Aviation industry may face carbon taxes in South Africa in 2015

carbon tax 1Author: Fabio Miceli (NortonRoseFulbright)†

If recent events between the European Union and the airlines of China, the USA and Russia are any guide, South Africa would do well to consider very carefully the impact of the carbon tax on the airline industry.

The updated carbon tax policy paper, published in March 2013, is informed by the following framework: a rate of R120 per ton of CO2 equivalent, increasing at 10% per year for the first five years. The objective is that a portion of the revenues generated through the carbon tax will be directed towards funding the energy efficiency savings incentive.

Off-set percentages of between 5% and 10% will be provided to certain carbon intensive and trade exposed industries to allow them to invest in projects falling outside of their normal operations with the aim of reducing their carbon tax liabilities.

When the European Union launched the EU Emission Trading Scheme (ETS) in 2005, it faced a great deal of resistance from countries such as China, India and Russia. The Chinese Government placed Chinese airlines in a very difficult position by banning Chinese airlines from participating in the ETS. Any Chinese airline caught paying any charges to the European Union for carbon emissions would be liable to severe penalties in China. However, if Chinese airlines failed to make such payments they would be banned from landing in Europe and could be grounded at any European airport at which they landed until such time as they paid outstanding charges for carbon emissions to the European Union.

The USA and Russia followed Chinaís example and raised their opposition to the ETS. Most of the criticism of the ETS stemmed from the opinion held by China, Russia and the USA that the ETS would increase airfares, which would impact negatively on consumers, but would not have any meaningful beneficial impact on the environment.

In response to this, the European Union decided, in February 2013, that the carbon tax for foreign companies flying into the European Union would be suspended for one year. This decision will have no impact on flights between the countries of the European Union, to which the ETS will continue to apply. The European Union explained that this decision was intended to allow for negotiations taking place through the International Civil Aviation Organisation to be completed. Much of the criticism coming from nations outside the European Union suggested that carbon taxes and emissions trading schemes impacting on the aviation industry should rather have been the subject of discussions within the relevant forum of the International Civil Aviation Organisation.

The Chinese Ministry of Foreign Affairs stated that it welcomed the European Unionís decision, as it allowed Chinese airlines to fly into the European Union without paying carbon taxes and being penalised in China for doing so. The Ministry added that, although it supported the reduction of carbon emissions, this should not be achieved by the unilateral decisions of the European Union but rather through negotiations by all nations concerned.

The Arab Air Carriers Organization echoed this view by saying that the ETS had died and that it was important for a global scheme to be formulated and implemented through the International Civil Aviation Organisation.

In light of these experiences and lessons learnt by the European Union, South Africa would be wise to carefully consider its options to ensure that it does not trigger the kind of backlash experienced by the European Union. Perhaps, participating in the ongoing negotiations at the International Civil Aviation Organisation would quell any such resistance by other countries when South Africa introduces carbon taxes in 2015. From a domestic point of view, South Africa should also bear in mind that a carbon tax could have a detrimental impact on already struggling airline industry.