Carbon Tax Bill: Treasury & stakeholder input

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Finance Standing Committee

04 December 2018
Chairperson: Mr Y Carrim and Mr M Mapulane (ANC)
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Meeting Summary

The Standing Committee on Finance together with the Portfolio Committee on Environmental Affairs met with National Treasury and NEDLAC for discussions on the Carbon Tax Bill. COSATU and the Association of Cementitious Material Producers (ACMP) gave brief inputs.

NEDLAC said during a previous parliamentary hearing on the response document to the Bill, the need to assess the impact of the carbon tax on jobs was recognised. The Joint Committee subsequently requested NEDLAC to engage on information tabled by Business, Labour and Government in relation to potential jobs losses that could result from the introduction of the carbon tax bill and submit a report to the Joint Committee on the jobs mitigation and creation plans. The task team on Carbon Tax Bill–Jobs Mitigation Plan was established and had eight meetings. In developing job loss mitigation plans the task team considered a range of approaches and ultimately agreed that a National Jobs Resilience Plan should be developed through collaboration of all social partners, covering the sectors where job loss was likely and those where adaptation to climate change and new lower carbon activities could in fact contribute to the creation of new jobs. The development of the plan would be undertaken as part of the implementation of the Just Transition agreed to in the Presidential Jobs Summit agreement. The task team considered a variety of presentations by Government, Business, and Labour constituencies. On the cross-cutting proposals for funding of the proposed jobs mitigation and creation plan, the Climate Change Flagship Programme team, in collaboration with the relevant lead partners, was actively developing funding proposals to the Green Climate Fund (GCF). The GCF was designated as an operating entity of the Financial Mechanism of the United Nations Framework Convention on Climate Change (UNFCCC) at COP17 in Durban. The Climate Change Flagship Programmes currently constitute the vast majority of South Africa’s GCF country programme. The current expanded set of Climate Change Flagship Programmes forms the foundation for South Africa’s Green Climate Fund Strategic Framework developed to enable a coherent engagement with the GCF and to ensure alignment with South Africa’s climate change response priorities. The Framework was presented to MINTEC and MINMEC in 2016 and 2017. On cross cutting proposals in research, development and technology innovation, South Africa is gearing towards a low carbon future. This requires innovation which requires a strong science base and an enabling environment for SMMEs to flourish (cooperative governance).High level skills will unlock innovations and technologies that will allow South Africa to catch up and even surpass the developed world. To innovate for an uncertain future will require a systems approach to developing innovation policy. There is a need for an institutional change where nexus thinking leads to innovative partnerships which in turn will lead to nexus solutions.

National Treasury highlighted the main changes to the Carbon Tax Bill following submissions and hearings. Outstanding issues related to: alignment of the carbon budget and carbon tax; taxation of liquid fuels, domestic aviation; and waste related activities. On progress in developing a Jobs Mitigation and Creation Plan at NEDLAC, an initial progress report on the work of the task team was submitted to the Standing Committee on Finance on 14 August 2018. Proposals for the Jobs Mitigation and Creation plans were presented by the government, business and labour constituencies to the task team on 16 October 2018. Government made proposals to facilitate collaborative efforts between departments of Environmental Affairs, Energy, Transport, Labour, Science and Technology. Initiatives would be targeted to the energy, building, waste, water, biodiversity and transport sectors as well as crosscutting proposals for jobs reskilling and opportunities to tap into research, development and technology innovation; research partnerships and support. Constituencies agreed that the report would include the combined proposals for a jobs plan and the process of developing the plan would take place as part of the implementation of the Presidential Jobs Summit Agreement which already includes agreement on the need for a Just Transition. The National Treasury has initiated a review process through the World Bank Partnership for Market Readiness initiative to ensure that the proposed benchmarks methodologies and benchmark values are robust. Following the evaluation, the benchmark values will be published by way of Regulation. Trade exposure allowance regulations will also be published shortly for public comment and finalisation.

COSATU called for a Just Transition that would protect vulnerable jobs and create new jobs, both from government and industry. There had not been any meaningful participation by some departments at NEDLAC. It was as if the economic cluster in government was just going through the motions- they were completely missing in action. COSATU would keep pushing and supported the Committee’s recommendation that there be a report after every six months from government.

