Car­bon emis­sions tax is up in the air

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ALAS­TAIR MOR­PHET

DUR­ING De­cem­ber last year a dis­cus­sion pa­per — re­duc­ing green­house gas emis­sions: the car­bon tax op­tion — was is­sued by the Trea­sury. From the pa­per it seems that the gov­ern­ment in­tends to iden­tify ma­jor users of fos­sil fu­els with the in­ten­tion of plac­ing an ad­di­tional tax bur­den on them. How­ever, it is un­clear at this stage how they will be taxed. There­fore all po­ten­tial emit­ters of green­house gases should re­spond to the gov­ern­ment’s con­sul­ta­tive process to pro­tect their in­ter­ests.

The pur­pose of is­su­ing a con­sul­ta­tive dis­cus­sion doc­u­ment on the topic of car­bon emis­sions taxes was to elicit com­ments from the pub­lic and other stake­hold­ers con­cern­ing the im­ple­men­ta­tion of some form of car­bon emis­sions tax. The dis­cus­sion doc­u­ment is grounded in eco­nom­ics and pub­lic fi­nance phi­los­o­phy but pro­vides lit­tle guid­ance as to what the gov­ern­ment’s think­ing on the im­ple­men­ta­tion of such taxes will be, and much work re­mains to be done through the con­sul­ta­tion process.

At present there is a tax on pur­chas­ing a car based on the car­bon emis­sions the ve­hi­cle will pro­duce.

In ad­di­tion, the gov­ern­ment al­ready taxes the sale of petrol and diesel and in July 2009 im­ple­mented an elec­tric­ity levy of 2c/kWh on elec­tric­ity gen­er­ated from non­re­new­able and nu­clear en­ergy. This has just been in­creased to 2,5c/kWh.

Philo­soph­i­cally the pa­per draws on the work of English econ­o­mist Arthur Pigou, who worked on the ra­tio­nale of tax­a­tion as a so­cial en­gi­neer­ing tool. In this con­text the gov­ern­ment would look to add to the price of en­vi­ron­men­tal goods and ser­vices that gen­er­ate ex­ces­sive lev­els of green­house gas emis­sions to re­flect the full cost of pro­duc­tion and con­sump­tion, hav­ing re­gard to dam­age to the en­vi­ron­ment.

A key ra­tio­nale be­hind the gov­ern- ment’s phi­los­o­phy is that by in­te­grat­ing those ex­ter­nal costs into the pro­duc­ers’ costs and con­sumer prices the ad­di­tional cost cre­ates an in­cen­tive for change in be­hav­iour.

This is sig­nif­i­cant in that the Trea­sury is aware that this cost­ing can have an ef­fect on ef­fi­ciency in the mar­ket­place and lower-in­come house­holds.

In Europe there is al­ready ex­ten­sive trad­ing in cer­ti­fied emis­sion re­duc­tion cer­tifi­cates aris­ing from projects that qual­ify as clean de­vel­op­ment mech­a­nism projects un­der the Ky­oto Pro­to­col. South African tax law recog­nises the sale of these cer­tifi­cates un­der sec­tion 12K of the In­come Tax Act and pro­vides an ex­emp­tion from nor­mal tax of amounts re­ceived on dis­posal of a cer­ti­fied emis­sion re­duc­tion.

The dis­cus­sion pa­per seems to re­ject the trad­ing of cer­ti­fied emis­sion re­duc­tions in the South African con­text, hav­ing con­cerns about the dom­i­nance of Eskom in the en­ergy sec­tor re­duc­ing ef­fi­ciency gains from trad­ing in car­bon re­duc­tion cer­tifi­cates.

The pa­per also makes an in­ter­est­ing point about the price volatil­ity of trad­ing in these cer­tifi­cates in the Euro­pean mar­ket and con­cludes that the EU’s price of car­bon un­der the scheme ap­pears to be too low be­cause of the large num­ber of free al­lowance al­lo­ca­tions among in­dus­trial users.

For tax­pay­ers in­volved in heavy in­dus­try and min­ing it ap­pears that this will be a fur­ther im­post adding to the costs of pro­duc­tion. While the South African econ­omy clearly has sub­stan­tial in­dus­tries that are ma­jor emit­ters of green­house gases, it is these busi­nesses that pro­vide the back­bone of em­ploy­ment in the na­tional econ­omy and the earn­ers of for­eign ex­change.

It seems that the Trea­sury favours some kind of car­bon tax whereby the South African Rev­enue Ser­vice (SARS) would levy a tax on few play­ers — that is col­lect­ing tax from a few tax­pay­ers — with a sim­ple struc­ture and lower ad­min­is­tra­tive costs. The Trea­sury also be­lieves this will min­imise lob­by­ing in the po­lit­i­cal process.

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