Reducing Greenhouse Gas Emissions Carbon Tax Policy Paper: National Treasury briefing

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Finance Standing Committee

03 June 2013
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

National Treasury briefed the Committee on its carbon tax proposal aimed to reduce greenhouse gas emissions. South Africa faced a number of environmental challenges that were likely to be aggravated as the economy grew. The biggest of these were climate change or global warming, resulting from excessive emissions of greenhouse gasses. Other challenges mentioned were local air pollutants, inappropriate land use, biodiversity loss, deteriorating water quality and increased levels of solid waste generation. Concern that climate change could slow or even reverse progress on poverty reduction, was also expressed. This fear was rooted in the fact that most developing countries were dependent on agriculture and other climate-sensitive natural resources for income and wellbeing. Large scale carbon capture and re-use, such as using waste CO2 from coal plants to grow algae for biofuels and food or to produce carbonate for cement, had to become a top priority in climate change reduction. A carbon tax, implemented gradually and complemented by effective and efficient revenue recycling, had been proposed by National Treasury as a means to reduce emissions. The tax created a means by which government could intervene by way of a market instrument to appropriately take into account the social costs resulting from carbon emissions. Carbon tax also sought to level the playing field between carbon intensive sectors (fossil fuel based firms) and low carbon emitting sectors (renewable energy and energy-efficient technologies). The introduction of a carbon price had the potential to change the relative prices of goods and services and could make emission-intensive goods more expensive than less emission-intensive goods, thus providing a powerful incentive for consumers and businesses to adjust their behaviour.

National Treasury proposed a carbon tax of R120 per tonne of CO2e above the suggested thresholds, with annual increases of 10% until 2019/20. A basic tax-free threshold of 60%, as well as an additional tax-free allowance for process emission (10%) and an additional relief for trade-exposed sectors (maximum 10%) were also proposed. The overall tax-free allowance for an entity would be capped at 90% of actual verified emissions. Tax-free thresholds would be reduced during the second phase (2020 to 2025) and might be replaced with absolute emission thresholds thereafter.

The carbon tax would be introduced as part of a package of interventions that aimed to minimise the potential adverse impacts on low-income households and industry competitiveness. These interventions included the potential phasing down of the electricity levy, tax exemption for revenues earned, accelerated depreciation allowances and tax incentives.

Public comment needed to be submitted by 2 August 2013. Draft legislation to implement the carbon tax would be released by National Treasury from 1 January 2015.

There was strong opposition from Members to the proposed implementation of carbon tax. The overriding feeling was that National Treasury was jumping the gun and that it needed to focus on pressing issues such as the country’s declining economic growth and the progress of its Integrated Resource Plan before it introduced carbon tax. A meeting with the Minister of Energy and a joint report from the Department of Energy and National Treasury were also suggested. They asked whether National Treasury had considered the cap and trade scheme as an alternative. Had the country accessed funds through a renewable energy initiative that it signed with other European countries? Would a carbon tax impact on electricity prices? Would National Treasury shift taxes?
 

Meeting report

National Treasury Reducing Greenhouse Gas Emissions Carbon Tax Policy Paper
Mr Ismail Momoniat, National Treasury Deputy Director-General: Tax and Financial Sector Policy, briefed the Committee on the carbon tax proposal which he said was the third in the series and updated the 2006 and 2010 discussion documents released by National Treasury (NT). The paper was not intended to deal with science but to find a way to deal with greenhouse gas emissions. He said if South Africa did not take action to change its behaviour to emit fewer greenhouse gasses the country could encounter environmental problems in the future. NT would not rush to increase taxes. Public comment had to be submitted by 2 August 2013, before draft legislation to implement the carbon tax would be released by NT from 1 January 2015.

Mr Cecil Morden, National Treasury Chief Director: Economic Tax Analysis, said South Africa faced a number of environmental challenges that were likely to be aggravated as the economy grew. The biggest of these was climate change or global warming, resulting from excessive emissions of greenhouse gasses. Other challenges mentioned were local air pollutants, inappropriate land use, biodiversity loss, deteriorating water quality and increased levels of solid waste generation. There was concern that climate change could slow or even reverse progress on poverty reduction. This fear was rooted in the fact that most developing countries were dependent on agriculture and other climate-sensitive natural resources for income and wellbeing. There was also concern that these developing countries lacked sufficient financial and technical capacities to manage increasing climate risk. Much of the poverty impact was expected to be concentrated in Africa and Asia. South Africa’s strategy to contribute towards greenhouse gas mitigation and adaptation was adopted by government in 2011 when Cabinet approved the National Climate Change Response White Paper. This was after the commitment made by South Africa at the 2009 Copenhagen conference of parties (COP17) to undertake appropriate national actions to curb greenhouse gas emissions by 34% by 2002 and 42% by 2025 below business as usual.

