A comparison of emissions trading and carbon taxation as carbon mitigation options for South Africa
There is consensus that carbon pricing is required to support a lower carbon pathway for South Africa. However, there remains debate on the most appropriate mechanism to introduce such a price. Although theoretically similar under restrictive assumptions, carbon taxes and emissions trading have very different environmental and economic implications in practice. The well understood differences between price and quantity instruments remain fundamental but there are other important criteria when comparing instruments. On the basis of a broad set of public policy criteria, carbon taxation appears to have many merits for a middle income developing country. Fundamental considerations are the relative political credibility, welfare impacts and long term stability of either instrument. The concentrated market structure of the South African energy sector raises further concerns about the ability to construct a competitive and efficient emissions trading market and supports taxation as the more appropriate instrument. A comparison of the instruments should not, however, be treated as a simplistic polarity and there are mechanisms that can be used to modify either instrument. The evaluation of the instruments in South African circumstances suggests potential criteria for evaluation and instrument modifications which may also be useful for other developing countries.
Carbon trading or carbon tax?
Weighing up South Africa’s mitigation options
Genna Robb, Emily Tyler and Brent Cloete
Economic instruments are proving to be the mainstay of carbon mitigation policy globally. South Africa’s position is consistent with this, and government has indicated its intention to move away from regulation as an emissions reduction tool. However, it is not yet clear what form this economic instrument, or instruments, should take.
Two approaches arise from theory and early international carbon pricing designs: taxation or emissions trading, and they differ in a number of ways. Whilst under strong assumptions, economic theory shows a tax and an auctioned cap and trade scheme to be equivalent, in the real world, under conditions of uncertainty and imperfect information, their different designs lend themselves to different contexts. This paper compares the use of a carbon tax and emissions trading scheme as the central instrument for South African GHG mitigation policy.
The analysis is based on economic theory and the limited international experience of the two instruments, combined with detailed consideration of the South African context. The paper concludes that a tax is likely to be more appropriate in the immediate future, but that the choice could be different in the medium to long term; particularly if an international emissions trading framework is agreed upon. The paper also identifies number of areas for future research to inform policymaking.