Carbon Tax Bill: Treasury response to submissions

Meeting report

Opening remarks by the Chairperson

Co-Chairperson Carrim said that climate change represented the greatest risk and threat to humankind. Currently, there was an electricity levy of 3.5 cents per kilowatt-hour, but before the levies, there had been tax incentives for good performance to encourage businesses to shift to cleaner sources of energy. He said that Phase I of the Carbon Bill would last between three and four years and an assessment of the instruments would be undertaken before Phase II commenced. Proposals and comments from industry, particularly on carbon tax pass-throughs, had been received, and the Department was evaluating the proposals in line with South Africa’s international obligations, such as the Paris Agreement.

As Finance Committee Chairperson, he would deal with the process issues, while the Environmental Committee Chairperson, Mr Mapulane would deal with policy issues. It was unfortunate that in public hearings, it was the non-governmental organisations (NGOs) and big businesses that turned up and their views were carried forward, instead of the ordinary citizen. The various stakeholders present that would address the Committee should state whether or not they believed in climate change.

National Treasury briefing on draft Carbon Tax Bill 2017

Mr Ismail Momoniat, Head: Tax and Financial Sector Policy, National Treasury (NT), briefed the Members on the draft Carbon Tax Bill. The initial draft Carbon Tax bill had been published for public comment in November 2015 following Cabinet approval in Oct 2015. Cabinet had adopted the second draft Carbon Tax Bill and approved the submission of the draft bill to Parliament on 16 August 2017, noting the carbon tax as an integral part of the system for implementing government policy on climate change.

The National Treasury had published the second draft Carbon Tax Bill in December 2017 for public comment, introduction in Parliament, and convening of public hearings by Parliament in early 2018. The closing date for public comments on the Bill was 9 March 2018 and 59 written comments had been submitted to the NT.

National Treasury had then briefed the Standing Committee on Finance and the Portfolio Committee on Environmental Affairs in February 2018, followed by public hearings, which were held on 13 March.

The policies reflected in the 2017 draft Carbon Tax Bill were a refinement of the 2013 Carbon Tax Policy Paper and the initial 2015 draft Bill. Because of this, many of the public comments on those earlier documents had been incorporated into the 2017 version of the draft Bill.

The draft Bill was published before the 2018 Budget and did not state the date of implementation. The Budget 2018 announcement, however, stated that implementation would be from 1 January 2019. The absence of a Bill would mean no implementation date, but having the Bill enabled the Minister to announce a date, which still needed Parliamentary approval.

Given that the processes for the Bill were likely to be completed towards the end of the year, the government would have to consider moving the date of implementation a bit later, but not too late, given Treasury’s “Nationally Determined Contribution” (NDC) commitments, and the period of implementation for Phase I was before Phase II kicked off. The Minister would probably update the date of implementation when introducing the Bill, or at the next Budget.

Dr Reshma Sheoraj, Director: National Treasury, in charge of developing policy frameworks for capital markets, insurers and asset managers, said that electricity pricing and the electricity levy had been among the policy changes on the carbon tax between 2013 and 2017. The carbon tax, taken with the electricity levy, would be revenue neutral in the first phase and have no impact on the price of electricity. Another change was in the tax rates and thresholds for Phases I and II of the carbon tax. To provide policy certainty, Section 5 of the Bill had been amended to specify the annual increase in the nominal carbon tax rate by a maximum of inflation plus 2%.

The system would be introduced in two phases. Phase one (2016-2020) would be voluntary, as there was no legal basis to set emission limits for sectors or companies. Phase two and subsequent phases (post-2020 period) would become mandatory only when climate change response legislation was in place.

Alignment of the carbon tax policy with the carbon budgeting system of the DEA:

• Phase 1: Introduction of the 5% carbon budget allowance in 2014.
• Phase 2: DEA and NT working on the alignment and integration of the carbon tax and carbon budget instruments for phase 2, and no double penalty.

An integrated review process to assess both instruments would be conducted after three years of implementation of the carbon tax.

In 2015, Cabinet had approved South Africa’s climate change mitigation system framework. The system included the following key elements:

• Greenhouse gas inventory;
• Mitigation potential analysis;
• National emissions trajectory;
• A carbon budget for each company;
• Pollution prevention plans by companies with carbon budgets;
• Desired emissions reduction outcomes for key economic sectors;
• A reporting system, to gather information on the actual emissions of users; and
• A variety of other measures to be applied to support and/or complement the carbon budget system including a carbon tax.