ACMP spoke about trade exposure as affecting the cement sector. The sector was very trade exposed and there has been an increase of 50 to 60% in cement imports from China and Pakistan over the last year. This imported cement, in many instances, is sold below the cost price of most local facilities. Following passage of the Carbon Tax Bill, the cement sector would be more vulnerable and some ACMP members had already confirmed that they would have to close some of their facilities in rural areas due to viability challenges owing to trade exposure and the tax burden.

Members said there were no disagreements about the need to reduce emissions and curtail climate change. However, the DA’s concerns arose from a succinct list of areas as follows: market-based solutions had not been exhausted in an effort to curb emissions despite evidence of a number of industrial players who had already cut down dramatically on emissions, and there being room for further cuts; questions about ring-fencing as the funds from the carbon tax could be best dedicated to addressing environmental challenges. These concerns were not on the basis of denying the reality of climate change. The Co-Chairperson said the Carbon Tax Bill could not be discussed endlessly. There had to be a cut-off for discussions as the Standing Committee on Finance would have to finalise five Bills by mid-February 2019. The Committee would have to vote on the Bill early February next year. He asked COSATU to furnish the Committee with a summary document highlighting its concerns about the NEDLAC process. These would be considered for inclusion in the Committee report to be produced early February.

Meeting report

PMG came in 20 minutes into the meeting.

NEDLAC presentation
Mr Madoda Vilakazi, Executive Director, NEDLAC, said during the parliamentary hearing on the response document to the Bill, the need to assess the impact of the carbon tax on jobs was recognised. The Joint Meeting of the Standing Committee on Finance and the Portfolio Committee on Environmental Affairs subsequently requested NEDLAC to engage on information tabled by Business, Labour and Government in relation to potential jobs losses that could result from the introduction of the carbon tax bill and submit a report to the Joint Committee on the jobs mitigation and creation plans. The task team on Carbon Tax Bill–Jobs Mitigation Plan was established and had eight meetings. In developing job loss mitigation plans the task team considered a range of approaches and ultimately agreed that a National Jobs Resilience Plan should be developed through collaboration of all social partners, covering the sectors where job loss was likely and those where adaptation to climate change and new lower carbon activities could in fact contribute to the creation of new jobs. The development of the plan would be undertaken as part of the implementation of the Just Transition agreed to in the Presidential Jobs Summit agreement. The task team considered a variety of presentations by Government, Business, and Labour constituencies.

Mr Vuyisa Tafa, Coordinator: Public Finance and Monetary Chamber, NEDLAC, took the Committee through the cross-cutting proposals for funding of the proposed jobs mitigation and creation plan. The Climate Change Flagship Programme team, in collaboration with the relevant lead partners, was actively developing funding proposals to the Green Climate Fund (GCF). The GCF was designated as an operating entity of the Financial Mechanism of the United Nations Framework Convention on Climate Change (UNFCCC) at COP17 in Durban. The Climate Change Flagship Programmes currently constitutes the vast majority of South Africa’s GCF country programme. The current expanded set of Climate Change Flagship Programmes forms the foundation for South Africa’s Green Climate Fund Strategic Framework developed to enable a coherent engagement with the GCF and to ensure alignment with South Africa’s climate change response priorities. The Framework was presented to MINTEC and MINMEC in 2016 and 2017. On cross cutting proposals in research, development and technology innovation, South Africa is gearing towards a low carbon future. This requires innovation which requires a strong science base and an enabling environment for SMMEs to flourish (cooperative governance). High level skills will unlock innovations and technologies that will allow South Africa to catch up and even surpass the developed world. To innovate for an uncertain future will require a systems approach to developing innovation policy. There is a need for an institutional change where nexus thinking leads to innovative partnerships which in turn will lead to nexus solutions.

