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Global Experience Warns SA Against Imposing Carbon Tax

27 August 2013   (0 Comments)
Posted by: Author: Philip Lloyd
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Author: Philip Lloyd (BusinessDay)

The Treasury proposes to introduce a carbon tax from 2015. It is a serious mistake. Not only are the reasons advanced by the Treasury flawed, but international experience has also shown that carbon taxes do not achieve what is hoped — a reduction in carbon emissions.

Instead, they capture wealth that could easily be put to better use. They cost jobs. The burden of the tax falls largely on the poor. The Treasury’s own paper shows this.

The Treasury sought to justify a carbon tax in its 2010 discussion paper.

It claimed that climate change was an example of market failure, in that the environmental costs of climate change were not factored into energy prices.

That, of course, presumes that one can determine the environmental costs.

A large pan-European team laboured for 15 years. It found that the total environmental costs — health effects from emissions, acid rain effects on crops, water chemistry changes on fish life and climate change — amount to between about €0.20/kWh and €0.75/kWh.

That sounds horrendous, but the cost of not having energy, in other words the benefit of energy, is about €25/kWh, so society is far better off. The market failure thesis fails.

The Treasury also argued that South Africa was one of the largest emitters of greenhouse gases in the world. That overlooks the fact that we are actually quite a populous nation.

When the number of South Africans is taken into account, we are only 34th in world rankings. We contribute a little more than 1% to the total. Anything we did to reduce our emissions would be invisible against the background of surging output elsewhere in the world.

A third reason the Treasury advanced was the possibility that failing to address our emissions might result in trade sanctions.

Our primary trading partners all emit more per capita than we do, so the risk of sanctions would seem remote.

Finally, the Treasury held out the hope that we might develop some wondrous low-carbon technologies, which would enable us to develop new markets.

Yes, it is possible that we might, but the world is so heavily dependent on fossil fuels that any change towards a lower-carbon energy scene will not happen rapidly. At best, the Treasury’s hopes can only be regarded as a long shot. So the reasons the Treasury put forward for wanting a carbon tax in the first place are all flawed.

Matters get worse when we turn to the Treasury’s economic arguments.

First, its own models predict a significant loss of economic growth.

It admits its models are inexact, but they produce some surprising results.

For instance, a carbon tax would have, apparently, no effect on electricity sales — yet most of our emissions come from generating electricity.

Nevertheless, the Treasury’s admission that we will nearly all get poorer seems to be one of those sacrifices we need to make to save the world. What is really surprising is the Treasury’s calculation of where the burden of poverty will fall hardest. I did not think I would live to see the day when an organ of this government would seriously propose impoverishing the poorest of the poor, while enriching the richest of the rich. Yet that is precisely what the Treasury estimates.

But is there any hope that a carbon tax could achieve what it sets out to achieve, which is to reduce our carbon emissions?

The Treasury has looked at a number of instances of carbon taxes elsewhere, but has not checked the effects. In the European Union, for instance, cited with approval by the Treasury, emissions have levelled off — but the price of carbon has recently collapsed, and the Germans are quietly taking full advantage of the collapse by building 23 new coal-fired power stations.

The Finns introduced a carbon tax as early as 1990 — and their emissions have grown relentlessly. Costa Rica introduced a carbon tax in 1997, since when its emissions have grown by more than 60%. India slapped a carbon tax on coal in 2010, since when its consumption has grown by nearly 30%.

Australia introduced a carbon tax in July last year; by July this year, the economic damage ran to billions of dollars, which cost Prime Minister Julia Gillard her government, while Kevin Rudd, her successor, immediately ditched the tax.

We introduced a tax on gas-guzzlers, and the streets have grown more crowded with sport utility vehicles.

Why does a carbon tax not work?

Most (more than 80%) of global energy comes from fossil fuels, so energy use and emissions go hand in hand.

Energy is an absolutely necessary element of wealth creation. It is not sufficient, because other factors such as skilled labour play their part, but without energy you cannot grow the economy, and you cannot create jobs.

As a developing nation, we need to grow our economy. That means our emissions are going to grow whether carbon is taxed or not. In economists’ terms, the demand for energy is inelastic.

Of course, it may become possible to produce energy economically without emissions, but it is going to take a long while to move away from the global level of more than 80% reliance on fossil fuels.

How could the Treasury have gone so astray? I think it was first misled when the government tried to turn the long-term mitigation scenarios into plans.

Scenarios explore extremes that have little chance of being realised in practice.

They have also been poorly advised by a British economist, Nicholas Stern.

Stern moved into then-prime minister Tony Blair’s office in 2007 to produce a political excuse for a carbon tax.

His economics have been severely criticised by fellow economists, so that he has had to rely on ethical arguments to justify his belief in a carbon tax.

Invoking ethics usually means you have lost the argument.The UK has not followed his prescriptions — so why should we?I can only conclude that the Treasury’s proposals are flawed from start to finish.But does that mean we should just give up on a lower-carbon world?Of course not.

The US has recently managed to get its emissions back to where they were 25 years ago. An analysis by Yale university staff has shown that the arrival of shale gas is largely responsible. Energy efficiency, less-thirsty cars and fewer air miles flown have also helped.

We could easily do something similar. Most nations get about a third of their energy from natural gas; we get only 3%.

If we grew our gas consumption by 20%, and cut our coal consumption by 20%, we would reduce our emissions by nearly a third. Rather than destroy our economy with a carbon tax, let us explore vigorously for gas.

Will the government stop dithering and positively encourage shale gas exploration?


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