Opinionista Saliem Fakir 15 March 2018

SA’s Carbon Tax Bill nearly there, but not yet enough to do the job

In under a year, South Africa’s carbon tax is likely to be introduced. It is to be welcomed, but it is still too weak to do the job of pushing South Africa into a just low-carbon transition. South Africa needs to do more given its international and domestic climate obligations.

So, what is the overall and systemic purpose of the carbon tax?

Simply put, the carbon tax is a way of pricing an environmental externality. The carbon tax is intended to help achieve three things, namely: to lower carbon intensity through improved energy efficiency or switching to alternative energy; to stimulate new growth, new technologies and enterprise; and to encourage the development of new product lines which, in turn, would stimulate new investments and jobs.

Put another way, the aim of a carbon tax is to disincentivise future carbon-intensive investments. It will also encourage the investment world to start pricing carbon dioxide emissions as a risk factor in the way they make future investment decisions and capital allocations.

The Paris Agreement means that most countries will likely have some form of carbon pricing by the middle of the next decade. The aviation industry is already moving in that direction and the shipping industry will soon follow suit.

As it stands, South Africa is one of the most carbon-intense economies in the world (measured as the amount of carbon used per unit of GDP) due to our heavy dependence on coal.

It’s important to note that South Africa, a nation known to punch well above its weight when it comes to climate negotiations on the international stage, is lagging behind when it comes to dealing with carbon pollution. The rhetoric does not match the reality on the ground, and this could cost us when other countries impose border carbon adjustments on our dirty exports.

By this time last year, more than 24 jurisdictions globally had some form of carbon pricing, and more are coming online all the time. In addition, the majority of these have prices higher than the proposed South African tax. There is no time to waste.

As it stands now, the National Treasury, which has long been working on a carbon tax, has put out a Draft Carbon Tax Bill for public comment.

A broad tax rate applied to the economy is a cost-effective and economically-efficient means of mitigation. Much input has gone into the drafting of South Africa’s Draft Carbon Tax Bill and, as it stands, proposed reporting arrangements and details appear to be well thought through.

At current proposed pricing, however, the tax will be insufficient to reach effectiveness as measured by the government’s own research and comparisons to other countries. Take, for example, the government’s own Long-Term Mitigation Scenarios (LTMS), which modelled at which price a carbon tax would be most effective.

The LTMS’s optimal path for systemic effectiveness of an embedded carbon price assumed a much higher price for carbon, assuming a starting price of R216 in 2008, rising to more than R542 by 2020 and peaking at around R1,000 in 2035 (prices correct for inflation).

The current price of R120/tCO2e (in 2019) is only 56% of the original proposal if one factors in inflation over the intervening period. The rate of increase over the first phase has dropped from 10% per annum to under 8% (CPI+2%), giving a lower final price. This compares poorly with the World Bank’s estimate of $80 to $200 for carbon taxes in 2030 in order to limit climate change to 2°C.

Under these scenarios, dirty industries are still being given a free pass and will not be pushed hard enough to shift the gear on climate change issues. The current proposals for waivers and discounts to dirty industry is delaying the low-carbon transition and will not be sufficient to induce industry to play ball and be a good citizen.

A carbon tax should also be used to support a low-carbon transition and help the poor improve their energy access. On this the bill is eerily silent.

Treasury proposes that the tax applies a “polluter pays principle”. The 2012 National Climate Change Response White Paper articulates this as “those responsible for harming the environment paying the costs of remedying pollution and environmental degradation and supporting any consequent adaptive response that may be required”.

While this is a just approach to dealing with the issue of emissions, the real costs of remedying pollution and climate change adaptation are much higher than the nominal rate. Moreover, without actually ring-fencing some of the income from the tax for climate adaptation, the proposed tax falls short of meeting the national criteria.

The tax should, on one hand, penalise polluters, but reward those who want to clean up the environment. In addition, it should actively promote clean energy solutions to encourage a trajectory of new low-carbon investments, opening a new economic sector for South Africa to ensure the development of new jobs and skills over time.

Much has been made of the need to align the carbon tax with the company-level carbon budgets being brought online by the Department of Environmental Affairs, citing these as double taxation, or a “shadow carbon price”. There is indeed alignment inasmuch as they share the same reporting requirements, and will share the same carbon offsets system.

However, they perform different functions and there is no reason they should not both be implemented. The carbon tax is an economy-wide driver, incentivising low-carbon options and pricing carbon. The budgets, on the other hand, are a regulatory instrument to manage emissions from specific activities down.

As an analogy, the carbon tax is the equivalent of the road tax levy you pay on fuel, while the carbon budgets are the laws that govern driving. The fact that you have paid for your fuel (and by extension of the levy, for the roads) has no bearing on whether you should face penalties for breaking the law or speeding. As such, the national carbon tax should in no way impact on regulatory penalties for exceeding company carbon budgets: it is necessary to retain both.

Overall, while the Carbon Tax Bill promotes a signal for change, WWF’s own calculations show it is insufficient to bring about desired change, given the present climate crisis and the existential threat it poses to humanity. South Africa needs to do more… as does the rest of the world. DM

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