Likely Impact of Carbon Tax on Energy Supply in South Africa (and SADC): Stakeholder discussion

Energy

23 July 2013
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

A round table discussion on the likely impact of a carbon tax on South Africa’s energy supply and the economy was organised by the Portfolio Committee on Energy with various stakeholders in attendance. The discussion was organised with a view to enrich the Committee’s understanding of the benefits and disadvantages of a carbon tax on South Africa’s energy sector, as well as the views of stakeholders on the issue.
National Treasury said the carbon tax proposal indicated the procedures and processes for taxing carbon emissions by energy companies in South Africa.  The point of departure for the carbon tax proposal was the White Paper on Climate Change developed by the Department of Environmental Affairs, which also served as an indicator of  the government’s policy position on carbon tax.  Government’s proposal on a carbon tax had been developed and further refined through a consultative process.  A carbon tax was being considered as a strategy to change behaviour in the energy industry, and not to merely raise revenue. It was apposite for South Africa to act now, despite the absence of a globally coordinated action on carbon tax, as this would strengthen the nation’s position and legitimacy in the ongoing international negotiations on carbon tax and climate change.  Mitigation issues would be seriously considered, as there was a likelihood that consumers would bear the brunt of a carbon tax introduction. The proposal would therefore take into consideration poor households, and would seek ways to protect them.

While stakeholders such as Eskom, the paper and petroleum industries, organised business and energy research entities, agreed on the need to act on climate change, opinions differed on the likely impact a carbon tax would have on South Africa’s energy sector and the economy at large. Many agreed that a carbon tax would change behaviour, reduce emissions generated in the energy sector, and curb other externalities associated with energy use. However, the negative effects highlighted by some stakeholders included increased energy prices, increased cost of production in the manufacturing sector, increased goods and transport prices, and a weakening of South Africa’s international competitiveness. It was suggested that there was a need to be cautious about what the domestic policy would be, in view of the ongoing international negotiations. The timing of the introduction of a carbon tax was also questioned, considering the fact that the economy was not growing, and a tax was already in place for renewables in the electricity sector. The negative effects could impact on South Africa’s economy. A carbon tax was also identified as essentially a market-based instrument, which would render it inappropriate in a regulated market. It was asserted that there was some level of non-alignment and incoherence in the plans, strategies and mitigation measures for carbon tax and climate change, by relevant government departments and parastatals.

The Committee noted that there would be trade-offs, as it was impossible for all stakeholders to agree on all issues relating to the carbon tax proposal. There was a need to work intensively and also to put a time frame on what the Committee and government intended to achieve on carbon pricing. Consultations and subsequent discussions with relevant stakeholders would therefore be organised, in a bid to reach a compromise on a carbon tax.
 

Meeting report

Likely Impact of Carbon Tax on Energy Supply in South Africa (and SADC)
The Chairperson welcomed everyone to the round table discussion and gave background information on the issue of the carbon tax the government was considering.   The government, through the National Treasury, was planning to introduce a carbon tax in the energy sector in South Africa and a document on the subject matter had been circulated.  A presentation on carbon tax by the National Treasury to the Portfolio Committee on Finance, had also taken place.  The Chairperson noted that issues relating to carbon tax were always debated in the Steering Committee on Climate Change, of which he was a Member. The opportunity to consider carbon tax critically, however, and on a broader scale, presented itself when the government, through the National Treasury, made its presentation on carbon tax to the Steering Committee on Finance. As part of South Africa’s regional integration strategy, it would also be imperative for the nation to work together with other nations in the Southern African Development Community (SADC) on climate change. The round table discussion was thus an opportunity to brainstorm and enrich the understanding on carbon tax and its likely impact on the energy sector. It would also go a long way in ensuring that all energy-related entities responded and/or had an input on the carbon tax proposal. He asked National Treasury and all other stakeholders to share their views on the carbon price proposal.

National Treasury’s view
Mr Ismail Momoniat, Deputy Director General: National Treasury, said the point of departure for the carbon tax proposal was the White Paper on Climate Change developed by the Department of Environmental Affairs, which also served as an indicator of the government’s policy position on carbon tax. Government’s proposal on carbon tax had been developed and further refined through a consultative process. A carbon tax was being considered as a strategy to change behaviour in the energy industry, and not merely to raise revenue. It would be impossible to eliminate climate change, but it could be significantly reduced, and a failure to adopt cleaner energy policies by energy companies would result in such companies being hit with higher carbon taxes in the future.  Although there was presently a lack of a globally-coordinated action on carbon emission, it was apposite for South Africa to act urgently on carbon emission, rather than to defer it to a later date. The critical issue, however, was mitigation matters, as there was likelihood that consumers would bear the brunt of a carbon tax introduction. The proposal would therefore consider the poor households, and would seek ways to protect them.  Consultations on the carbon tax proposal were still ongoing and specific issues that would be raised by stakeholders would still be considered. The ultimate intention was to come up with a response document, as well as legislation, on a carbon tax. 

