Why should we price carbon?

(part 1: why a carbon tax?)

After several years of discussion and an initial document dating back to 2010, the National Treasury’s Carbon Tax Policy Paper was finally released for public comment in May 2013. Since then, debate over both the efficacy and prudence of pricing carbon in the South African economy has dominated in the media, with many commentators arguing that the tax will kill industry or cost jobs.

South Africa has already announced plans to construct Coal-3, even though it is not in the IRP 2010 and would hamper efforst to meet the mitigation benchmark in the National Climate Change Response White Paper.

South Africa has already announced plans to construct Coal-3, even though it is not in the IRP 2010 and would hamper efforst to meet the mitigation benchmark in the National Climate Change Response White Paper.

We think this discussion has become divorced from the realities of South Africa’s economic structure and the country’s role in global emissions (dealing with those commentators who are questioning the science underpinning climate change are beyond the scope of this article – but let the 97% of American climate scientists who support the science speak for themselves)

In short, climate change is real and already being observed – and it is a problem with some specific features. Firstly, it is a long-term problem requiring urgent solutions. Although the impacts will only really start to be felt in years to come, doing nothing now will result in infrastructure ‘lock-in’, where high carbon investments will be made precisely because there is no signal that such investments should not be made.

Secondly, for South Africa and globally, it is primarily an energy problem, that is, reducing GHG emissions from the use and supply of energy. Given how central energy is to economic activity, that means climate change is not only an environmental problem, but fundamentally a question of our socio-economic development path. And it is not a question we can escape: because even if the costs of climate action might seem large, the one thing we do know about the costs of inaction is that they are even larger, and would be paid mostly by the poor.

Thirdly, climate change is also a collective action problem – solutions only work if all countries act, and resist the temptation to free-ride on the efforts of others. This does not mean that all countries need to do exactly the same. The key task of developing countries over the next decade, is to slow the growth of our emissions. It is necessary to now start to shift very large systems, to avoid being locked into a high-emissions, high-climate-impact world.

Pricing pollution is integral to preventing carbon intensive lock-in

Pricing pollution is integral to preventing carbon intensive lock-in

So what is South Africa’s role in all this? Yes, we are only a middle-income country. And yes, we do face extremely high levels of unemployment, poverty and inequality. And because of our abundant (and cheap) coal resources, we are also incredibly high emitters of carbon dioxide. We are amongst the top 20 largest emitters in the world in fact (and only the 28th largest economy by GDP). Our per capita emissions are similar to those of the United Kingdom’s (though this figure masks the extraordinary inequality in emissions between the rich in south Africa – whose emissions are as high as THE highest emitting countries in the world – and the poor, who are amongst the lowest). We are also extraordinarily dependent on coal (both for electricity and liquid fuel production), to such an extent that we are a global outlier in terms of coal’s contribution to our primary energy supply (at about 73%, this is similar to where the US was more than a hundred years ago).

Many people argue that it is not our responsibility to act. And to some extent that is true. There are other countries with much higher levels of historical emissions; there are countries who will contribute far more than we will in the future. But problems of this importance require that all countries act. The rationale for pricing carbon is to correct for market failure – to account for the costs of carbon dioxide that have not been considered when firms have made investment decisions. And decisions are being taken, even now, to retain and expand South Africa’s carbon intensive energy system – through building more coal-fired power stations, beyond those already under construction (this is despite the highly successful REIPPPP and the falling costs of renewable energy technologies globally).

Currently, a fair portion of global emissions are covered by a carbon price. Acting to internalise the costs of climate change does not make us an unusual case: there are carbon prices or taxes in the EU, in parts of China, in Australia, California, states in Canada, and in Costa Rica.

Furthermore, industry in South Africa has benefitted for many years from the cheapest electricity in the world (not to mention labour). This is changing; industry will have to adjust. They will not be ‘killed’ by a carbon tax but the incentive to invest in more efficient technology or cleaner electricity production will be felt on balance sheets (the only place where such impacts seem to matter). In the long-term, investment will shift to different sectors (that is the point of a carbon tax); in the meantime, National Treasury have provided exemptions to vulnerable sectors and we believe there are good models for providing transitional assistance to energy-intensive industry.

(Not to mention that South Africa has amongst the highest PGM, chrome and manganese resources in the world – we are not a price taker in every market in which we are producers).

Those who would have us believe that the carbon tax will destroy South Africa’s economy often leave aside that poor planning and governance in the electricity sector are resulting in significantly higher electricity price increases than the carbon tax is going to. Historical underinvestment in electricity supply infrastructure means that South Africa  is going to face increasing costs to meet electricity demand over the next 5 years. In addition, the cost of the carbon tax pales in comparison to the potential cost to the economy of overbuilding infrastructure, which may happen if the next Integrated Resource Plan is not published soon (with updated costs included for coal, nuclear and renewable energy technologies).

So while we do think that the design of the carbon tax can be improved, we think it is very important that the reasons for having a carbon tax are not forgotten, or drowned out, by those who cry ‘it’s the economy, stupid!”.  To them we say, ‘it’s the environment, stupid!’