Carbon emissions tax is up in the air
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.