the GDP
BIOFUELS IN THE PHILIPPINES 69

increment is very small. The tax credits can expand the demand for biofuel, thereby
impacting bioethanol production; however, the credits reduce tax revenues and
generate a welfare-reducing effect. In short, determining how to enhance technological
innovation rather than implementing tax credits should be a key policy direction for the
Philippine biofuel policy. CDM is a good way to promote technological innovation for
bioethanol distilleries, which need to be constructed under NREP, although, presently
the Philippine CDM projects dealing with biofuel account for only 12.5 percent of the
total CDM projects.
The results of the analysis are similar to those presented in the study by
M. Gehlher et al.37 Their research showed that tax credits for biofuel result in a
negative impact on GDP in the United States. The impact is measured by ex-
penditures in the public and private sectors and net exports. They used the com-
putable general equilibrium (CGE) model for the United States developed by
Monash University in Australia and the U.S. Department of Agriculture. For us to
undertake CGE modeling, we would require a substantial data set for the econ-
omywide analysis, which would be difficult to obtain for the Philippines. We
disregarded the impact of the scheme under the Biofuels Act of 2006 on the whole
economy unlike M. Gehlher et al.’s work; however, our analysis provides the
Philippine policy makers with a direction to focus biofuel policy. Finally, the
accuracy of the analysis will be most influenced by the uncertainties regarding oil
prices and sugar prices. We leave these variables for future research.
NOTES
1
The Philippine Department of Energy (DOE), “Renewable Energy Plans and Programs
(2011–2030),” in National Renewable Energy Program (Manila: DOE, 2012).
2
For countries outside of the Organization for Economic Cooperation and Development
(OECD), liquid fuel consumption is correlated to GDP. U.S. Department of Energy, Energy In-
formation Administration (EIA), “Economic Growth Has a Strong Impact on Oil Consumption:
Non-OECD Liquid Fuels Consumption and GDP,” Washington, D.C., EIA, 2013, available at
www.eia.gov/finance/markets/demand-nonoecd/cfm.
3
The Philippine National Statistical Coordination Board, Statistics-Economic Accounts, avail-
able at http://www.nscb.gov.ph.
4
The Philippine National Statistical Coordination Board, op. cit.
5
Throughout the paper, biofuel implies the bioethanol blended gasoline.
6
The Philippine Sugar Regulatory Administration (SRA), Roadmap to Bioethanol through the
Sugarcane Industry Route (Quezon City: SRA, 2008).
7
NREP and the Act seem to rule out the “blend wall” where bioethanol production exceeds the
amount that can be blended in gasoline. National Research Council, Renewable Fuel Standard:
Potential Economic and Environmental Effects of U.S. Biofuel Policy (Washington, D.C.: National
Academy Press, 2011). The possible blend wall in the Philippines arises from the fact that old vehicles
70 THE JOURNAL OF ENERGY AND DEVELOPMENT

cannot use E10 or E20 without engine modifications. Thus, flex vehicles would have to replace older
ones; however, lower-income households cannot afford to do this. The problems caused by the blend
wall are outside of the scope of this article and, therefore, are excluded from our discussion.
8
Masami Kojima, Donald Mitchell, and William Ward, Considering Trade Policies for Liquid
Biofuels (Washington, D.C.: World Bank, 2007); Organization for Economic Cooperation and
Development (OECD)–U.N. Food and Agricultural Organization (FAO), “Biofuels,” in Agricul-
tural Outlook 2011–2020 (Paris: OECD, 2011); and Govinda R. Timilsina and Ashish Shrestha,
“Biofuels, Markets, Targets and Impacts,” Policy Research Working paper no. 5364, The World
Bank, Washington, D.C., 2009.
9
In addition to the value added, there are other benefits to be expected, i.e., foreign exchange
and carbon credits earned by the reduction in greenhouse gas emissions under the Kyoto Protocol.
Our analysis will disregard these benefits in estimating the impact on the economy.
10
The Philippine Sugar Regulatory Administration, op. cit.
11
Php stands for the Philippine peso. The Philippine Bureau of Internal Revenue, Tax In-
formation, available at http://www.bir.gov.ph/taxinfo/taxinfo.htm, accessed April 3, 2013.
12
H. de Gorter and D. Just examined theoretically the effect of tax credits with the blend
mandate for the case of the United States where the Renewable Fuel Standard (RFS) is imple-
mented. The RFS requires the annual minimum blending that is the ratio of ethanol to total fuel
consumption. Under RFS, they showed that a biofuel tax credit reduces fuel prices; however,
a blend mandate either increases or decreases fuel prices with endogenous oil prices. That is, the
consumer price is the sum of a weighted average of the biofuel and gasoline and the direction of the
change in biofuel prices depends on the relative supply elasticities of biofuel and gasoline. Harry de
Gorter and David R. Just, “The Economics of a Blend Mandate for Biofuels,” American Journal of
Agricultural Economics, vol. 91, no. 3 (August 2009), pp. 738–50.
