ATC140314: Report of the Portfolio Committee on Energy on the likely impact of Carbon Tax on energy supply in South Africa and the Southern African Development Community (SADC) on 24 July 2013, dated 12 March 2014
Report of the Portfolio Committee
on Energy on the likely impact of Carbon Tax on energy supply in South Africa
and the Southern African Development Community (SADC) on 24 July 2013, dated 12
Subject of the report
The subject of this report
is to report back to the National Assembly (NA) on the Portfolio Committee on
Energys findings after scheduling a roundtable discussion on:
The likely impact of carbon Tax on energy
supply in South Africa and South African Development Community (SADC)
levels of economic growth must be sustained to facilitate significant
reductions in the levels of unemployment, poverty and income inequality.
It is not just the quantity of growth that
matters, but also quality, and incorporating sustainable development
considerations in policy development and decision-making processes.
Market prices do not always reflect full
economic costs of production or consumption/use.
Therefore, in many countries, government
intervention is necessary through regulations, taxes and incentives, etc.
Africa faces a number of environmental challenges that is likely to be further
aggravated as the economy grows if natural resources are not properly managed
These include emissions
of local air pollutants that manifest in poor air quality with adverse impacts
on society; excessive emissions of greenhouse gases that contribute to global
warming (climate change); inappropriate land-use that results in land
degradation; biodiversity loss and damage to terrestrial ecosystems;
deteriorating water quality with severe impacts for South Africa as a water
stressed nation and increased levels of solid waste generation comparable to
many developed countries.
is likely to lead not only to changes in the mean levels of temperatures and
rainfall, but also to a significant increase in the variability of climate and
in the frequency of extreme weather-related shocks.
experts argue that a carbon tax should be considered among the range of
instruments available to the South African government, economy and society as
part of a broad portfolio of mitigation actions.
A carbon tax was one of the most effective
wedges of mitigation scenarios (LTMS Long Term Mitigation Scenarios) for
The purpose of such a tax
would be to reduce greenhouse gas (GHG) emissions.
A carbon tax would achieve this through two
broad effects a demand effect, reducing energy demand due to higher prices,
and a substitution effect, with switching from more or less carbon-intensive
Experts further argue that there
are other ways of achieving this end, but a carbon tax is a highly effective
means of doing so if experience of actual taxes in other countries and
modelling of potential taxes in South Africa is any guide.
The proposed carbon tax policy released by
National Treasury in May 2013 lays out the details of a proposed Carbon Tax for
South Africa that is to be implemented on 1 January 2015.
For the purposes of conceptualising the
programme for a roundtable of the topic at hand, National Treasury, various
private companies, the labour movement and civil society were invited to attend
this meeting, together with briefing documents from National Treasury which served
as a basis in preparation for this round of discussions.
The objective of the report
is as follows:
To provide an overview to Members of the PCE of
the implications and impact of a carbon tax in the South African context.
The Chairperson welcomed everyone to the roundtable discussion. The Chairperson highlighted that government, through the National Treasury, is planning to introduce a carbon tax in South Africa.
Chairperson noted that issues relating to carbon tax have been always debated
in Parliaments Steering Committee on Climate Change, of which he is a member.
The opportunity to consider carbon tax was presented when government itself,
through National Treasury, released the proposed carbon discussion paper as well
when a presentation on carbon tax was delivered by the National Treasury to the
Parliamentary Standing Committee on Finance.
As part of
South Africas regional integration strategy, the Chairperson highlighted that
it will be imperative for the SA to work together with other countries in the
Southern African Development Community (SADC) on climate change. The round
table discussion is thus an opportunity to brainstorm and enrich the
understanding on carbon tax and its likely impact on the energy sector. It will
also go a long way in ensuring that all energy-related entities respond and/or
has an input on the carbon tax proposal.
2.1. National Treasurys view
, Deputy Director General: National Treasury, stated
that the point of departure for the carbon tax proposal is the White Paper on
Climate Change developed by the Department of Environmental Affairs, which also
serves as an indicator of governments policy position on carbon tax.
Governments proposal on carbon tax was developed and further refined through a
tax is being considered as a strategy to change behaviour in the energy
industry, and not merely to raise revenue. National Treasury acknowledged that
it will be impossible to eliminate climate change, but pointed out that it can
be minimized. Failure to adopt cleaner energy policies by energy companies
would result in such companies being hit with higher carbon taxes in the
Treasury conceded that although there is presently a lack of a
globally-coordinated action on carbon emission, it is appropriate for South
Africa to act urgently on carbon emission, rather than to defer it to a later
date. The critical issue, however, is mitigation matters, as there is likelihood
that consumers would bear the brunt of a carbon tax introduction. The proposal
will therefore consider the poor households, and it will seek ways to protect
Consultations on the carbon tax
proposal are still ongoing and specific issues that will be raised by
stakeholders will still be considered. The ultimate intention is 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 are two types of intervention for consideration in carbon tax. These are the regulatory intervention and the market-based intervention. According to National Treasury both interventions work 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 are the same in theory, they both differed in practice, especially in terms of institutional mechanisms, market structure and interventions.
