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Too much stick, too little carrot in Treasury’s carbon tax plans

05 July 2013   (0 Comments)
Posted by: Author: Sipho Hlongwane
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Author: Sipho Hlongwane (BusinessDay, bdlive.co.za)

South Africa will soon be the first country in the developing world to implement a comprehensive carbon tax aimed at curbing the emissions of carbon dioxide and other gases that are popularly blamed for climate change.

The Treasury has issued a paper, titled Reducing Greenhouse Gas Emissions and Facilitating the Transition to a Green Economy, for comment. It is an improvement after some complained that an earlier paper, tabled in 2010, put forward onerous motions.

The new paper raises the thresholds at which tax becomes payable, allows for offsets and posits that revenue raised from carbon dioxide-equivalent gases should be channelled into incentives and subsidies for low-carbon technologies. It envisages a phased-in tax rate of R120/t of carbon dioxide-equivalent gas for the first five years, in which it will increase 10% each year. After that period, the threshold for taxable emissions will be removed, which will result in a steep rise in the rate.

On the face of it, this is a sensible and much-needed policy. (I am obviously of the view that our dependency on coal is bad and we should diversify into much cleaner forms of energy, such as nuclear.) This is from the Department of Energy: "About 77% of South Africa’s primary energy needs are provided by coal. This is unlikely to change significantly in the next two decades owing to the relative lack of suitable alternatives to coal as an energy source. Many of the deposits can be exploited at extremely favourable costs and, as a result, a large coal-mining industry has developed."

South Africa is one of the largest coal-exporting countries in the world. Medupi and Kusile are two new coal-powered power stations being built. Medupi is expected to be the largest dry-cooled coal-fired power station in the world. Our love of coal is far from over.

Some critics are urging the Treasury to rethink its carbon tax, arguing that it will have a negative effect on the economy. (Engineering News has a good article on this, if you want to get to grips with the technicalities at hand.)

Democratic Alliance (DA) shadow minister for finance Tim Harris says: "The DA will oppose any tax increases over the next three-year budget cycle and until our economy improves its growth performance.

"The (International Monetary Fund) has revised our growth forecast down to 2.8% for 2013. This is half the rate of growth forecast for the rest of sub-Saharan Africa, indicating that our economic performance is a drag on African growth. The introduction of any new tax in the medium term will further dampen our growth performance."

Izak Swart, associate director for tax management consulting at Deloitte, says the Treasury’s plans do not take into account South Africa’s heavy dependency on coal or the effect that such a tax might have on the price of electricity.

The plan also gives a lot of stick without providing much carrot. "The problem is that we have no alternative. It’s not like I can take my house or factory and plug it out, and look for green energy," he says.

"We are saying we need to change our behaviour, and a lot of people would agree that we need to change from a climate-change perspective. But is a carbon tax the right method at this point in time, given that we do not have alternatives?

"Our view has always been that you must first incentivise a change in behaviour. At a certain time in the future, you bring the tax in and hit those who don’t change hard because they will have had time. Then that’s fair. But at the moment we do not have the technology to change our behaviour."

South Africa already has some environmental incentives and concessions under competitive enhancement incentives, but these are not enough to give business something to ensure a smooth transition to a low-carbon economy, or to safeguard industries.

The difficulty is that our trading partners know South Africa has a disproportionately large carbon footprint. We are ranked as the 42nd-heaviest polluter, and number one in Africa by far, on a per capita rate of 8.8 metric tonnes a year, based on 2008 figures by the United Nations Statistics Division and the US Department of Energy’s carbon-dioxide analysis centre, even though we are ranked 77th in the world on gross domestic product per capita (at purchasing power parity).

Our trading partners that observe carbon-restriction rules may decide to charge an extra levy on our goods, which would have been produced using coal energy. Conversely, to save costs, local producers could just shift operations across the border to countries such as Mozambique that are less bothered by these concerns, and then import into South Africa. This would force our government to implement levies on those goods to protect local producers.

Swart believes the faith that green technologies will create new jobs to absorb the job losses caused by higher manufacturing costs introduced by this tax is misguided. "If a carbon tax does come in, the hardest-hit industries are going to start looking where they can cut costs. And it’s not like the jobs lost will be absorbed by the jobs created," he says.

The model adopted by British Columbia, the westernmost province of Canada, could be very instructive to the South African situation, according to Swart. The revenue is strictly ring-fenced for green projects and the tax is revenue neutral, meaning that the money taken for emissions is returned through tax cuts elsewhere. British Columbia even has a low-income climate-tax credit, to offset the losses of carbon taxes paid by low-income individuals and families.

Without such incentives elsewhere for tax payers, the view that South Africa’s carbon tax regime is just another revenue raiser to place a R20bn plug in the budget deficit will continue to hold water.

Rather than implementing a sweeping carbon tax that will affect everybody via shocks to the price of electricity (set to rise at alarming rates in any case), Swart suggests that the government should place caps on emissions, after which the producers of carbon dioxide and equivalent gases would be fined. That way, the only people to pay a carbon tax would be those who contribute most to the problem.

Unfortunately, that would still leave Eskom as the biggest culprit. While I do not agree with the DA’s "let future South Africa deal with the problem" approach, I cannot escape the thought that any significant upticks in costs for the national electricity utility would be transferred to the public. This would increase the price of everything, from bread to BMWs. We sincerely do not need that now, or indeed in the medium term.


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