13
Scott Baier, Mark Clements, Charles Griffiths, and Jane Ihrig, “Biofuels Impact on Crop and
Food Prices: Using an Interactive Spreadsheet,” International Finance Discussion paper no. 967,
Board of Governors of the Federal Reserve System, Washington, D.C., 2009; Harry de Gorter and
David R. Just, “The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with
Price Contingent Farm Subsidies,” American Journal of Agricultural Economics, vol. 91, no. 2
(May 2009), pp. 477–88; and Donald Mitchell, “A Note on Rising Food Prices,” Policy Research
Working paper no. 4682, The World Bank, Washington, D.C., 2008.
14
The Philippine Sugar Regulatory Administration, op. cit. Also, in the Philippines deforestation
is not allowed for the expansion of cultivated land.
15
Robert McRae, “Gasoline Demand in Developing Asian Economies,” Energy Journal, vol. 15,
no. 1 (1994), pp. 143–55.
16
Reiji Tateishi, “Energy Cooperation in Asia and Japan’s Mission,” Economic Review (April
2001), pp. 48–77 (in Japanese with English summary).
17
We use the absolute values for the price elasticity of the demand.
18
The use of either the lower or the higher heating values does not make a significant difference
in the demand projection. Our analysis uses the lower heating value.
BIOFUELS IN THE PHILIPPINES 71
19
U.S. Energy Information Administration, op. cit.
20
Laboratory data on lower heating values of bioethanol and gasoline is used. Japanese Agency
for National Resources and Energy (JANRE), Heating Values of Energy Sources (Tokyo: JANRE),
also available at http://www.enecho.miti.go.jp (in Japanese).
21
The Philippine Sugar Regulatory Administration, op. cit.
22
The productivity of 65 tons per hectare is equal to the world average. The Philippine Sugar
Regulatory Administration, op. cit. Brazil has higher productivity than the world average; i.e., one
hectare of cultivated land harvests 73.5 tons of sugarcane. U.N. Food and Agriculture Organization
(FAO), The State of Food and Agriculture (Rome: FAO, 2008).
23
This is based on communications with San Carlos Bioenergy Inc.
24
This calculation method is suggested by the Philippine Sugar Regulatory Administration.
25
This assumption follows the Philippine Sugar Regulatory Administration.
26
The Philippine Department of Labor and Employment, Current Regional and Annual Mini-
mum Wage Rates in the Philippines, available at http://nepc.dole.gov.ph/pages/statistics, accessed
on April 3, 2013.
27
The Philippine Bureau of Internal Revenue, Tax Information, available at http://www.bir.gov.ph/
taxinfo/taxinfo.htm, accessed April 3, 2013, and The Philippine Department of Labor and Employment,
Current Regional and Annual Minimum Wage Rates in the Philippines, op. cit.
28
In Brazil, 74.5 liter of bioethanol is produced from one ton of sugarcane. U.N. Food and
Agriculture Organization (FAO), op. cit.
29
San Carlos Bioenergy Inc., Overview of Bioethanol Project, available at http://www/scbi.co.
ph, accessed on September 10, 2013.
30
This is based on communications with San Carlos Bioenergy Inc.
31
The Philippine Bureau of Internal Revenue, Tax Information, op. cit.
32
Section 148, National Internal Revenue Code, The Philippine Bureau of Internal Revenue.
33
Ibid.
34
The total volume of oil imported by the Philippines is 182,000 barrel per day in 2010, which is
less than 1 percent of the imported oil of the United States (i.e., 880 million barrels per day). So,
given the projected demand for bioethanol in the Philippines, the Philippine oil importation will
have little influence on the world oil price.
35
The projected demand for bioethanol with tax credits depends on the price elasticity of
the demand. Even with a higher price elasticity (i.e., 1.5), the difference between the projected
bioethanol demand with and without tax credits is less than 8 percent of the demand. Hence, the
graphs of the projected demands with the selected values of the price elasticity look similar to
figure 2 and thus we omitted to show them in the paper.
72 THE JOURNAL OF ENERGY AND DEVELOPMENT
36
The Philippines Department of Energy, “Clean Development Mechanisms,” Material prepared
for the APEC Peer Review on Low Carbon Energy Policies, November 2012, Manila, the Philippines.
37
Mark Gehlhar, Agapi Somwaru, Peter Dixon, Maureen Rimmer, and Ashley Winston,
“Economy-Wide Implications from U.S. Bioenergy Expansion,” American Economic Review:
Paper and Proceedings (May 2010), pp. 172–77.