OECD Backs South African Carbon Tax Plans

by Ulrika Lomas, Tax-News.com, Brussels

The Organization for Economic Cooperation and Development (OECD) has recommended that South Africa speed the implementation of a carbon tax to leverage fiscal space to enhance the tax regime. It has recommended that an environmental levy could provide a significant new revenue stream that would allow authorities to cut taxes on corporate profits and improve job creation and employment incentives to foster stronger economic growth.

The OECD’s Economic Survey of South Africa notes authorities’ efforts to confront the challenge of climate change mitigation. At an international level, South Africa has articulated a commitment – conditional on the provision of external financing – to reduce emissions relative to a Business as Usual scenario by 34% by 2020 and by 42% by 2025. This would be achieved through a carbon tax presently under consideration by authorities.

The OECD highlighted the importance of a broad and easy-to-implement instrument, to mitigate the burden of enforcement and administration, and advocated the adoption of a simple carbon tax. The Organization pointed out that there is so far no explicit economy-wide carbon price, and putting in place a carbon tax is taking longer than expected.

The OECD stated: “For South Africa it appears particularly important, in designing climate change mitigation policies, to bear in mind administrative capacity constraints. This consideration favours instruments such as a simple carbon tax, which is effective but relatively easy to administer, rather than, for example, extensive sectorial carbon budgeting with cap-and-trade or industrial policies driven by subsidies and tax breaks. A suitably simple carbon tax would be uniform, based on the carbon content of fuels, apply to all sectors, eschew border tax adjustments, and avoid earmarking of recycled revenues.”

The OECD recognized that when a carbon tax is installed it is expected that the initial rate will be set at a very low level and will therefore take several years before it truly incentivizes businesses to change their environmental approaches. The OECD, however, advocated that the carbon tax should be applied as broadly as possible from the outset, including the electricity industry. Furthermore, the OECD highlighted there may be a case for taxing fertilizer in order to limit diffuse water pollution, which it pointed out is hard to measure and charge directly.

Summarizing, the OECD suggested that the authorities’ need to “raise additional revenue can go hand in hand with initiatives to address negative externalities, such as taxing environmentally harmful activities.”

“More generally, if revenues are increased while reorienting the tax mix toward more growth-friendly taxation, by reducing taxation of corporate profits (excluding resource rents) and raising property taxes, the negative effects on growth [of a carbon tax] could be minimized,” it recommended.

Measures to boost growth could also include tax credits for firms that provide on-the-job vocational training, and measures to make the personal income tax regime more progressive to tackle income inequality, which the OECD claims continues to be a key challenge for the nation, exacerbating crime rates.