There were areas of disagreement during the aforesaid negotiations. Business raised concerns about limitations of the Socio-Economic Impact Assessment (SEIAS) for the Carbon Tax Bill and the World Bank Study. High-level breakdown of some of the limitations include: it models only the carbon tax; does not include other climate change instruments or other government policies; the final design of the carbon tax is not the same as modelled and all elements of the carbon tax design could not be modelled (some of the allowances); none of the revenue-recycling models used were or are considered in the final design, for example there has been an increase in VAT where a decrease was modelled; concludes only slight impacts on production and/or export of affected sectors, but does not consider that these industries are already stressed, for example iron and steel; GDP used is much higher than actual figures; a “modest” impact on GDP, household consumption and employment on an already low base is already too high an impact for a surpassed economy with over 27% unemployment. Business was of the view that the potential for job losses would be higher than reflected in these reports. Business requested that additional modelling analysis be undertaken to assess the impacts of the carbon tax. On the other hand, government was of the view that the purpose of the task team was to engage on jobs mitigation and creation plans and was concerned that the proposal was outside the scope of the work of the task team and that several carbon tax modelling studies have already been undertaken. Government was of the view that business was free to undertake the study to inform its proposals for the jobs mitigation and creation plan. Several carbon tax modelling studies have been undertaken to date, by the National Treasury (Economic Policy Unit), local academics and international institutions such as the World Bank. The broad findings from these Computable General Equilibrium models show that a carbon tax will make a significant contribution to the reduction of GHG emissions and that the economic impact of the carbon tax will depend on how the revenues used, i.e. the revenue recycling measures. The results of these studies provide a reasonable understanding of environmental and economic impacts of a carbon tax and helped with the decision making process. The potential adverse impacts of the carbon tax are likely to be overestimated in the study due to the inability to model certain tax-free allowances such as the offsets, performance and trade exposure allowances, while the benefits of reducing emissions including reduced costs of adapting to the impacts of climate change and health co-benefits were not quantified and included in the model.

Business further indicated that the current state of the economy is an important consideration in the decision to implement a new tax, particularly one that will affect every sector of the economy. The importance of this factor was recognised by National Treasury in its media statement on the publication of the Carbon Tax Bill for public comment, in that the decision on the timing of the imposition of the tax would consider the state of the economy at the time. Unemployment was at an all-time high and any intervention which could exacerbate this situation deserves very careful consideration. On the other hand, Government was of the view that the phased approach to the introduction of the tax, which has already been delayed and the recent postponement from 1 January 2019 to 1 June 2019 with the first phase extending from 2019 to 2022, provides sufficient flexibility to businesses to transition their activities and business models. The introduction of the tax at a relatively modest rate and the additional significant tax free allowances ranging from 60 to 95 %, commitment to electricity price neutrality and channelling some of the revenues from the tax towards the energy efficiency savings tax incentive will help to cushion households and businesses, especially energy intensive sectors such as iron and steel and mining from potential adverse impacts over the short term. The carbon tax seeks to give effect to the polluter pays principle, and price the externalities as a result of climate change. These costs are currently being incurred by society, whether it is other businesses or individuals who will have to adapt to the impacts of climate change, which in turn will also have an adverse impact on economic growth.

Lastly, Government noted the sector interventions and the minimal impacts on jobs in sectors over the short term up to 2022 due to the current tax design including the tax free allowances. However, it expressed concern that some of the assumptions regarding the design of the carbon tax beyond the first phase such as the removal of allowances and concessions, and the limited consideration of mitigation opportunities in the sector interventions are likely to overstate the impacts of the carbon tax over the medium to long term. It is important to note that the carbon tax will be subject to a review after three years of implementation, which will take into account the impacts of the tax on reducing emissions, and will help to inform future changes to the tax rate and tax free allowances.

National Treasury presentation
Ms Sharlin Hemraj, Director & Senior Economist, National Treasury, highlighted the main changes to the Carbon Tax Bill following submissions and hearings. Outstanding issues related to: alignment of the carbon budget and carbon tax; taxation of liquid fuels, domestic aviation; and waste related activities. The changes were as follows:

Clause 6: Calculation of the carbon tax payable
On 6(1) –deduction in formula for sequestered emissions and petrol and diesel related emissions. The formula was changed to reflect the tax-free allowances provided for the liquid fuels sector i.e. petrol and diesel emissions.

Clause 7- Allowance for fossil fuel combustion
Basic tax free allowance for fossil fuel combustion was set at 60 percent –read with Schedule 2 which specifies the allowances per activity.
Clause 11: Performance allowance
Performance allowance has been set up to a maximum of 5 percent. The changes would refer to “measures” not “additional measures”.

Clause 12: Carbon budget allowance
Carbon budget allowance of 5 per cent from taxpayers that participate in the voluntary carbon budget system of the Department of Environmental Affairs.
Schedule 2: List of activities, applicable thresholds and allowances
Domestic Aviation: amendment in activity to specify domestic aviation (activity 1A3a) and adjustment in allowances from 90 to 95 per cent with basic tax-free allowance increased from 60 to 75%; trade exposure allowance from 10 to 0 %.
Other Transport: The basic tax-free allowances for transportation were changed to allow for administrative ease of implementation. For activity 1A3 (b-e), the basic tax-free allowance was changed from 60 to 75%; trade exposure allowance from 10 to 0 % and performance allowance was changed from 5 to 0%.
Waste activities: basic tax-free allowances for waste incineration was changed to allow for alignment in the tax treatment of energy generation (including heat and electricity recovery from waste).