A carbon tax modelling study -- modelling of the current design undertaken through the World Bank (WB) in 2016, and the socio-economic impact of the carbon tax -- showed a significant impact on reducing the country's emissions, without a significant impact on growth (negative 0.05-0.15%). The trade exposure allowance was adjusted from a company to a sector-based trade exposure allowance. Additionally, a carbon tax pass-through was allowed for regulated sectors like the liquid fuels sector. The process and fugitive emissions had the provision of a 10% additional tax-free allowance. The scope of the offset allowance had been expanded, such as the inclusion of certain renewable energy projects as well as sequestration (a deduction for sequestered emissions e.g. from forestry plantations). Thresholds were applied, thereby aligning the reporting and classification of greenhouse gas emissions for tax purposes ,with mandatory emissions reporting to the Department of Environmental Affairs. Only emissions above the thresholds for reporting were subject to the tax (2014). 

The main comments received on the 2017 Draft Carbon Tax Bill focused on these main areas:

• Carbon tax rate was too low.
• Carbon tax modelling and socio-economic impact.
• Long-term certainty and timing of the introduction of the tax.
• Policy alignment with the carbon budgets.
• Energy efficiency savings tax incentive extension.
• Taxation of domestic aviation fuels -- alignment with global mechanisms.
• Use of the Customs and Excise Act and payment of the tax.

Some stakeholders viewed the carbon tax as a critical tool in South Africa's climate change toolbox, which was necessary to meet both international obligations and address local constitutional and developmental requirements. The draft Carbon Tax Bill was commended as a landmark piece of legislation to guide future efforts, and the carbon tax was viewed as a critical tool for pricing greenhouse gas (GHG) emissions as a key element of the national mitigation strategy. 

In addition, it was argued that a lower level of economic growth did not obviate the need for a carbon tax to incentivise further reductions in overall carbon dioxide emissions. Other stakeholders suggested that GHG emissions were below the national benchmark trajectory and unlikely to increase above that level before 2025. A carbon tax was thus not required for South Africa to achieve its NDC before 2025.

The annual GHG emissions for South Africa -- fuel combustion only -- has been increasing in absolute terms between 1990 and 2015. World annual GHG emissions had similarly increased during this period. However, in relative terms, South Africa's annual GHG emission had increased at a faster rate than the world average -- 2.3% per year against the world average of 1.8% per year.

The annual GHG emissions are sensitive to the business cycle. This had been clearly observed during the world recession in 2008/09 and the slower economic growth experienced by South Africa between 2008 and 2011, also in 1998/99 and again in 2015. South Africa's most recent slowdown in the absolute levels of GHG emissions was expected to reverse as soon as economic growth recovered. It would therefore be irresponsible to say South Africa must do nothing and wait until growth recovered before action was taken. Given the inaction to date, and the relatively high growth in South Africa’s GHG emissions, the need for pre-emptive action was now more urgent than ever before.

Ms Jeannine Bednar-Giyose, Director: Fiscal and Intergovernmental Legislation, NT, said in response to a stakeholder comment that the Treasury contended that the mandatory carbon budgets’ regime would be introduced in a way that was fully aligned with the carbon tax, and designed to ensure no double penalty. In other words, the carbon tax could apply to emissions above the carbon budget approved by the DEA. An integrated review process to assess both instruments would be done after three years of implementation of the carbon tax, and would inform any significant changes in the tax rate and the implementation of the carbon budgets.

On the comments on Energy Efficiency Savings (EES), the National Treasury would consider extending the duration of the EES incentive and aligning the incentive with the first phase of the carbon tax. A review of the EES tax incentive would also be undertaken in collaboration with the Department of Energy (DoE) and the South African National Energy Development Institute (SANEDI). Initial analysis, however, suggested that the monetary value or subsidy for energy efficiency investments was about R3 billion. This measure had been specifically introduced as one of the options for potential revenue recycling, even though the carbon tax had not yet been introduced.

Following the stakeholder consultations on the initial 2015 draft Bill, NT had engaged the aviation sector and agreed to consider the options to ensure that the carbon tax regime for domestic aviation should be aligned with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) approach and principles. In November 2017, the National Treasury had developed a proposal for the taxation of domestic aviation, and had consulted with the Departments of Transport and Environmental Affairs, and the Civil Aviation Authority. Consequently, the overall tax-free threshold for domestic aviation would be increased from 90% to 95% by adjusting the carbon offset and performance allowances for the sector. This would be in line with the CORSIA basket of measures.

