Carbon tax – a slow start and then?

The Finance Minister’s budget speech gave little detail of the carbon tax, although Pravin Gordhan did say it will be implemented in the next financial year, i.e. 2013/14. The outlines are sketchy, but it seems the tax will not be as high as it sounds due to exemptions, and rise only slowly in the next seven years.

Some more  detailed design elements are in the Budget Review,   Surprisingly this comes ahead of a more detailed tax design document which has been due out “next month” since the last quarter of 2011, and is still due in March – yet there are details put forward in the Budget Review documents.[i]

The following analysis has to make some assumptions of what is intended – for example, the thresholds are a “percentage of what?”   It is clear that exemptions are being proposed for 2013 -2019, i.e. there will be seven more ‘fat’ years.  Only from 2020 would the carbon tax really come into effect at anything like the headline number of R120 / ton CO2–eq (€ 12 / t CO2–eq)[ii].  We know that a carbon tax has a substantial additional effect between R 100 to R 200 – but that will not be the effective level for some time, it seems.

Assuming the threshold percentages are simply a share of GHGs on which no tax will be payable, then simple math would indicate that just about everybody gets 60% ‘off’ and pays only R48 (so that you can follow the math: 1-0.6 = 0.4; and 0.4 * R120 = R48)

  • The effective tax level  is at best R 48 / t CO2–eq in 2013
  • Many sectors get off more, getting 80% off, the cement, iron and steel, aluminum and glass sectors are paying on 20% or R 24 / € 2.40
  • at 100% exemption, waste, agriculture and forestry simply won’t pay anything

The announcement gives little indication of how the tax level is linked to the fundamental objective of a carbon tax – to reduce greenhouse gas emissions. There seems to be a good degree of PR in this proposal, making the notional value of the tax sound higher, whereas the effective rate is lower. There might well be objective bases for offering slightly lower tax levels, and we have argued that product-specific or economy-wide emissions intensities might be such a basis.[iii] In the case of Minister Gordhan and his team, we simply don’t know yet what the basis for the thresholds is. We hope to hear a reasoned basis in the discussion document still forthcoming – rather than that this was simply accommodation of lobbying by vested interests before the tax has even been implemented. An adjustment mechanism should be linked to the desired GHG emission trajectory, which is now specified in our climate policy.[iv]

So an attempt in this direction is an inclusion of 10% increases each year in the tax level, up to 2019/20. So that would mean that the notional amount would be R 213 / t CO2–eq by 2019, effectively paying R 85 (at 60% exemption) and R47 (at 80%, i.e. only paying 20% of the tax).  The table below shows what this would look like, extended to 2020.

 

Notional

40% paid

20% paid

2013

R      120

R       48

R       24

2014

R      132

R       53

R       26

2015

R      145

R       58

R       29

2016

R      160

R       64

R       32

2017

R      176

R       70

R       35

2018

R      193

R       77

R       39

2019

R      213

R       85

R       43

2020

R      234

R       94

R       47

 

It is good to see some sort of price path specified, but my, is it a gradual slope from a low base. And that’s assuming the 10% is in real, rather than nominal terms. If it were 10% nominal, less say 6% inflation, then the ‘price path’ would barely have an upward slope.  And a further question to be clarified is whether thresholds are available to new investments too, or only to existing facilities.

 Putting the tax in place is the necessary first step, but it is not on its own sufficient to achieve a fair contribution to mitigating climate change. To have an effect in reducing emissions, more will be needed. The proposed levels are almost certainly not enough to change the structure of our economy from a minerals-energy focused one to a low-carbon version.

The budget review does give recognition that recycling revenue is crucial, and this goes in a good albeit broad direction. Revenues might be used for energy efficiency and to support low-cost households. The latter is crucial and the modalities of implementing it will hopefully be elaborated, e.g. through an extension of the poverty tariff to a greater diversity of fuels used by poor households.

Energy efficiency is critical, and too easily forgotten in the renewed focus on infrastructure. If this is code language, however, for making those industries more sensitive to a carbon price do their part, then something rather more structured is needed.  My colleagues and I have argued that exemptions or lower tax rates subject to an agreement between the entity and government indicating how it will contribute to mitigation. [v]  What is needed are clear mitigation plans for all major emitting sectors and entities.

 


[i] See Budget Review navigating through http://www.treasury.gov.za or directly at http://tinyurl.com/7krn6vg particularly the text box on p. 56 and thresholds in Annexure C (p185).

[ii] Roughly at R 10 / €, depends on the strength or otherwise of the Euro.

[iii]  Winkler, H, Jooste, M & Marquard, A 2010. Structuring approaches to pricing carbon in energy- and trade-intensive sectors in South Africa. Climate Policy 10 (5): 527–543.

[iv] National Climate Change Response White Paper. Government Gazette No. 34695, Notice 757 of 2011, http://tinyurl.com/7pczfxl

[v]  see footnote iii

 

1 thought on “Carbon tax – a slow start and then?

  1. Very tactful, while not ignoring major shortcomings in what has been tabled to date. Clearly Treasury needs to feel, and government in general to perceive, a push-back against industry lobbying, including repeated and loud articulation of the rationale for effective pricing of carbon, a.s.a.p.
    Some words of President Zuma, in May 2009, come to mind:
    “We believe that by stimulating investment in green industry we will be able to contribute to the creation of decent work.” &
    “We have no choice but to develop a green economy”
    What we have in the Budget documentation comes perilously close to a pledge that there will not be effective pricing of carbon at least until 2020. Borrowing some of your delicate words:
    “proposed levels are almost certainly not enough to change [the structure of our economy]” – anything?

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