Carbon Tax and White Paper on Climate Change: National Treasury and National Planning Commission briefings

Committee: Water and Sanitation

Chairperson: Mr J de Lange (ANC)

Date of Meeting: 18 Oct 2011

Summary

The National Treasury addressed the Committee on the Carbon Tax, which was an market-based instrument for changing behaviour and dealing with externalities produced by the presence of carbon. Treasury pointed out that the market-based instrument was more efficient as opposed to one of regulation and control. However, both means were complementary to each other.

The Committee raised concerns similar to those towards the White Paper on Climate Change, including policy coherence, institutional arrangements and database and skills requirements. The Department needed to think more about the implications of any further price and tariff increases on the already poor and vulnerable within South Africa.  South Africa needed to take fundamental and systemic steps to change the behaviour of consumers.

The National Planning Commission presented its view on the White Paper. It could not give full information as the Development Plan was being finalised. Nevertheless, the focus of its work towards the low carbon economy pivoted on resolving the developmental challenges of the country in alleviating poverty and dealing with inequality. The overall paradigm guiding the work of National Planning Commission needed to look at pragmatic solutions, which had to be evidenced-based.

The Committee appreciated both presentations and encouraged National Treasury and the National Planning Commission to keep up the good work.


Minutes

Carbon Tax: National Treasury Presentation
Mr Ismail Momoniat, Deputy Director-General (DDG): Tax and Financial Sector Policy, National Treasury, said that the National Treasury's presentation was based on discussion. The carbon tax paper had been circulated and the National Treasury had received 78 comments in its engagement with industry. There was a lot of concern about how South Africa used electricity and there was a high dependence on coal for electricity. Such an adjustment would be very significant. The National Treasury would come out with a new version of the paper, hopefully in the next month to accommodate the comments received. The tax was above all about changing behaviour but it would need complementary measures before it could succeed and it was important to establish regulatory standards on the products that would be used.

Mr Cecil Morden, Chief Director: Economic Tax Analysis, National Treasury, provided the context of the presentation by saying that South Africa valued the importance of economic growth and poverty alleviation. Growth in itself was not so important as its sustainability. The quality of growth must not be compromised as, when it came to the issue of resource use, issues like pollution would become very important, as it was the poor people who would be most affected. Therefore, the role of Government in regulating interventions was crucial.

From air pollution to climate change, and to water, there was a whole host of challenges that would need to be addressed along the way. South Africa had begun to use some of the measures to address the challenges. The polluter pays principle was one example. Those responsible for pollution should bear the cost. In relation to strategic priorities carbon pricing would be a means to facilitate behavioural change and  prioritise the use of incentives and disincentives to change behaviour towards a low carbon economy. On the adaptation side, energy was of major concern as South Africa needed energy efficiency and a less intensive energy mix, hence the link of the role of carbon pricing to efforts to deal with climate change.

The National Treasury also looked at other challenges across the world and the Paper highlighted some of the challenges in terms of trade barriers and shifting investment priorities. The option to do nothing was not an option. The basis of market failure in the climate change issue was that in terms of the externalities the market price did not take into account certain costs or benefits - hence the costs of the effects were external to price mechanisms. Therefore interventions such as the carbon tax were needed to deal with externalities, either to provide a benefit, or a charge(Pigovian tax) opposed to equal negative externalities. This provided the rationale for the carbon tax. Australia had done quite a lot of work on the carbon tax. It had been seen that the tax changed the prices of goods and services and also changed behaviour.

When dealing with broader issues on the environment, there were two types of interventions. The one was measures which used regulatory standards and the other was market-based instruments. These two complemented one another but the market-based was more efficient. Incorporating the price of external cost into product would change price and consumer behaviour and would stop the consumers from taking the cheaper option.

There were two options for the carbon tax; carbon emissions tax or proxy tax bases upstream or downstream. In considering tax design it would be important to contrast issues around benefits on actual emissions and upstream taxes. The fuel input tax at point of combustion was easier to collect at source than at every household. During the Long-Term Mitigation Scenarios (LTMS) process, various interventions had been used to rank them and their different combinations. Some of the challenges that were important in the world included the international negotiations process which was complex and drawn out, and there were various country progress.

