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Scrap the Carbon Tax Bill

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets.

Eager to make a progressive showing at the Paris Climate Conference, the South African government is trying to bundle through a Carbon Tax Bill. It allowed only six weeks for comments, ending on 15 December 2015. A major new tax deserves more than token public consultation. Also, it’s a bad idea.

South Africa is a developing country where more than 25% of the workforce is unemployed, 20% of the population lives below the food poverty line (of a measly R321 per capita per month in 2011 prices), and credit ratings are slipping because of zero economic growth and severe constraints in electricity generation. This country emits about 1.1% of the world’s carbon dioxide, and ranks 48th on a list of countries by greenhouse gas emissions per capita.

Yet, like a dutiful revolutionary, it is in the international vanguard of dramatic measures to curb greenhouse gas emissions. It published a Carbon Tax Bill on 2 November 2015, and opened it to public comment until 15 December 2015. (Written comments should be emailed to Dr. Memory Machingambi by the close of business on 15 December 2015.

The problem with being in the vanguard is that you tend to get shot unexpectedly.

The most obvious flaw in a carbon tax for South Africa is that whatever the virtues of reducing carbon dioxide emissions, this burden should surely fall upon the countries that have historically produced most of them, and have grown wealthy by relying on inexpensive, abundant energy.

A developing country such as South Africa, being a relatively small contributor to global emissions, should have other priorities, such as providing water and sanitation to all its people, ensuring that electricity infrastructure is adequate to support job creation and economic growth, improving primary and secondary education, and fighting the preventible diseases that ravage especially our poorer neighbourhoods.

South Africa’s proposed carbon tax will be applied to fossil fuels at source, as well as to industrial processes, product use and raw material use. It is broadly based, affecting 86.7% of all the country’s primary energy supply. Consequently, it will have an impact on costs and prices throughout the economy.

It prices carbon dioxide emissions, as well as methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride, at R120 per tonne of carbon dioxide equivalent. There are many allowances and offsets, with the result that only between 5% and 40% of actual emissions will be taxed. Conversely, each tonne will cost between R6 and R48. This makes it hard to calculate the likely cost to the taxpayer, but if we assume a price of R30 per tonne, and we apply that to South Africa’s total greenhouse gas emissions of 458.29 megatons of carbon dioxide equivalent units, the fiscus stands to gain some R13.7 billion.

None of this revenue will be ring-fenced to fund research and development of clean energy technology, or subsidise energy-efficient equipment, or otherwise support environmental policy. It will simply be added to the National Revenue Fund for general use.

Because it applies to fuel, it is a regressive tax. It will fall much more heavily on the poor than the rich, since the poor spend a much larger share of their income on transportation.

Many people will not have any alternatives to paying the carbon tax, so it cannot possibly serve as an incentive to reduce emissions. For example, most people won’t have the means to switch to electric vehicles, or even to buy new, more fuel-efficient vehicles. Even if they do buy an electric or hybrid, they’re dependent on a state-owned monopoly for the electricity to power their vehicles. That monopoly, Eskom, still burns coal to generate the bulk of its supply.

In industry, too, the bill attributes specific “greenhouse gas emission factors” to a wealth of processes. Because those factors are fixed, the carbon tax offers no incentive to make them more efficient.

Nominally, a carbon tax does work, as a matter of policy. Of course it does: if you want less of something, you tax it, just like you do with booze and cigarettes. However, that does not make it an obvious solution that justifies its economic cost.

Carbon tax should be distinguished from a cap-and-trade system. With a carbon tax, you are not targeting a specific level of carbon-equivalent emissions. You’re merely setting a price on carbon, and hoping for the best. By contrast, with cap-and-trade, government sets an overall emissions goal, and leaves it to companies to trade emissions permits among themselves. In this way, the market determines where cuts can most efficiently be made. A carbon tax gives you certainty on the price, but uncertainty about the impact, while a cap-and-trade system provides the opposite.

