Making net zero a reality in the Philippines sooner rather than later

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A NUMBER of countries in the Asia-Pacific region, including China and Indonesia, have set aggressive targets to reduce greenhouse-gas emissions, despite significant coal exposure. The Philippines has not yet followed suit. Instead, it has pledged to reduce emissions by 75% from the “business as usual” trajectory by 2030; this promise is also almost entirely conditional on international financial support that has so far not been forthcoming. The Philippine Energy Plan forecasts emissions increasing until at least 2040.

That said, there has been some action. The Department of Energy has set an objective of 50% renewable energy in power generation by 2040, and in 2020 imposed a moratorium on construction of new coal-fired power stations. In transport, there are mandates for biodiesel and bioethanol and targets for electric vehicle (EV) penetration. There are also goals for energy efficiency in buildings and for planting new forests. But it is not enough.

A more aggressive approach that would cut emissions 44% by 2030 and reach net zero by 2060 — as China and Indonesia have pledged — is not only possible, but could bring substantial benefits, in the form of cleaner air, healthier land, and new sources of economic value and growth.

There is great potential in four areas.

Expanding renewable power generation capacity to 80% of supply, including decommissioning and conversion of existing thermal plants and modernization of the electricity grid. Solar power would contribute the biggest share, accounting for about 40% of total capacity by 2060, with wind contributing more than 20%. For this to happen, the Philippines would need to build long-duration energy storage to give the system the necessary flexibility to operate with a higher renewable share. All this would enable a full phase-out of coal-fired generation by 2050, with some installed coal capacity retro-fitted with carbon capture and storage (CCS) equipment. The shift to renewables and phase-out of coal would bring about a 98% reduction in emissions from the power sector by 2060, even as demand is expected to rise more than 150% over that period.

Introducing mechanical farming techniques, especially in rice cultivation. This will require educating farmers and coordinating with many small landowners; there may also be a role for subsidies to finance the transition. More efficient cultivation could cut emissions 70% by 2060, and also improve water management. In addition, restoration of forest areas and other land-use improvements could abate 20 million metric tons of carbon dioxide equivalent (Mt CO2e), the basic unit of greenhouse-gas accounting.

Creating new green-value chains in emissions-intensive industries, including installation of CCS devices on industrial plants and adoption of new electric technologies for manufacturing steel. For example, 100% of cement production could be decarbonized through CCS and electrification.

Converting to low-emission technologies in transport and buildings. Converting the road fleet from internal combustion engines (ICE) to EVs will take time, as well as regulatory support and further technology improvements. But improving efficiency 60% by 2040, and an additional 1% a year thereafter, would get the Philippines to net zero in transport.

In the building sector, the opportunity is for electrification, for example shifting from gas to electric cooking in residences would improve indoor air quality and improve health. Regulatory support for this shift in the form of subsidies could incentivize this change. For instance, in the UK a government scheme makes grants available to homeowners to replace oil and gas boilers with electric heat pumps, opening up the likelihood of clean energy usage, kickstarting the British heat pump industry, and buffering consumers against unexpected hikes in oil and gas prices.

Given appropriate investment, all these activities could serve to create new sources of value and growth.

Private companies and startups in the Philippines are already at work on green-growth initiatives. A number of companies are producing power from biomass waste. For instance, by end 2022, SMC Global will complete 1,000 MW of BESS facilities. Prime Infrastructure Holdings has also invested P3.5 billion in Solar Philippines Project Power Holdings for >340 MW of solar, and has partnered with US-based WasteFuel Global for a 30-million-gallon synthetic crude oil biorefinery pilot targeted to be operational by 2025. Victorias Milling Company has one of the largest biomass power plants (63 MW) in the Visayas. In the area of transport, EV startup QEV Philippines plans to roll out 50,000 electric jeepneys over the next five years by replacing their ICEs with lithium-ion batteries.

That is the potential; getting there, however, means putting sustainability at the heart of strategy. For government, that starts with reporting emissions and setting ambitious and quantifiable sector-level decarbonization goals. This would provide a framework within which individual agencies could work with the private sector to devise action plans. The government can also put emissions reduction at the heart of its investment strategy, for example by working with business to build charging infrastructure for EVs and establishing a market for carbon credits, which could support investment in these areas.

The private sector must be involved — and it can be in their interest to do so. International experience shows that businesses that act to reduce their carbon footprint can improve returns and cut costs, including the cost of capital. A recent example in the Philippines includes RCBC bank, the first bank in the Philippines to issue green bonds. In 2019, RCBC listed P15 billion worth of green bonds, which ended up directly correlating with the bank achieving a low borrowing cost of 7%, the lowest of any bank. Another example is telecoms provider Globe which set itself a goal of being net zero by 2050. To this end, it has been pro-actively undertaking sustainable practices even before regulatory compliances require them to do so, including installing hybrid generators at off-grid sites, which have resulted in a 60% reduction in fuel and maintenance costs. A number of other companies in the Philippines have made similar pledges to become net zero and are establishing targets and prioritizing budgets to cut emissions, such as Ayala Corp., Nestlé, and Shell.

Finally, the Philippines’ current modest strategy envisions support from international investors and donors; a more ambitious one will likely do the same. One priority is to mobilize green finance to support investment in decarbonization, for example through public-private partnerships in the power sector. The Asian Development Bank is already playing a crucial role in supporting the development of green financing instruments. NGOs and donors also have an opportunity to scale up investment in low-carbon programs such as microgrids and sustainable agriculture, by providing technical assistance and innovative financing.

The conventional wisdom is that action on climate change is inimical to economic growth. On the contrary: the right strategy could bring new green growth opportunities, particularly in power and carbon management. Capturing these opportunities depends not on innovations yet to be seen or unrealistic business models, but on proven, economically competitive technological solutions.

Indeed, not going in this direction poses long-term risks. Climate change is becoming a factor in international policies on trade and investment; countries that fall short risk being subject to punitive trade measures. In addition, international investors are increasingly focused on sustainability.

Finally, let’s not forget that the Philippines archipelago is already exposed to significant risks from climate change, including sea levels rising at three times the global average. The UN Food and Agriculture Organization projects that falling crop yields will cause a 6% annual loss of GDP by 2100 if climate change continues unabated.

The imperative is clear, and so are the opportunities. A start has been made; now it’s time to advance.

Jon Canto is a senior vice-president in McKinsey Manila office.

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