What would the Government do with the revenue? There would be revenue recycling, budget neutrality, revenue neutrality, and earmarking of revenue, and environmental funds could be set up. The objective of the tax would be behaviour change. The tax could also lower other taxes Priority of expenditure would need to  be on the broader budget priorities. A fuel levy already existed and had been applied to petrol and diesel. The vehicle emissions tax was already in place as well, based on R75 per gram/km. The consumer would be taxed on every gram/km above 120.

Discussion
The Chairperson thanked Mr Morden for the excellent and comprehensive input. He asked the National Treasury  to include the principle of the carbon tax in the White Paper. He also suggested that part of the Paper would deal with how Treasury would keep data they needed so the progress could be measured.

Mr G Morgan (DA) thanked Treasury for the comprehensive presentation. He raised the issue of sequencing and how the Paper dealt with it to ensure to have the right response at the right time and in the right order. He also suggested that the National Treasury obtain policy coherence across various Government departments. He supported the Chairperson in the importance of having a database to measure progress as there were other drivers in the economy and the database would be needed to ensure the emissions were indeed reduced. Some institutional arrangements had to  be in place before the tax could be implemented. He also raised concerns about collecting tax at the point of combustion as South Africa had only one producer of electricity and 90% of it was based on coal,  and tax on the source meant the producer would pass it on to the consumer. How then could the producer’s (Eskom’s) behaviour be changed? The tariffs would then be raised and it would be the poor and middle income population who would be affected the most. The conditional grants, for example, would have to be raised in order to deal with tax increases. The National Treasury needed to think carefully about the point of introduction. The National Treasury also needed to look at the Australian carbon tax system and find ways to give back to the consumer and to the economy as Australia had. The complexity of the economy needed to be considered so that if there were job losses the unemployed could be absorbed into the green economy. There was also a need to do a regulatory assessment to find the impact of tax on ordinary South Africans. The transition to the low carbon economy needed to go through the path of least disruption.

Mr J Skosana (ANC) said that there was a need for skills development for people who would be implementing the interventions in the document. He asked the National Treasury if there was a plan to deal with old cars, as these were the ones that brought in the most pollution.

Mr L Greyling (ID) said that another committee had heard a presentation from the National Energy Regulator of South Africa (NERSA) the day before. The issue of electricity price needed to be put into context. But as Mr Morgan had said, the issue was more complex in the electricity market. South Africa (SA) had developed an Integrated Resource Plan (IRP) to say what energy mix was in the next 20years; the carbon tax would not change that. There was far greater flexibility needed. Also, at what rate should the carbon tax be set as it was an externality for the country and in the global sense? Why just a carbon tax? He asked the National Treasury if it was debating issues beyond carbon. The most important point was the issue around transition and shocks the economy might receive if this was really a way SA wanted to go. Such impact needed to be considered.

Ms H Ndude (COPE) said that Treasury could not think outside of the box without introducing new taxes as it was not an answer to every ill. The National Treasury needed to engage the stakeholders and educate them and consider the inequalities that existed in the country. There also needed to be some thought to be given to challenges like not having a good transport system which drove people to buy more and more cars.

Mr S Huang (ANC) asked the National Treasury who the holder of the Clean Development Mechanism (CDM) project was. He also asked for clarification on the offset credit mechanism.

Ms D Tsotsetsi (ANC) said that raising revenue was good news for the Government, but if compliance was not enforced, then it would not be any better.

Mr Momoniat replied that the issues raised were hard and complex and that there were no easy solutions in climate change. There was no plan B for the planet and Treasury did not have all the answers. There was also no certainty. Incentives were there to ensure behaviour change. The polluter needed to pay. It was important for  Government to look at the impact and on the expenditure side. The discussion on the Paper would also need to involve other committees such as those on energy, transport, and other relevant ones and he hoped that the Committee,  which had oversight, could assist. He thanked the Committee for the comments and would take them as concerns to be taken into account. Tax would not change behaviour by itself and he assured Members that National Treasury was thinking outside of the box. The challenge was in how to price carbon.

