Opinionista Saliem Fakir & Manisha Gulati 6 May 2015

Climate change: To tax or not to tax?

If 20 countries that between them account for 85% of the world’s economy insist on discussing climate change, a sharp mind can only draw two inferences: one, climate change is bad for the economy or two, addressing climate change is good for the economy. Surely?

Our favourite climate skeptics and denialists are active once again. They have come up with creative reasons to deny climate science and monetary impacts of climate change but they have been recycling the same argument of the irrelevance of climate change for an economy and scrapping the climate tax proposed in South Africa.

Last we heard, much to the chagrin of their host Australia in November last year, the G20 countries insisted on putting climate change on the discussion agenda. Now, if 20 countries that between them account for 85% of the world’s economy insist on discussing climate change, a sharp mind can only draw two inferences: one, climate change is bad for the economy or two, addressing climate change is good for the economy. Since then the move to a global agreement in Paris in December this year for putting a price on carbon as part of an effective response to climate change has intensified.

Talking about a carbon price, while governments have had difficulty negotiating agreements on the global scale, they have instituted taxes on carbon in their countries and some of these schemes are already proving effective. Incidentally even fossil fuel proponents are supporting one – how interesting! Shell, for example, says on its website that carbon-dioxide emissions must be reduced to avoid serious climate change and that it supports an international framework that puts a price on carbon-dioxide. BP believes that while a global carbon price should be the long-term goal, regional and national approaches are a good first step, provided temporary financial relief is given to sectors that are exposed to international competition. ExxonMobil agrees that that a carbon tax would be a more effective policy option to reduce greenhouse-gas emissions than alternatives such as cap-and-trade. It is strange that when fossil fuel companies, which stand to be most affected by measures to fight climate change, agree on the occurrence of climate change and putting a price on carbon, some opposing experts continue to look for reasons to deny it.

Now let’s talk about the carbon tax being proposed in South Africa. It is easy to criticise the tax: the tax is anti-industry, anti-development and anti-employment.

We agree that the tax is certainly far from perfect when it comes to the design but then there is no magic wand when it comes to such a tax. Every jurisdiction that has levied it has different ground realities – be the energy market, the energy mix, or the socio-economic context. Yet much of the scare-mongering fails to account for the current low threshold of the tax, gradualism and net effective of various allowances and off-sets that the tax design allows. Of course, in the long term, if companies do not adjust to the tax by lowering their carbon intensity, the tax will be punitive. Then again, hanging onto the current status quo is not going to be rewarding either. There is a danger that the majority of G20 countries will have one form of carbon price or the other. Such a carbon price is likely to bring with it Border Tax Adjustments. These tariff adjustments will in fact be anti-industry and anti-development as South African manufactured goods would be taxed by these countries by way an import fee based on the carbon content of goods as perceived by these countries.

The all doom and no gain scenario also fails to acknowledge that while carbon intensive industries will no doubt be affected, the tax will enable new types of economic activity through energy efficiency, resource optimisation, development or adoption of new technologies, and stimulating new services around these technologies.

This is not to say that the tax will have no pass-through effects. All taxes have pass-through effects. The issue is one of managing them. It boils down to the ways the revenues raised by the tax are reinvested in the economy. Targeted revenue-recycling could maintain industrial competitiveness, economic growth and social welfare or create additional economic benefits if it improves the efficiency of the overall tax system. The difficulty lies in the choice of the revenue recycling policy option: one that generates higher short term social welfare by stimulating higher consumption and benefiting those who are most affected by the tax or one that favours long term benefits of locking out of the carbon and energy intensive development pathways over short-term welfare gains.

Many factors influence economic growth, employment and development. Failure to account for these factors and only focus on the carbon tax produces incorrect conclusions. The suggestion that the tax will be an economic destroyer is far-fetched and not substantiated by either domestic or international economic studies. It is often the opposite. Then again, it doesn’t matter to the skeptics and denialists. Even the Kremlin switching off lights for Earth Hour, a global annual event where millions of people switch off their lights for one hour to show their support for environmental issues plaguing the planet, won’t make them see reason. DM

Fakir is Head of Living Planet Unit at WWF-SA and Gulati is the energy economist at WWF-SA.


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