CAR­BON TAX

‘DON’T STRESS’ ABOUT THE Trea­sury re­search claims mas­sive ef­fect and lit­tle eco­nomic dam­age, but is it so?

CityPress - - Business - DEWALD VAN RENS­BURG dewald.vrens­burg@city­press.co.za

Trea­sury this week pub­lished re­search in­di­cat­ing that its planned car­bon tax will achieve large re­duc­tions in fu­ture green­house gas emis­sions, while hav­ing only a tiny ef­fect on eco­nomic growth and em­ploy­ment. This glow­ing en­dorse­ment is, how­ever, based on a model of the South African econ­omy where none of the con­tin­u­ing gov­ern­ment-driven in­vest­ment into re­new­ables, gas or (po­ten­tially) nu­clear would take place un­less there is a car­bon tax.

This means that the model prob­a­bly ex­ag­ger­ates the drop in emis­sions due to the car­bon tax – be­cause the en­ergy mix has al­ready started mov­ing in the ab­sence of the tax.

In re­sponse to ques­tions Trea­sury told City Press by email that “yes, the gen­er­ated by the model are higher as IRP has not been built into the base­line”.

“This could be done very eas­ily, how­ever, the in­ten­tion was to iso­late and mea­sure the im­pact of the pro­posed car­bon for dif­fer­ent tax de­signs and rev­enue re­cy­cling sce­nar­ios,” said Trea­sury.

The pre­dic­tion that the car­bon tax will have a small over­all eco­nomic ef­fect also largely on the way in which Trea­sury uses the money is col­lects from the tax.

The re­port’s most op­ti­mistic pre­dic­tion is that the car­bon tax will re­duce South Africa’s GDP in 2035 by 3% com­pared with the base­line sce­nario.

This as­sumes that Trea­sury re­cy­cles all the rev­enue as broadly as pos­si­ble by giv­ing it to all com­pa­nies in pro­por­tion to their out­put. This would in ef­fect mean that heavy pol­luters sub­sidise in­dus­tries with less emis­sions.

The ac­tual rev­enue re­cy­cling plan in Trea­sury’s 2013 car­bon tax pro­posal didn’t work this way.

Trea­sury pro­posed to dis­trib­ute the car­bon tax rev­enue in two ways: to re­duce the ex­ist­ing elec­tric­ity levy that all power users pay, and to sub­sidise low-in­come house­holds’ power con­sump­tion.

Ac­cord­ing to the re­search, any “nar­row­ing” of rev­enue re­cy­cling makes the ef­fect on eco­nomic growth worse.

If all the tax rev­enue is used to for in­stance sub­sidise re­new­ables, the South African econ­omy ends up a sig­nif­i­cant 15% smaller in 2035 than it would’ve been.

The im­po­si­tion of the tax has been post­poned to next year, al­though it will only be clear when it is to be in­sti­tuted when the min­is­ter of fi­nance gives his bud­get speech in Fe­bru­ary.

The re­search was com­mis­sioned by the Part­ner­ship for Mar­ket Readi­ness, a World Bank unit, on be­half of Trea­sury.

It uses econo­met­ric mod­el­ling to com­pare a “base­line” sce­nario with­out a car­bon tax to var­i­ous dif­fer­ent for­mu­la­tions of the car­bon tax, and fore­casts the eco­nomic ef­fects through to 2035.

The “base­line” as­sumes that the coal-heavy en­ergy mix of 2014 would stay un­changed all the way to 2035.

The mas­sive re­duc­tion in emis­sions fore­cast un­der the car­bon tax seem­ingly re­lates mostly to the rise of re­new­able and nu­clear power gen­er­a­tion, which is as­sumed to hap­pen be­cause the tax makes coal power more ex­pen­sive.

The depart­ment of en­ergy has, how­ever, al­ready is­sued var­i­ous de­ter­mi­na­tions lead­ing to mas­sive pri­vate in­vest­ment in re­new­able en­ergy.

In a state­ment ac­com­pa­ny­ing the re­port, Trea­sury held up the low­est es­ti­mated ef­fect the tax could, ac­cord­ing to the model, have on emis­sions: 33% by 2035.

This is in com­par­i­son with the base­line fore­cast of emis­sions in 2035 and does not re­flect an ac­tual re­duc­tion in emis­sions – they will sim­ply in­crease more slowly.

The ac­tual re­port pre­dicts a higher ef­fect of up to 50% if re­al­is­tic re­cent eco­nomic growth es­ti­mates are used in­stead of the long-term as­sump­tion of 3.5% GDP growth per year in its base­line.

The re­search sup­ports ArcelorMittal SA’s re­peated claims that the car­bon tax would be par­tic­u­larly harm­ful to it.

A sec­toral anal­y­sis in the re­port shows that steel­mak­ing and cok­ing ovens – the two main com­po­nents of ArcelorMittal’s busi­ness – will be the worst hit. Petrol re­finer­ies are also pre­dicted to have sig­nif­i­cantly lower out­put by 2035 than would other­wise have been the case.

The re­port’s main con­clu­sion is that a lot hinges on the de­sign of the tax and the way the tax rev­enue is used.

Us­ing the sce­nario where the taxes are given back to com­pa­nies, the re­search shows a po­ten­tially wor­ry­ing ef­fect on peo­ple’s in­come.

With­out the car­bon tax, the real growth of wages in the econ­omy is pro­jected to be 13% be­tween 2014 and 2035.

With the car­bon tax be­ing used for re­bates to com­pa­nies, this growth falls to 8%, ac­cord­ing to the model.

PHOTO: GALLO IMAGES

NEXT STEP Cool­ing tow­ers at the Hen­d­rina Power Sta­tion in Mid­del­burg, Mpumalanga. Trea­sury might want to re­con­sider the way it will spend the car­bon taxes that it will even­tu­ally col­lect

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