Mr Cecil Morden, Chief Director, Economic and Tax Analysis: National Treasury, added that there were two types of intervention for consideration in carbon tax. These were the regulatory intervention and the market-based intervention.  They both worked in tandem in a carbon pricing system. The use of tax to reduce emissions could be approached in two different ways -- through carbon tax or remission tax. While the outcomes of both were the same in theory, they both differed in practice, especially in terms of institutional mechanisms, market structure and interventions.

Paper Manufacturers’ Association’s view
Ms Jane Molony, Executive Director: Paper Manufacturers’ Association of South Africa (PAMSA), said that the paper manufacturing sector did not think a carbon tax was the right mechanism to bring about the desired change in the energy sector. The paper manufacturing sector accounted for about 4% of manufacturing gross domestic product (GDP), 27% of agricultural GDP and 1.6% of national GDP. It was already the largest producer and user of renewable energy, avoiding the use of 1.3 milllion tonnes of fossil fuels. The cost implications of a carbon tax on the paper manufacturing sector would be in the region of R250 million per year, and this might impact negatively on an already stressed manufacturing sector, and would definitely trickle down to the rest of the economy. The paper manufacturing sector had, however, contacted the National Treasury to consider opportunities for carbon tax discretion, as well as the utilisation of the Forest Industry Carbon Assessment Tool (FICAT), a tool that allowed for consideration of manufacturing emissions, carbon storage impacts, upstream emissions, and end-of-life effects.  PAMSA believed that tree planting represented one of the best ways to tackle climate change. However, there existed at present a limit to the number of trees that could be planted, due to regulations and space constraints.  

Eskom’s view
Ms Gina Downes, Corporate Advisor on Environmental Economics: Eskom, argued that it would be inappropriate to introduce carbon tax in South Africa’s energy sector at the moment.   Carbon tax was essentially a market-based instrument and it would not be ideal to use a market-based instrument in a regulated sector. The intended objective of introducing a carbon tax might not be realised, given the nature of South Africa’s economy. The domestic action being proposed by South Africa was pre-empting international commitments by all countries, and this position might not be good for South Africa in the ongoing international negotiations and deliberations on climate change. The current situation of the electricity sector in South Africa was also worrisome, as Eskom was presently running at full capacity at all times and this was envisaged to continue for a long time. The introduction of the integrated resource plan by the National Treasury had resulted in the policy-adjusted plan of the Department of Energy.  The plan was to ensure electricity availability for the next ten years, and this was influencing Eskom’s work. Eskom was of the opinion that the carbon pricing system was already in place in the energy sector, and the introduction of a carbon tax might forestall plans to ensure electricity availability in the future.

Mr Steve Lennon, Chief Executive on Sustainability: Eskom, added that there was currently a tax in place on renewables, as 3% of the recent 8% increase in the electricity tariff had gone to renewables. There had to be a better policy alignment on climate change among government departments and parastatals.  The cost of water use in the energy sector and carbon emission was being increasingly internalised in the integrated resource plan. The premium cost under the integrated resource plan was in the region of R78 billion. However, the commitment of the Copenhagen Accord and the conditionality attached to it, was a clear indication that the global fund to assist South Africa’s power sector, as suggested in the integrated resource plan, might be difficult to access.  

Sasol’s view
Mr Norbert Behrens, General Manager on Strategy and Regional Affairs: Sasol, presented Sasol’s position on the government’s carbon tax proposal, appraising its likely effect from three perspectives -- the Department of Environment’s policy on climate change, pricing, and the timing of the proposal. He identified the Department of Environment as the foremost department on issues relating to climate change. Any policy being considered on climate change should thus be aligned with the policy the Department of Environment was pursuing on climate change, such as a carbon budget and the work currently being conducted with the technical working group on mitigation.  Introducing a carbon tax would ultimately be premature and might not necessarily be in consonance with the plan of the Department of Environment on climate change. The introduction of a carbon tax would also have an effect on energy pricing, as there were limited alternatives being currently explored to switch to lower carbon sources. In a broader policy context, the carbon tax proposal might negatively impact on energy prices in a country like South Africa that was mainly dependent on coal, and which had limited alternative sources of energy, especially renewable sources. It would therefore be ideal to give a time frame to explore other alternative energy sources before introducing a carbon tax. An introduction of carbon tax would also have a negative impact on South Africa’s international competitiveness, due to the fact that a significant proportion of South Africa’s exports were energy-intensive exports.

