South Africa’s Carbon Tax – a means to an end?

One of the salient questions for any country or city looking to benefit from all the upside potential in a “low carbon, resource efficient and socially inclusive” (UNEP, 2011) green economy, is how to go about the transition, and perhaps more acutely, how to finance the transition. Internalizing the externality costs of greenhouse gas emissions via a carbon pricing or a cap and trade scheme is one of the instruments available.

In May 2013 South Africa’s Treasury released its much awaited Carbon Tax Policy Paper: reducing greenhouse gases and facilitating the transition to a green economy. Since that time the focus has been on gathering public comment and tightening perceived loopholes in advance of a planned 1 January 2015 commencement date.

The proposed carbon tax forms a central plank in South Africa’s National Climate Change Response Plan and is the key instrument in achieving the “peak-plateau-decline” trajectory of greenhouse gas emissions that will see the country’s 2012 emissions level of 590Mt of carbon dioxide (CO2) reach a maximum of 614Mt of CO2 between 2025 and 2035 before declining to 428Mt of C02 in 2050. This in turn would allow South Africa to meet its commitment to the international climate negotiations of a 42 percent reduction in emissions relative to a “growth without constraints” baseline in 2025, and would result in an almost 75 percent reduction relative to the unconstrained scenario by 2050.

The proposal is for a carbon tax of R120/ton of CO2-equivalent emissions. All companies will receive a 60 percent initial exemption, resulting in an effective tax rate of R48/tCO2e. Further exemptions, up to a maximum of 90 percent, are possible for trade-exposed sectors, best in class companies or companies that pursue offset projects. Agriculture and forestry are completely exempted up until 2019.

In recognition of the difficulty of measuring, reporting and policing the emissions of a colourless, odourless gas, the tax will be levied on coal, oil and gas inputs and a few process emissions for things such as cement production.

Predictably, the public comment window elicited strong and divergent opinions from the 115 respondents. Adversaries were quick to articulate their concerns regarding particular loopholes: Will the minimum threshold be set at 100,000t CO2 as per South Africa’s carbon disclosure project or at a lower level?  How will carbon market red tape be reduced so as to make offsets more viable and carbon registries more efficient? Should South Africa, with its reliance on coal-fired electricity and its high per capita carbon count, really be seeking to lead the developing world countries on this issue given the risks to its economic competitiveness? Do we need additional tax revenue streams when we struggle to marshal and spend the existing fiscus with any real impact?

The reality is that the amount of money that a carbon tax is likely to generate for South Africa is likely to be between R8 billion and R12 billion in initial years; a roughly one percent increment to South Africa’s total tax revenue and hardly the grounds for gross fiscal malfeasance. Moreover, South Africa is by no means the first country to embark on this exercise: Mexico, China, Japan and the states of Alberta and British Columbia in Canada have versions of a carbon tax or a local carbon market in place to support their respective domestic green economies.

For South Africa, the issue critical to the success of a carbon tax involves the extent to which other policy and institutional developments allow energy users to respond to the price signal by switching to cleaner energy sources and the manner in which they spend the additional revenue. Clearly the type of energy sector deregulation that enables consumers a choice of electricity and liquid fuels would enhance the structural shift that can be expected following a relative price increase in carbon intensive energy. In this sense the limbo that South Africa’s draft Independent Systems and Market Operator Act finds itself in is conspicuous, as is the potential lock-in that Coal 3 (the commissioning of further coal fired power stations) would ensure.

It is also important how the additional revenue is allocated. The country has a number of intuitively attractive options from a fiscal strategy perspective: an extension of the free basic energy grant, welfare grants or indigent energy subsidy, support for renewable energy programmes, support for commodity exporters or a simple reduction in company or income tax. Similarly, Treasury’s insistence that offset options be restricted to South African projects creates the potential for R500 million to R1 billion investment each year in mitigation and sequestration projects.

South Africa leading the developing world in implementing a domestic carbon tax certainly represents an interesting policy space. A lot of work is still required if the country is to be ready to implement the tax come 1 January 2015, particularly as adversaries are found amongst both organized business and labour – that is both sides of the economic spectrum – and 2014 is an election year.

There is however, something compelling about a country, inspired by a noble vision, looking to demonstrate bold leadership. Given the relative lack of real economy traction provided by other economic instruments such as monetary policy and inflation targeting, and policies such as the Industrial Policy Action Plan and the National Development Plan, the fiscal shock of a carbon tax could be used to arrest the current economic slide and associated complacency, regain control and introduce an economic coherence and focus, especially among those businesses that have mastered the art of obfuscating and delaying government policies aimed and introducing change. In this sense the implementation of the technical but relatively simple carbon tax could provide a useful precursor to the more complex and pressing tasks of ensuring a more inclusive, competitive and resource efficient economy.

Anton Cartwright is a Mistra Urban Futures Researcher at the African Centre for Cities, where he focuses on the green economy.

 

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