Low tax rate not enough to force transition to low-carbon activity
• Other countries could impose border tariffs on SA’s dirty exports
SA’s carbon tax is set to be introduced in less than a year. It is to be welcomed but it is still too weak to push the country to a low-carbon transition. SA needs to do more given its international and domestic climate obligations.
So, what is the overall and systemic purpose of the carbon tax? It is a way of pricing an environmental externality. It is intended to help achieve the following: lowering carbon intensity through improved energy efficiency or switching to alternative energy; stimulating new growth, new technologies and enterprise; encouraging the development of new product lines, which would stimulate new investments and jobs.
The aim of a carbon tax is to disincentivise future carbonintensive investments. It will also encourage investors to start pricing CO² emissions as a risk in the way they make decisions and capital allocations.
Due to the Paris Agreement most countries will probably have a form of carbon pricing by the middle of the next decade. The aviation industry is moving in that direction and the shipping industry will soon follow suit.
Due to its heavy dependence on coal, SA is one of the world’s most carbon-intensive economies, measured by the amount of carbon used per unit of GDP.
Known to punch above its weight in climate negotiations, SA is lagging behind in dealing with carbon pollution.
The rhetoric does not match the reality on the ground, and this could cost the country when other countries impose border carbon adjustments on SA’s dirty exports.
By this time in 2017 more than 24 jurisdictions globally had some form of carbon pricing and more are coming online all the time. Most of these also have prices higher than the proposed South African tax. There is no time to waste.
The Treasury, which has long been working on a carbon tax, has put out a Draft Carbon Tax Bill for public comment. A broad tax rate applied to the economy is a cost-effective and economically efficient means of mitigation. Much input has gone into the drafting of the bill and the proposed reporting arrangements and details appear to be well thought through.
At proposed prices, however, the tax will be insufficient to reach effectiveness as measured by the government’s own research and comparisons to other countries.
Take for example the government’s own long-term mitigation scenarios, which modelled at which price a carbon tax would be most effective.
The scenarios’ optimal path for systemic effectiveness of an embedded carbon price assumed a much higher price for carbon, starting at R216 in 2008 and rising to more than R542 by 2020 and a peak of about R1,000 in 2035 (prices correct for inflation). The price of R120/tCO²e (in 2019) is only 56% of the original proposal if inflation over the intervening period is factored in. The rate of increase over the first phase has dropped from 10% a year to below 8% (CPI+2%), giving a lower final price. This compares poorly with the World Bank estimate of $80-$200 for carbon taxes in 2030 to limit climate change to 2°C.
Under these scenarios, dirty industries still have a free pass and will not be pushed hard enough to shift gear on climate change issues. The proposals for waivers and discounts to dirty industry is delaying the lowcarbon transition and will be insufficient to induce the industry to be a good citizen.
A carbon tax should also be used to support a low-carbon transition and help the poor improve their energy access. On this the bill is eerily silent.
The Treasury proposes that the tax applies a polluter-pays principle. The 2012 white paper on national climate change response articulates this as “those responsible for harming the environment paying the costs of remedying pollution and environmental degradation and supporting any consequent adaptive response that may be required”.
While this is a just approach to dealing with emissions, the real costs of remedying pollution and climate change adaptation are much higher than the nominal rate.
Without ring-fencing some of the income from the tax for climate adaptation, the proposed tax falls short of meeting the national criteria. The tax should penalise polluters but reward those who want to clean up the environment. It should actively promote clean energy solutions to encourage a trajectory of new low-carbon investments, opening a new economic sector for SA to ensure the development of new jobs and skills over time.
Much has been made of the need to align the carbon tax with the company-level carbon budgets being brought online by the Department of Environmental Affairs, citing these as double taxation or a “shadow carbon price”. There is indeed alignment inasmuch as they share the same reporting requirements and will share the same carbon offsets system. However, they perform different functions and there is no reason they should not both be implemented.
The carbon tax is an economy-wide driver, incentivising low-carbon options and pricing carbon. The company-level budgets are a regulatory instrument to manage down emissions from specific activities.
As an analogy, the carbon tax is the equivalent of the road tax levy paid on fuel, while the carbon budgets are the laws that govern driving. The fact that drivers have paid for fuel (and, by extension of the levy, for the roads) has no bearing on whether they should face penalties for breaking the law or speeding. As such, the national carbon tax should in no way affect regulatory penalties for exceeding company carbon budgets. Both tariffs should be retained.
Overall, while the Carbon Tax Bill promotes a signal for change, the World Wildlife Fund’s (WWF’s) calculations show it is insufficient to bring about desired change, given the climate crisis and the existential threat it poses to humanity. SA needs to do more — as does the rest of the world.
DIRTY INDUSTRIES WILL NOT BE PUSHED HARD ENOUGH TO SHIFT GEAR ON CLIMATE CHANGE ISSUES THE TAX SHOULD PENALISE POLLUTERS BUT REWARD THOSE WHO CLEAN UP THE ENVIRONMENT