To take the cynical view: the purpose of a cap-and-trade system is to guarantee a reduction in greenhouse gas emissions. The purpose of a carbon tax is to guarantee government revenue.

The view that this is just another source of revenue for the South African government, no matter the policy outcome, is bolstered by considering a rare example of a successful carbon tax, in British Columbia, the western-most province of Canada. A key feature of this tax is that it is revenue-neutral. The province now sports the lowest personal income tax in Canada, and one of the lowest corporate tax rates in North America, according to the Economist. These reductions in personal and corporate taxes not only buoyed public support, but compensated for the otherwise high economic costs the tax could otherwise have been expected to have.

In Australia, a controversial carbon tax was pushed through in 2012, but that country’s left-leaning Labour Party paid a heavy electoral price for having supported the proposal of the Greens. Although transport fuel was exempt from the tax, levied at about R240 per ton of carbon dioxide, households were complaining that the tax had imposed a burden of as much as R800 per month on them. Business was resolutely opposed to any policy that would “clobber the economy”. Two years later, the centre-right Liberal Party bundled the Labour Party out of power by promising to “Ax the Tax”, and the carbon tax was summarily repealed.

South Africa’s tax implicitly acknowledges the harm it will do to the economy, by providing a slew of “allowances”, including for producers who export goods instead of selling them into the domestic market. It seems to suggest that it should try not to harm competitiveness in international markets, while domestic productivity can safely be undermined.

Why foreigners should be better protected against high prices charged by domestic producers than locals is something a policy-maker should probably explain to me one day.

It is notable that carbon taxes, in the handful of places that have implemented or proposed them, are set at widely varying levels. This should not be surprising. One of the economic insights that earned Friedrich Hayek his Nobel Prize in Economics was that central planners simply do not have the necessary information to make efficient economic choices. That means that governments can at best take a trial-and-error approach to setting an optimal tax rate which maximises the desired benefits while minimising the consequent costs.

Research shows that even under the best of assumptions, the target in case of carbon reduction costs versus climate benefits is surprisingly small, and getting it wrong can have tremendous costs. South Africa’s Carbon Tax Bill doesn’t even bother to set any goals or standards by which benefits can be measured, nor does it make any provision for adjusting the rate at which emissions are taxed. Expecting such a rash shot in the dark to hit that small target is preposterous.

Even if it does, the costs to the economy will be high. Besides the direct costs to most of industry, in the form of tax, and the indirect cost of taxing almost all primary energy, the Carbon Tax Bill also provides for the establishment of an elaborate bureaucracy to measure, budget for, and compare greenhouse gas emissions among companies and industries. This will create an additional level of costs throughout the economy – not to mention lucrative employment opportunities for environmental consultants and eco-auditors.

Increasing the cost of living and doing business in South Africa will deter both domestic and foreign investment, and have obvious consequences for the country’s ability to attract and retain educated workers with marketable skills.

In short:

  • A South African carbon tax will have a minimal impact on global emissions.
  • South Africa has more urgent priorities.
  • It is a regressive tax that will hurt the poor.
  • Since there is no off-setting tax reduction, its cost impact is not mitigated, and it seems designed merely to contribute revenue to the fiscus.
  • The revenue to the fiscus is only a small part of the total cost that the tax will impose upon the economy.
  • Carbon tax revenue will not be ring-fenced for environmental policy purposes.
  • In many cases, there is no alternative to fossil fuel use, so a carbon tax offers no incentive.

That the government is willing to rush a Carbon Tax Bill through with only six weeks for public comments, during the busiest time of year just before the holidays, is revealing. It looks like it wants no discussion at all.

If it did, it would hear that taking all this economic pain, in the hope of slightly reducing the percent or so of global emissions that South Africa produces, is extremely foolish. It will benefit only wealthy eco-consultants and green-tech investors.

With the poor already suffering under conditions of low or no growth, high unemployment and high prices, the last thing they – and the rest of us – need, is to have the government pile on more taxes with broad costs to the economy and highly doubtful policy outcomes.

The Carbon Tax Bill needs to be scrapped. DM


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