Business Unity South Africa view
Dr Laurraine Lotter, Convenor: Business Unity South Africa (BUSA), said that South Africa needed to answer the question of how the carbon tax proposal, or domestic instrument, would align with the forthcoming international decision on climate change.  Although National Treasury had rightly opined that South Africa needed to act on climate change, there was a need to be cautious about what the domestic policy would be, in view of the ongoing international negotiations that would not be completed earlier than 2015. BUSA had been working with the technical working group on mitigation, the Department of Environment and other relevant government departments, as well as other entities, on a comprehensive analysis of the mitigation potential of South Africa’s economy. It was therefore important to complete the work in order to have a good quantitative idea of what was feasible. It was also important to understand the socio-economic impact of the tax on the general populace. Measures to alleviate the impact of carbon tax had been outlined in the White Paper on carbon tax, but the paper had not expounded on how the measures would be implemented. The question also to ask, despite the appropriateness of a carbon tax, was the extent to which a carbon tax would result in a change in behaviour. If a carbon tax would not lead to a change in behaviour, then it might not have the desired effect and would be inappropriate.

SA Petroleum Industry Association view
Mr Anton Moldan, Environmental Advisor for the South Africa Petroleum Industry Association (SAPIA), indicated that the crude refinery sector accounted for only about 0.5% of the national green house gas emissions. The sector’s emissions were not primarily from carbon, but from fuels in the refinery, such as fuel oil and fuel gas. The sector could achieve a maximum 10% reduction in its emissions, but the cost of achieving this was extremely high and further brought into question the cost effectiveness of such an endeavour. The crude refinery sector’s regulatory cost was also increasingly high, and had been influenced by government’s regulatory decisions lately. The introduction of a carbon tax would have an adverse effect on the return on investment in the sector, as the price of products produced by the sector was currently being regulated. This could result in the discouragement of investors to sustain investment in the sector.

Energy Intensive Unit Group view
Mr Michael Rossouw, Chairman, Energy Intensive Unit Group (EIUG) reiterated the need for every stakeholder to work together on the issue of climate change.  The carbon price was being considered in South Africa due to the need to collect more revenue and to change behaviour, as well as the desire to be proactive on issues relating to climate change. Creating a carbon pricing regime which did not exist globally, however, might not augur well for South Africa, as it could contract the economy.   A carbon price levy needed to be informed by the international carbon price regime.  He also questioned the rationale for the carbon tax design, which called for the phasing out of the tax-free allowance, pegging it at five to 10 years, and advocated that the number of years for a tax-free allowance ought to be more than what was being proposed.  Also, since government in its several plans was proposing alternatives to coal -- especially renewable sources -- the introduction of a carbon price was not needed. A carbon tax would inherently not change behaviour and needed to be introduced gradually in order to minimise its adverse effect on the economy.

SA Faith Community Environment view
The South African Faith Community Environment argued that although it was right to curb the externalities associated with energy use, those who bore the cost of fossil fuel exploitation and carbon tax did not necessarily benefit from it. The White Paper on carbon tax did not have plans for mitigating the effect of the proposed carbon price on the poor. The introduction of a carbon tax would also affect not only the energy sector, but other sectors such as transport and business. The timing of the introduction of a carbon tax was also problematic. More importantly, however, there was an urgent need to address the question of how the carbon tax proposal would ensure that poor households did not bear the brunt.

Discussion
Mr L Greyling (ID) indicated that at the international level, pricing carbon was one of the best ways to mitigate climate change, but there was the need for an international agreement on how to price carbon. To an extent, there was also a carbon tax in force in the electricity sector. If the carbon tax proposal was adopted, however, then it would be apposite to ensure that the electricity tariff did not increase, as this would be a way to mitigate the effect of a carbon tax on the economy. It was important that South Africa solicited financial and technological support from the international community in order to achieve South Africa’s goal on climate change. There was also a mechanism put in place by the international community to help fund the incremental cost of countries’ renewable programmes, and some European countries had already accessed this fund. This fund was also available for developing countries, but the National Treasury did not have the appropriate funding model to be able to access these funds.  It was thus important to ask the National Treasury what it was doing in order to access them.

Mr Momoniat argued that it was important to have a long-term perspective on climate change, and a failure to act immediately could be costly for South Africa. A decision by South Africa to defer its actions could consequently lead to job losses in the long run. It was unfortunate that the Department of Environmental Affairs was not present in the discussion, as it would have been good to have heard their perspective and the Department would also have helped to clarify the policy position the government was putting forward.  The various entities opposing carbon tax in the round table discussion were not proposing alternatives. It was important to consider the alternatives the nation had, apart from a carbon tax, as it would be inappropriate to do nothing.  A carbon tax was merely a means to an end, and the emphasis should be on the outcomes of having a carbon tax. The intention with the carbon tax proposal was to come in very low and to eventually step it up. The challenges were going to be significant and the solution would not be straightforward, but it was expedient to act on emission and climate change.

