Unintended consequences of SA carbon tax

                                                                                                                             (Picture by: Duane Daws)
As South Africa grappled with the proposed introduction of a carbon tax, consultancy firm Africa International Advisors (AIA) has warned that carbon regulation, and in particular taxation, must not disadvantage South Africa economically, relative to other competing economies, given the country’s reliance on coal.

AIA director Tim Hough on Wednesday suggested options that he said would reduce actual greenhouse gas emissions, rather that just generate another tax revenue stream for the National Treasury, which could potentially prejudice South Africa’s competitiveness, and result in job losses.

Stakeholders were warned of unintended consequences as a result of imposing the current carbon tax proposals, and said that South Africa appeared to be taking an inordinate burden with respect to greenhouse gas (GHG) emission reduction commitments.

Hough’s suggestion was that Eskom be excluded from paying carbon tax on current emissions or primary energy, as these costs would merely be passed on to the consumer. However, the utility should accelerate the diversification of its generating fleet − as reflected in the second Integrated Resource Plan − with major technical and financial support from the developed nations.

There should also be a more aggressive drive on energy efficiency, and industrial efficiency, through programmes such as solar water heaters supported by public−private partnerships on a large-scale.

With regard to Sasol and other major emitters, Hough suggested a gradual tax increase on the last 30% to 40% of direct emissions at the margin, for example, not a tax on total emissions, but a tax designed to change behaviour at the margin.

He also noted that if emissions taxes were focused on the top-200 emitters in South Africa (excluding Eskom), this would ease measurement and collection of taxes.

Addressing delegates gathered at an African Minerals and Energy Forum workshop, Hough also proposed that a tax on liquid fuel users should be used to subsidise moves to more efficient fleet mixes, commercially and privately, and should be tax neutral – meaning that taxes collected funded incentives.

“A fiscally neutral set of incentives and penalties aimed at substantially improving the efficiency of our transport systems for both people and freight could reduce emissions by 20% to 30% from our second-highest source of GHGs,” Hough reiterated.

Last year, the National Treasury proposed that a carbon tax should be applied in South Africa initially at R75/t of emissions rising to R200/t. Estimates from a study by Deloitte were that such a tax could generate some R82,5-billion.

“It’s clear that, because of the geological hand that South Africa has been dealt, making it an inordinately coal dependent economy, a tax on primary inputs (coal, crude oil, and natural gas) could have enormously damaging consequences and risks severely impacting existing job preservation let alone creation” said Hough.

He added that it was difficult to understand why government would wish to foist its own parastatal, Eskom, with the heaviest tax burden of all – in effect, taxing itself – while simultaneously raising the prospect of massive cost multipliers throughout the economy, putting pressure on inflation with all its related impacts, discouraging fixed investment, reducing international competitiveness and destroying existing jobs rather than creating new ones.

“A major problem is that the carbon tax will come on top of prices for electricity and crude oil that are already increasing sharply. Marginal heavy energy users like mines will come under severe pressure to either close or change work methods to increase efficiency both of which will cost jobs.

Hough emphasised that an alternative approach could achieve considerable, and meaningful reductions in GHG emissions, with less risk of invoking ‘the law of unintended consequences’.