Carbon tax delay risks SA’s exports of the future

The latest emissions gap report by the UN Environment Programme shows a “catastrophic” gap between the pledges made by countries to reduce greenhouse gas emissions and the steps taken to cap global warming.

SA failed to introduce a carbon tax as planned for January. Local climate-change experts are concerned that the delays may cast doubt on the government’s commitment to climate-change mitigation.

A draft Carbon Tax Bill was published in November 2015 with an implementation date of January 1. A revised bill was promised by mid-2017 and Finance Minister Malusi Gigaba says it will be published “soon”.

The country, which is a signatory to the UN’s Paris Agreement on climate change, has committed to a 34% emission reduction by 2020.

Cova Advisory joint MD Duane Newman says the carbon tax was included as a key policy instrument in SA’s written commitments on how to achieve its emission reduction targets.

Climate Change director Andrew Gilder says the tax is aimed at generating revenue, “but it also has a broader purpose — to change behaviour. It is intended to hurt,” he says.

DNA Economics director of climate change and energy Brent Cloete says SA is far from its main export markets, and its electricity supply is disproportionately carbon intensive by international standards. “This leads to high levels of greenhouse gas emissions embodied in South African exports.

“It is thus unsurprising that whenever the impact of international carbon mitigation policy on trade is considered, SA always comes out as one of the countries (if not the country) most at risk of losing export competitiveness due to the mitigation policies of its trade partners,” he says.

Cloete says this threat becomes more real when considering the enormous investment China is making to increase the carbon efficiency of its economy. SA should start transitioning to a lower-carbon economy to have any hope of being able to compete internationally, Cloete says.

South African Institute of Tax Professionals CEO Keith Engel says the old technology of SA’s energy system is contributing to pollution beyond its proportional global economic contribution. “The real problem is with the energy-producing processes of Eskom…. One must question why taxpayers should bear the burden for this failure when the government is ultimately responsible,” he says.

Engel says better regulation and investment in Eskom would be the more effective choice. “Sadly, we have decided on an answer several years ago … it now appears that there is no going back.”

According to the 2017 Carbon Pricing Watch Report of the World Bank and Ecofys, a consultancy in renewable energy and climate change policy, more than 40 national and 25 subnational jurisdictions are putting a price on carbon. In SA, the price has been set at R120 per tonne of CO² .An initial threshold of 60% has been proposed below which no tax will be payable.

The Department of Environmental Affairs has proposed additional tax-free allowances depending on the sector, or for those participating in the carbon budget system.

Cloete says the Davis tax committee has highlighted the undesirability of introducing a new tax in times of low economic growth. Several local modelling exercises have shown that, depending on how revenue raised by the tax are recycled, the carbon tax is not expected to have a large negative effect on growth.

However, even a small negative effect on growth could be enough to tip SA back into recession. Studies have shown that the economic effect of the carbon tax depends critically on how it is spent, says Cloete.

“If revenues are used to reduce other distortionary taxes … it may actually have a positive impact on growth, or more likely a negligible impact.” If it is used to stimulate demand or undo some of the regressive effects of a carbon tax, such as subsidised transport for the working poor, it may lessen the impact, he says.

If it is used to make up for a tax shortfall, the tax burden will increase and the negative economic effects are likely to be greater.

Newman says rich countries are assisting poorer countries, including SA, to achieve its mitigating objectives.

“It is not clear if this financial assistance would be withdrawn from countries who do not show any progress on their commitments,” she says.

Signatories to the agreement will reconvene in 2020.