University of Cape Town Energy Research Centre view
Professor Harald Winkler, Director of the Energy Research Centre: University of Cape Town, commended the agreement among stakeholders on the need to reduce carbon emissions.  He emphasised, however, that no single instrument or sector could do it all.  Pricing was an important issue and the Energy Research Centre’s analysis pointed to the fact that the proposed carbon tax rate -- which was in the region of R12 to R48 -- was not enough to transform the energy sector. The minimum threshold would be to apply R120 to 40% of emissions, and this would have a bigger marginal effect on the sector. It was also important to distinguish between economic instruments at the domestic level and at the international level. Domestically, the centre’s analysis revealed that a carbon tax would be an effective instrument, albeit not a sole instrument, to modify behaviour. The mechanism for the provision of credits at the international level should also be explored by South Africa. Poor households could also be catered for under the carbon pricing policy by using instruments such as Free Basic Energy and direct transfers to households, which had proven effective in Brazil. It was important to have a carbon price and mitigation programme, and this must be duly taken into consideration in budget proposals. The answer to the critical question of the other alternatives to carbon pricing would need to take cognisance of the issue of the electricity price to consumers. Overall, there should be a clear indication of where carbon pricing and emission trajectory would go in the long term, as this information would be extremely important to investors.

Mr Andrew Marquard, Senior Researcher at the Energy Research Centre, highlighted the importance of developing institutional structures to deal with climate change issues.  Experiences from around the world suggested that the development of institutional mechanisms and designs took about five to seven years. It was not entirely true that South Africa was taking the lead on carbon emission reduction among developing countries, as activities from some developing countries were widespread. It was also important that South Africa acted speedily on carbon emission in order to strengthen its legitimacy and position in the ongoing international negotiations on climate change. Globally, carbon tax had been widely recognised as an economic rationale to increase the allocative efficiency of the economy. The way in which measures on carbon pricing would be implemented, and what other measures would be implemented with them, would go a long way in determining the success of carbon pricing.  Regulation of carbon tax was also important, and it was not presently clear how a carbon tax would translate across the value chain and what its effect would be on consumers. The cost of regulation would also be significant in ensuring the efficiency of the regulation.
Discussion

Ms Downes reiterated that there was something already in place in terms of a tax in the electricity sector that went to renewables, and the proposed carbon tax, contrary to some opinions, was not a low tax.

Mr Lennon argued that the models used in the development of the carbon tax proposal did not have the level of sophistication needed to identify holistically what the impacts were going to be.

Dr Lotter indicated that the carbon tax was not a low starting point, but was significantly high. However, there was no need to rely on alternatives to the carbon tax proposal.  An organisation that reduced its emission to the required level would not pay tax, and a carbon tax would come into effect only with a failure to meet the specified target. The Mitigation Plan of the Department of Environmental Affairs and the Energy Management Plan of the Department of Energy were two instruments that were not in direct alignment with the carbon tax proposal of the National Treasury. These two instruments needed to be linked, together with carbon tax proposal.

Mr Shaun Nel, an executive at the Energy Intensive Users Group, questioned the level of inter-departmental coherence in government, noting that there was a high level of non-alignment in South Africa’s numerous plans of action on climate change.

Mr Rossouw asked if the country could afford the lower tax, considering the fact that companies and organisations were already taking their businesses out of the country. He further asked why a nation like South Africa, which emitted about 1% of carbon, could not be a fast follower rather than a leader on carbon pricing.

Mr Kevin Morgan, of the Energy Intensive Group, asked how the government’s plan on revenue recycling would be actualised.

Mr D Ross (DA) noted that there was a need for a broader perspective if carbon tax were to be introduced. South Africa’s economy was not growing, and as such it was expedient to comprehend fully the impact of a carbon tax on the economy.

Mr Momoniat stated that there was alignment among government departments on the carbon tax issue. All the relevant departments were in support of the implementation of a carbon tax, and the Mitigation Plan and the Energy Management Plan should be seen as complementary to the carbon tax plan. There was quite a lot of coordination and coherence among departments on climate change, although it might not necessarily be complete coherence. There were two plans that addressed the mitigation of the effect of carbon tax on the poor, and the National Treasury would be willing to consider other proposals.

The Chairperson, in his summary of proceedings, highlighted the importance of striking a balance between process and content with the intention of getting an optimal outcome. The Committee had a role to play in ensuring the achievement of the desired balance and outcome, and would be working on achieving this with all relevant stakeholders. The quality of the process would bring trade-offs, as it was impossible to agree on everything.  However, there had to be a common understanding, and agreement on the need to act on climate change was noteworthy. There was a need to work intensively and also to put a time frame on what the Committee and government intended to achieve on carbon pricing. The Committee would organise another discussion on carbon tax in the near future, and it was imperative that all relevant government departments and parastatals, as well as other stakeholders, should be in attendance.

The meeting was adjourned.
 

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