NEDLAC process
On progress in developing a Jobs Mitigation and Creation Plan at NEDLAC, an initial progress report on the work of the task team was submitted to the Standing Committee on Finance on 14 August 2018. Proposals for the Jobs Mitigation and Creation plans were presented by the government, business and labour constituencies to the task team on 16 October 2018. Government made proposals to facilitate collaborative efforts between departments of Environmental Affairs, Energy, Transport, Labour, Science and Technology. Initiatives would be targeted to the energy, building, waste, water, biodiversity and transport sectors as well as crosscutting proposals for jobs re-skilling and opportunities to tap into research, development and technology innovation; research partnerships and support. Constituencies agreed that the report would include the combined proposals for a jobs plan and the process of developing the plan would take place as part of the implementation of the Presidential Jobs Summit Agreement which already includes agreement on the need for a Just Transition.
 
The South African Revenue Service (SARS) would engage industry to help inform the drafting of the rules. The modification of the National Atmospheric Emissions Inventory System (NAEIS) system to enable reporting of ghg emissions has commenced under the Partnership for Market Readiness. SARS, the Department of Environmental Affairs and National Treasury are working closely to ensure that the systems are aligned with regular meetings and workshops being held. Industry will be consulted during the 2nd quarter of 2019 on the design of the system, practicality and possible pilot reporting phase. On the review of carbon tax, National Treasury will undertake a review of the carbon tax after three years of implementation. This will take into account and include the following: assessment of the impact of the tax in helping with mitigation of emissions and its contribution to commitments under the Paris Agreement; appropriateness of the rate of the carbon tax and the tax free thresholds- this will include further modelling analysis; alignment with other mitigation instruments including the carbon budget; inclusion of the Agriculture, Forestry and Other Land Use (AFOLU) and waste sectors within the tax net; and review the interaction between the carbon tax, electricity levy and the renewable energy premium. National Treasury has initiated a review process through the World Bank Partnership for Market Readiness initiative to ensure that the proposed benchmarks methodologies and benchmark values are robust. Following the evaluation, the benchmark values will be published by way of Regulation. Trade exposure allowance regulations will also be published shortly for public comment and finalisation.

Discussion
Mr Carrim appreciated the presentation and asked for confirmation from the Committee Advisor that the changes to the Bill as highlighted by National Treasury were consistent with the policy positions articulated by Members during the draft process. Was there anything substantially new that the Committee needed to be alerted to?

Dr Zakhele Hlophe, Committee Advisor, agreed that the highlighted changes were consistent with the Committee’s policy positions. The issues flagged by Members during previous discussions had been addressed.  

Ms T Tobias (ANC) suggested that scope 1 (direct emissions) and 2 (indirect emissions) incentives be clearly defined and it should be ensured they are linked to sector-based allowances. She asked why the agricultural sector was not looked into. All sectors would need to be regulated in as far as carbon emissions reduction was concerned. On clause 11, she was not sure why Treasury had backtracked on such a significant issue. She added that the discussions on thresholds and methodologies should start in earnest.

Mr Carrim said the Carbon Tax Bill could not be discussed endlessly. There had to be a cut-off for discussions as the Standing Committee on Finance would have to finalise five Bills by mid-February 2019. The Committee would have to vote on the Bill early February next year. If all outstanding issues are not exhausted by the next day, the Committee might have to get back a week before Parliament resumes sitting early next year.

Ms G Ngwenya (DA) asked about the plans to align the IP process with the review of the Carbon Tax. Were there any plans to align these processes? For instance, would there be any further increase in the tax in the event of increases in demand. What were some of the salient features that would be considered and how exactly would it happen? How exactly would carbon trading happen? Would the review also be an opportunity to look at the policy questions or would it just be fiddling of numbers? She believed market-based solutions and alternatives to reducing carbon emissions had not been exhausted.
 