Large scale carbon capture and re-use have to become a top priority in climate change reduction, such as using waste CO2 from coal plants to grow algae for biofuels and food or to produce carbonate for cement. Carbon capture sequestration (CCS) could reduce CO2 emissions in industrial applications by 4Gt if 20%-40% of facilities were equipped with CCS by 2050. This intervention could be expensive and required the introduction of carbon taxes to make it economically attractive. A carbon tax created a means by which government could intervene by appropriately taking into account the social costs resulting from carbon emissions. Carbon tax also sought to level the playing field between carbon intensive sectors (fossil fuel based firms) and low carbon emitting sectors (renewable energy and energy-efficient technologies). He said the introduction of a carbon price would change the relative prices of goods and services and would make emission-intensive goods more expensive than less emission-intensive goods. This provided a powerful incentive for consumers and businesses to adjust their behaviour and would result in a reduction of emissions. NT proposed a carbon tax of R120 per tonne of CO2e above the suggested thresholds, with annual increases of 10% until 2019/20, as of 1 January 2015. A basic tax-free threshold of 60%, as well as an additional tax-free allowance for process emission (10%) and an additional relief for trade-exposed sectors (maximum 10%) were also proposed. The overall tax-free allowance for an entity would be capped at 90% of actual verified emissions. Tax-free thresholds would be reduced during the second phase (2020 to 2025) and might be replaced with absolute emission thresholds thereafter. A formula was proposed to adjust the basic 60% tax-free threshold to take into account efforts already made by firms to reduce their emissions and to encourage firms to invest in low-carbon alternatives. He said the carbon tax was designed to change behaviour today so as to pay less tax tomorrow.

The carbon tax would be introduced as part of a package of interventions that aimed to minimise the potential adverse impacts on low-income households and industry competitiveness. These interventions included shift taxing, the potential phasing down of the electricity levy, tax exemption for revenues earned from clean development mechanism projects, accelerated depreciation allowances for renewable electricity generation and biofuels production and tax incentives for biodiversity conservation. Under the National Climate Change Response White Paper, several priority flagship programmes had been identified in the energy, transport, water and waste sectors, To complement these initiatives, consideration would be given to support for households and businesses (slide 34). A carbon tax implemented gradually and complemented by effective and efficient revenue recycling could contribute to significant reduction of emissions.
 (See presentation document)

Discussion
Mr T Harris (DA) voiced major concerns over South Africa introducing a carbon tax. He said while the DA supported the principle of fighting carbon pollution on a national level, he felt that this step needed to be adopted by all countries. SA could not be seen as the only implementer of this tax among developing countries, especially as the country had barely shown economic growth this year, compared to other emerging markets. Carbon pollution could only be fought effectively on an international level. If SA fought this alone it would have very little impact on carbon levels, unless coordinated with other countries.  . First world countries, China and the United States of America stood a much better chance of fighting this. There was no logic in SA being the first country in the developing word to implement this tax.

Mr Momoniat agreed that SA acting alone would not impact global carbon emission levels and that coordinated action was needed. However, the question was - how did one secure coordinated action? He said SA’s leadership role should not be underestimated. If SA failed to take action because the US and China did nothing, then the country faced a bleak future.

Mr Harris said SA already had existing taxes such as tax on vehicle sales and the environmental levy. Had those levies affected the behaviour of consumers or did they simply raise revenue for government?

Mr Momoniat replied that it was not just about raising revenue, but quality of spending.

Mr Harris referred to the cap and trade scheme, which had not worked in other countries because of design problems. Could SA not solve those design problems and adopt the scheme for own use?

Mr Momoniat replied that SA would not rule out the cap and trade system and that there was a place for it, but he saw carbon tax as a more effective method.

Mr Harris said that it was his understanding that SA was granted access to funds through a renewable energy initiative that the country signed with other European countries. He said it would not be responsible of SA to talk of implementing a new tax when the country had not made any effort in accessing those funds?

Mr D Ross (DA) said it was not fair of NT to suggest that compared to the rest of Africa, South Africa was the worst carbon emitter. The analogy failed because the rest of Africa was, in fact, energy poor.

Mr Ross asked NT to look at alternatives to a carbon tax. He said SA’s Integrated Resource Plan (IRP) (slide 21) needed urgent revision and he suggested that the Committee engage the Minister of Energy so as to assess the progress of the IRP before the country embarked on a carbon tax.

Mr Momoniat replied that joint session with the Minister of Energy would be a good idea, as it would give perspective to the problems the country faced.

Mr Ross said a carbon tax would impact on electricity prices, as inflation-related tariffs would no longer be adhered to.

Mr N Koornhof (COPE) said that National Treasury was jumping the gun on a carbon tax. He would first like to see a joint report from the Department of Energy and National Treasury. This tax would hit the small guys hard.

Mr Momoniat said he did not feel that NT was jumping the gun. He would welcome a broader discussion between Energy and Treasury as the two departments needed to coordinate their actions so as to ensure that both were achieving the same objectives.

Mr Koornhof said SA was battling to remain the number one economy in Africa, so why should it be saddled with this tax. He was sure that the rest of Africa would not implement a carbon tax. He also did not believe that NT would shift taxes. NT was there to control revenue and to ensure it was not wasted, not to shift taxes.

Ms Z Dlamini-Dubazana (ANC) agreed that the timing was not right. She said the proposed tax would affect the mining industry most and that it would not be a good thing, especially with so much instability in the mining sector.

Mr Momoniat said the impact on the mining sector had been taken into account and that NT had noted the industry’s concerns.

Chairperson’s closing remarks
The Chairperson said taxation was not an easy issue to deal with and it proved to be the case with carbon tax as well. The Committee needed to make sure that it became a valuable contributor to this process. What had also emerged was the need for the Committee to engage constructively with other parties such as energy and environment in this process.

The meeting was adjourned.
 

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