Update on carbon tax in South Africa

In south Africa, the National Treasury today (May 2, 2013) publishes the Carbon Tax Policy Paper, Reducing greenhouse gas emissions and facilitating the transition to a green economy for public comment. This step is considered to be a critical before the South African’s government be able to have a go ahead with the publication of draft legislation giving effect to carbon taxes for first January 2015.

The Treasury has proposed a tax of R120 per ton of carbon dioxide-equivalent, with a 60% tax-free emissions threshold and some exemptions for heavy emitters. The treasury has confirmed once more that the primary aim of carbon taxation was changing behavior, not revenue collection. It therefore starts with a relatively low carbon price, and then progressively rises significantly after five to ten years and beyond. This approach provides industry and other major emitters sufficient time to innovate and invest in greener technologies for the future.

The public must let their comment to reach the Treasury by August 2, 2013.

Climate change posed a major threat to humankind, and one of the most significant ways to mitigate the risk was to reduce greenhouse gas emissions, the Treasury said in a statement issued to reporters with the larger discussion document. There are at least three ways in which a carbon tax will work to drive changes in producer and consumer behavior and therefore address climate change according to the treasury:

First, carbon pricing will encourage a shift in production and consumption patterns towards low carbon and more energy efficient technologies by altering the relative prices of goods and services based on their emissions intensity and encouraging the uptake of cost effective, low carbon alternatives. Pricing carbon emissions addresses the problem of negative externalities, as polluters should pay for their emissions.

Second, carbon intensive factors of production, products and services are likely to be replaced with low carbon emitting alternatives. To achieve the extent of emission reductions committed to in Copenhagen, the production technologies will need to become less carbon intensive and/or the consumption of certain carbon intensive products such as cement, steel, and aluminum will need to be reduced. Given that these industries are important with respect to the country’s proposed infrastructure build program appropriate policies are required to ensure mitigation and adaption strategies are taken into account in investment decisions that have long term lock-in effects.

Third, a carbon price will create dynamic incentives for research, development and technology innovation in low carbon alternatives. It will help to reduce the price gap between conventional, carbon intensive technologies and new low carbon alternatives.

As per the press release document published by the treasury. The key design features of the carbon tax are:

A phased approach to the implementation of the carbon tax. The first phase (introductory) will be for five years, effective from 1 January 2015 to 31 December 2019 followed by Phase 2 of another five years, from 2020 to 2025. Follow up phases can be explored at a later stage.
An across the board basic 60 per cent tax free threshold of actual emissions below which the tax will not be payable.
Additional 10 per cent relief for certain sectors to allow for technical or structural limitations to reduce emissions (process emissions).
Up to an additional 10 per cent relief for emissions intensive and trade intensive sectors, e.g. iron and steel, cement, glass, etc. to take into account the risk of carbon leakage and competitiveness concerns.
Offsets could be used by firms to reduce their carbon tax liability up to limits of 5 or 10 per cent, depending on the sector.
Emissions from the agricultural and waste sectors will be exempt during the first phase. This complete exemption will be reviewed during the second phase.
The electricity sector will qualify for a tax free threshold of up to 70 per cent and some sectors will be able to qualify for a tax free threshold of up to 90 per cent during the first phase.

Emission reductions and macroeconomic impact

Economic modeling undertaken suggests that a broad based carbon tax will make a significant contribution towards emissions reduction with limited negative macroeconomic impacts, Treasury said. The impact on the country’s economic growth is shown to be largely neutral if accompanied by effective revenue recycling measures. Such revenue recycling measure include on budget government expenditure (both general and targeted), tax incentives and tax shifting, i.e. no increases in other more distorting taxes and where possible reduction in some taxes.

Energy efficiency and technology support

According to the treasury, the core policy mix to mitigate climate change constitutes a carbon pricing mechanism, energy efficiency and technology policies. Energy efficiency savings can be seen as one of the “low-hanging fruits” to help address concerns relating to both energy security and climate change.

Government already provides support of new and innovative technology through the research and development tax incentive and its on-going support for the carbon capture and storage (CCS) research project.