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, said a lot of the issues raised by Members were not new. Treasury was trying to provide as much information mindful of the fact that certainty is key. Certainty would require that all players continually engage in good faith. He emphasised that the tax was not being rammed through. The carbon tax review would need to look at the progress in implementation of Paris Agreement targets, and finding the right balance. The climate change problem needed to be appreciated and something should be done about it.

Mr Jongikhaya Witi, Chief Director: Climate Change Mitigation Policy, Department of Environmental Affairs, said the problem with direct emissions from agriculture was that they are decentralised and the timespan of activities versus release of emissions is long. This, therefore, in principle presents measurement and regulatory challenges. The existing methodology did not allow for the accurate measurement of emissions from the agricultural sector.

Ms Hemraj said scope 2 emissions would not be completely excluded as there was already a wide range of incentives to encourage industry to reduce emissions such as the energy efficiency saving tax incentive. The proposal was to extend this incentive and align it with the first phase of the carbon tax. The whole gamut of energy efficiency incentives was being reviewed by way of tightening and extensions. The incentives were meant to reduce absolute emissions by individual companies. She pointed out that Treasury called for benchmark proposals in 2014 and only received submissions from stakeholders in 2017. The submissions had been reviewed and Treasury was currently sitting with ten benchmark proposals and their review process was 75% complete.

Ms Ngwenya said there were no disagreements about the need to reduce emissions and curtail climate change. However, the DA’s concerns arose from a succinct list of areas as follows: market-based solutions had not been exhausted in an effort to curb emissions despite evidence of a number of industrial players who had already cut down dramatically on emissions, and there being room for further cuts; questions about ring-fencing as the funds from the carbon tax could be best dedicated to addressing environmental challenges. These concerns were not on the basis of denying the reality of climate change.

Ms Tobias said the South African context is different from the rest of the developed world as the carbon content in imported crude oil was higher than that consumed by developed countries. The necessary balance had been struck through the provision of incentives.

Mr Mapulane said he was satisfied with the policy aspect in the Bill as the necessary compromises between government and stakeholders had been found. He felt there was no meaningful appreciation of the problem the Bill sought to address. Robust instruments to help the country overcome the climate change challenge had to be devised. The country could not continue with its business as usual approach. This Bill would help the country significantly in reducing emissions. The Bill together with the climate change legislation on the pipeline was a step in the right direction. This was the direction the world was taking.

Mr Carrim noted that the Portfolio Committee on Environmental Affairs was satisfied with the progress towards finalisation of the Bill. He wanted to know what the issues preoccupying stakeholders in relation to trade volumes and exposure were. He also invited comments on the NEDLAC process.

Dr Dhiraj Rama, Executive Director, Association of Cementitious Material Producers (ACMP) spoke about trade exposure as affecting the cement sector. The sector was very trade exposed and there has been an increase of 50 to 60% in cement imports from China and Pakistan over the last year. This imported cement, in many instances, is sold below the cost price of most local facilities. Following passage of the Carbon Tax Bill, the cement sector would be more vulnerable and some ACMP members had already confirmed that they would have to close some of their facilities in rural areas due to viability challenges owing to trade exposure and the tax burden.

Mr Carrim pointed out that stakeholders have had eight years to mull over issues and engage Treasury whilst the Committee only had less than a year and had other bills to process in-between. However, there was no harm in having concerted discussions at this stage.

Ms Hemraj, on trade exposure, said the trade intensity threshold was initially set at 50%. However, on the basis of consultations with stakeholders and international best practises, it was reduced to 30%. If trade intensity is above 30%, the 10% allowance applies. This was part of efforts to get the incentive mechanism right, and to deal with trade exposure. The incentives were to sector-based to accommodate the various comments from stakeholders. The thresholds would be used to determine tax liability.

Mr Matthew Parks, Parliamentary Coordinator, COSATU, called for a Just Transition that would protect vulnerable jobs and create new jobs, both from government and industry. There had not been any meaningful participation by some departments at NEDLAC. It was as if the economic cluster in government was just going through the motions- they were completely missing in action. It is very difficult to move forward with industry and government not speaking to each other. Workers would suffer most from the brunt of both climate change as well as job losses. COSATU would keep pushing and supported the Committee’s recommendation that there be a report after every six months from government.

The Chairperson asked COSATU to furnish the Committee with a summary document highlighting its concerns about the NEDLAC process. These would be considered for inclusion in the Committee report to be produced early February. The Committee would consider the Bill clause-by-clause the following day.

The meeting was adjourned.

 

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