Further consideration would be given to the request for one annual carbon tax payment. Under such a proposal, the tax period and accounting period would run from 1 January to 31 December. The account for that year, together with the payment of the carbon tax liability, would then be due by 30 June of the following year, as the DEA would have verified the declared emissions only by May of the following year.

Stakeholder inputs

First stakeholder: Non-governmental organisation (NGO)

A stakeholder representing a local NGO told the Committees that they had engaged broadly on the economic model and had regularised the matter of recycling in the Bill for three years, and that whenever there was a company that was carbon intensive, the companies understood the need to pay a carbon tax. They contended, however, that that should not be done overnight as it would negatively hamper international investments into South Africa’s economy. The NGO had looked at Treasury’s data and did not see how it was possible for it to have a different conclusion from theirs. She summarised by saying, “we simply do not agree with Treasury”.

Co-Chairperson Mapulane queried this view, and asked for the specific names of international companies that would reduce their investments.

The NGO’s representative responded that she could not recall the exact names of the companies, but would be willing to provide a comprehensive list at a future date. She added that South Africa was the only country in the world that wanted to impose a carbon budget, which was essentially a cap, as well as a carbon tax on companies. Other countries that had both measures never imposed both of them at once, or on a single company. They imposed only one of the measures at a time. She contended that there was a duplication of taxation, and gave the example of the tax on liquid fuels while also taxing the vehicles themselves, which constituted double taxation. She summarised that they were, however, working with the National Treasury and the South African Revenue Service (SARS) to reach a practical solution.

Co-Chairperson Carrim commented that the NT was under-resourced to deal with all the matters that required input, such as the eight Bills pending in the hands of the Finance Committee.

Second stakeholder: University Professor

Prof Phillip Lloyd, Energy Institute, Cape Peninsula University of Technology, said he had extensively studied climate change over many years. He informed the Members that the Paris Accord was being ignored and not adhered to globally. He wondered whether South Africa “should be the only one obeying, while others like China are not?” The world was not going with the Paris Agreement, and nations were pulling out. 

From his own extensive research and study, “the evidence suggests that the influence of climate change is not as severe as people are saying.”

Third stakeholder: Congress of South African Trade Unions (COSATU)

Mr Matthew Parks, Parliamentary Coordinator, COSATU, agreed that climate change was a crisis. COSATU, however, wanted to hear about a jobs plan from the Government on the green economy.

They encouraged the State to plan proactively, especially because there were opportunities to reap from the plans by Europe to implement the Paris Accord strictly.

They were nonetheless aware of the fact that the government had a great appetite for taxes, and were worried because there was no transition plan in place. He made the comment that “Government sleeps until there is a crisis.” 

Fourth stakeholder: World Wide Fund for Nature (WWF)

WWF supported a carbon tax as one tool needed for the necessary and just transition to a low-carbon economy. They had made the case for such a transition elsewhere and to Parliament, including the trade implications for South Africa of the global low-carbon shift, and the social costs of fossil fuels and climate change impacts already being paid, largely by the poor.

They asked Members of the relevant Committees to ensure implementation of the tax met the Minister's 2019 deadline, and to make the tax stronger, so that it could be effective for the purpose it was intended to serve.

They tabled three points for their consideration:

• The tax rate was too low to be effective for its purpose of re-orientating the whole economy;
• The allowances reduced the tax to a token;
• Increases allowed for in the draft Bill did not address the problem.

They felt that there was a need to set the country’s carbon tax rate at levels comparable to export partners, to maintain competitiveness in the face of border adjustment taxes or other measures they might take against carbon-intensive imports.

They were of the view that efficient carbon-price trajectories began with a strong price signal in the present, and a credible commitment to maintain prices high enough in the future to deliver the required changes. What should not be forgotten in the push-back on the tax rate and on timing by special interest businesses, was that an effective carbon tax was an incentive for the emergence of lower-carbon businesses, which was where the opportunities for job creation and economic development lay, not in industries increasingly facing market downturns and stranded assets.

Calculations done by WWF using data in the public domain showed that the impact of tax at R120/ton, less allowances, on the revenue of the top 20 listed highest emitters was small. The sooner the transition started, the better the position of the economy for the coming low-carbon shifts, and it would buffer workers and the poor against these shifts and deleterious climate change impacts.