The issue of sequencing was important. But unless there was a better global coordination South Africa could reduce all its emissions but still would not make much of a difference as others continued to pollute. SA also wanted to show that it could lead. The National Treasury  could not answer all the hard questions until the price of carbon would be properly announced as it was market sensitive. South Africa also needed to look at greening new investments. Education at school level was the best way to go green. The tax itself did not need much skills and the National Treasury acknowledged that phasing in the tax was a hard challenge.

Mr Morden agreed with the Committee that databases were critical and such was the reason for the delay of the tax efficiency incentive due to the need to get the institutional arrangements in place. Quantifying incentives and sequencing in the electricity sector was a challenge for the National Treasury. Sending some good signals about price of carbon could regulate the IRP. The Department of Energy was the custodian for the CDM. Offset mechanisms suggested in the paper were international but there was a need to look at local ones.

The Chairperson said that it was  important for the National Treasury to look at the economy and realize that the DNA of it was set many centuries ago and was very difficult to change. From a pragmatic view South Africa needed to take fundamental and systemic steps to change the behaviour of consumers, if it was serious in its response. He urged the National Treasury that the next steps were to legislate the White Paper  and many of the issues discussed would be part of it. He thanked the National Treasury  for its work. 

National Planning Commission Presentation
Ms Tasneem Essop, Commissioner, said that the National Planning Commission (NPC) had taken inputs into the White Paper. It was important for the NPC to see where the shortcomings were and how the Paper would fit into what the NPC was doing. She clarified that she was merely presenting the view of the NPC on the White Paper though it had not formally taken a position. The presentation was to brief the Committee about the approach NPC was taking. There was a need to look at the ongoing work done in terms of overall development in the vision statement and the development plan in transition to low carbon economy. She could not give more details on the development plan as the NPC was in the process of finalising it.



The NPC envisaged that further work would continue after the plan had been launched. The vision zoomed in on the principle of  natural wealth harnessed sustainably. The document identified nine critical elements and two strategic objectives. They focused on eliminating poverty and reducing inequality considering the resource intensive nature of the economy and society The NPC wanted to draw the attention of the Committee to the promotion of sustainable resource use.

The overall paradigm guiding the work of NPC needed to look at pragmatic solutions, which had to be evidenced-based. Much work had gone into research and expert engagement in order to avoid duplication. The Commission was also looking at ensuring that the transition to the low carbon economy was as developmental as much as possible to ensure that the vulnerable and the poor did not bear the costs. Resilience was the focus of adaptation measures to ensure a broader definition framed in the context of South Africa’s development challenges in dealing with poverty and inequality.

Discussion
The Chairperson said that the Committee had just wanted to hear what the NPC was doing and then make up its own mind about the progress. He thanked the Commissioner for her report and said that the Committee looked forward to the research paper from the NPC.  He indicated that the Committee would need to engage with the NPC after the draft developmental plan had come out to see what implications were on water and environmental issues.

Mr Morgan referred to issues he had raised earlier with the White Paper and the carbon tax paper about policy coherence.  He suggested that NPC might need to act to get Government departments and other spheres to act with some kind of common purpose.

Mr Greyling asked how much the influence the NPC had in challenging the plans in the energy sector and the IRP and to what extent has NPC engaged with issues on energy and the IRP.

Mr Skosana asked about how the NPC could mobilize resources.

Ms Essop apologized to the Committee that she would love to carry on in explaining what the Commission was doing but she did not want to pre-empt the content of the Development Plan that was being finalised. She also reminded the Committee that the NPC was merely an advisory body and not an implementing one. The Commission approached the work in theme areas and work streams. They were integrated not isolated. Another piece of research work had been commissioned to look at potential lock-ins in policy which would inform the next phase of its work going forward. She said that she viewed what the Members had said as comments.

The Chairperson thanked the Commissioner for taking the time to come to address the Committee and that he was very glad that it had engaged with the NPC. It was nice to see that the NPC was focusing on economic issues that, when mitigated in a certain way, would lead to certain consequences..

The meeting was adjourned.