They summarised their point to be that they supported the carbon tax, even though it was too low, felt its implementation should not be delayed any further, and believed it would incentivise positive change with the increased emergence of green businesses and increased sustainable job opportunities.

Fifth stakeholder: Metal SA company

The National Treasury had singled out the cement, iron and steel sectors as the severely affected sectors. Despite the exceptions, profits would still be eroded and the measures being taken were not enough.

Sixth stakeholder: Eskom

Eskom thanked the National Treasury for always considering their input, even though they did not always address their concerns in the manner they would have liked. Eskom had projected a 34% decline in GHG emissions by 2020.

They were of the view that the tax was a good financial instrument to get South Africa on the right path, particularly on electricity tariffs. They added that climate budgets and taxes worked very well together, and there was currently no overlap in the timeframes of their implementation.

Discussion

Mr Dino Lazaridis, Senior Economist: Financial Sector Policy Unit, National Treasury, responded to the various stakeholder inputs by saying that the Bill would obviously not provide all the information requested, and there would likely be no agreement with all stakeholders on the tax, particularly those who did not even believe in climate change. They had said that ESKOM should conduct itself in line with government policy. They had added that the country was running against the clock in applying the Paris Agreement, but was ahead of schedule in some of the aspects. On the alignment of carbon budgets and carbon tax, a study had been conducted and had concluded that in principle, the alignment was best when the tax was applied above the levels of the mandatory approved budget on companies.

The Department of Environmental Affairs delegation, in its response, stated that it was aligned and agreed with the National Treasury. They nonetheless disagreed that countries were beginning to align themselves against the Paris Accord, and that the opposite was true. On China, it ranked above South Africa in terms of reaching its targets, and therefore South Africa needed to increase its efforts and be more ambitious.

Ms G Ngwenya (DA) said there were concerns about the socio-economic impacts of the Bill, and that a holistic set of criteria needed to be factored in, not just emission levels. There were many “big ifs” for the country’s economy, so more studies and modelling needed to be performed. Emphasis needed to be placed on sectoral analysis, and there were strong arguments on both sides, so decisions should not just be technical, but also political. She called for a genuine review of the policies and international obligations, which would need to be reflective of the country’s current low growth path. It was concerning when the National Treasury said there would be no negative impact on electricity prices, but ESKOM stated the opposite view.

Ms T Tobias (ANC) said they had expected the NGOs to say something different from the previous engagement with the Committee, but that there had been nothing new. She gave an example of her time as Chairperson of the Defence Committee, when there had been an argument at the time to ban on cluster ammunition, even though the United States was not doing the same. She said South Africa should be the example for other countries to follow, and that even though the United States was pulling out of the Paris agreement, South Africa should implement it fully. The debate was not whether to have a tax, because that had already been settled on -- the debate should be what the level of the tax should be, and the amounts.

Mr S Makhubele (ANC) said that South Africa was resolute on its climate obligations, and there was not much debate on whether or not to have a carbon tax. He asked whether the policy gaps had been identified so that once the Bill had been enacted, those gaps could be closed.

Co-Chairperson Mapulane suggested a workshop with all the stakeholders to iron out the teething issues.

Mr Alf Willis, Deputy Director General: Environmental Advisory Services, DEA, said that the NDC of the Paris agreement stipulated that the measures were country-specific, and were determined only by the individual countries themselves. In five-year cycles of actions, the level of ambition was to be increased over time. Any modelling depended on the assumptions applied to it. The targets were determined nationally, and no one was forcing them upon any country. The longer the delay in taking action, the harder it would be to remedy the problems. The incentives in the Integrated Resource Plan (IRP) were not primarily targeted at businesses, but rather on the economy.

The Chairperson of the Environmental Committee said that the future was doomed for coal, because the cost of production would be higher than for other alternative energy sources. He added that there was a need to reduce carbon emissions and that the Government had developed minimum emission standards which required industries to adjust to. He added that rolling postponement had been created on air quality, exempting compliance for a period.

The Chairperson of the Finance Committee told the stakeholders that every line and sentence in their submissions had been read, and that the two Chairpersons would confer on the best date for the proposed workshop. He requested NT to table information on job losses, the potential job creation, and comments from the various trade unions. He maintained that the Bill would not be voted upon until that report was tabled.

The Treasury officials responded that consultations were still ongoing, but that judgment calls had already been made on the big issue items. On the issue of trade unions, a task team had already been set up

The meeting was adjourned.