2.2. Paper Manufacturers Association of SA (PAMSA)
, Executive Director: Paper Manufacturers
Association of South Africa (PAMSA
said that the
paper manufacturing sector did not think a carbon tax is the right mechanism to
bring about the desired change in the energy sector. The paper manufacturing
sector accounts for about 4% of manufacturing gross domestic product (GDP), 27%
of agricultural GDP and 1.6% of national GDP.
to PAMSA the cost implications of a carbon tax on the paper manufacturing
sector will 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
, however, contacted the National Treasury to
consider opportunities for carbon tax discretion. Also the utilisation of the
Forest Industry Carbon Assessment Tool (FICAT), which allows for consideration
of manufacturing emissions, carbon storage impacts, upstream emissions, and
to PAMSA tree planting represents one of the best ways to address climate
change. However, there is a limit to the number of trees which can be planted,
due to regulations and space constraints.
, Corporate Advisor on Environmental Economics:
argued that it would be inappropriate to introduce
a carbon tax in South Africas energy sector at the moment.
to ESKOM, carbon tax is essentially a market-based instrument and it will not
be ideal to use a market-based instrument in a regulated sector. ESKOM
highlighted that the intended objectives of introducing a carbon tax might not
be realised, given the nature of South Africas economy. The domestic action
being proposed by South Africa is 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.
current situation of the electricity sector in South Africa is also a concern,
as Eskom is presently running at full capacity at all times and this will
continue for a long period. The aim of the Integrated Resource Plan (IRP) is to
ensure electricity availability for the next ten years, and this is going to
have a profound influence on ESKOMs activities. Eskom is of the opinion that
the carbon pricing system is already in place in the energy sector, and the
introduction of a carbon tax might prevent plans to ensure electricity
availability in the future.
Mr Steve Lennon, Chief Executive on Sustainability: ESKOM added that there need to be better policy alignment on climate change among government departments and parastatals . The cost of water use in the energy sector and carbon emission is being increasingly internalised in the Integrated Resource Plan. However, the commitment of the Copenhagen Accord and the conditionality attached to it, is a clear indication that the global fund to assist South Africas power sector, as suggested in the Integrated Resource Plan, might be difficult to access.
Behrens, General Manager on Strategy and Regional Affairs:
presented Sasols position on the governments carbon tax proposal, appraising
its likely effect from three perspectives -- the Department of Environments
policy on climate change, pricing, and the timing of the proposal.
identified the Department of Environmental Affairs 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 Environmental
Affairs is pursuing on climate change, such as a carbon budget and the work
currently being conducted with the technical working group on mitigation.
to SASOL, introducing a carbon tax will ultimately be premature and might not
necessarily be complimentary to the plan of the Department of Environmental
Affairs on climate change. The introduction of a carbon tax will also have an
effect on energy pricing, as there are limited alternatives currently being
explored to switch to lower carbon sources.
broader policy context, the carbon tax proposal might negatively impact on
energy prices in a country like South Africa which are mainly dependent on
coal, and which has 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 Africas international
competitiveness, due to the fact that a significant proportion of South
Africas exports are energy-intensive exports.
2.5. Business Unity South Africa (BUSA)
, Convenor: Business Unity South Africa (BUSA
said that South Africa need to answer the question of how
the carbon tax proposal, would align with the forthcoming international
decision on climate change.
stated that although National Treasury rightly pointed out that South Africa
need to act on climate change, there is 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.
been working with the technical working group on mitigation, the Department of
Environmental Affairs and other relevant government departments, as well as
other entities, on a comprehensive analysis of the mitigation potential of
South Africas economy. Dr
emphasised that is
thus important to complete the work in order to have a good quantitative idea
of what is feasible. She further pointed out that is also important to
understand the socio-economic impact of the tax on the general populace.
Measures to alleviate the impact of carbon tax are outlined in the White Paper
on carbon tax, but the paper does not explain how the measures will be
important question to ask, according to BUSA is - despite the appropriateness
of a carbon tax, is the extent to which a carbon tax will result in a change in
behaviour. If a carbon tax will not lead to a change in behaviour, then it
might not have the desired effect and therefore inappropriate.
2.6. SA Petroleum Industry Association
, 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 sectors 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 sectors regulatory cost was also increasingly high, and had
been influenced by governments 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.
2.7. Energy Intensive User Group (EIUG)
, Chairman, Energy Intensive User Group (EIUG)
reiterated the need for every stakeholder to work together on the issue of
The carbon tax is being
considered in South Africa due to the need to change behaviour, as well as the
desire to be proactive on issues relating to climate change.
carbon pricing regime which did not exist globally, however, might not augur
well for South Africa, as economy can contract. A carbon tax needs to be
informed by the international carbon price regime.
also questions the rationale for the carbon tax design, which calls for the
phasing out of the tax-free allowance, pegging it at five to 10 years, and
advocates that the number of years for a tax-free allowance ought to be more
than what is being proposed.
government in its several plans is proposing alternatives to coal - especially
renewable sources - the introduction of a carbon price is not needed. A carbon
tax would inherently not change behaviour and need to be introduced gradually
in order to minimise its adverse effect on the economy.
2.8. SA Faith Community Environment Initiative (SAFCEI)
African Faith Community Environment Initiative (SAFCEI) argued that although it
is correct to address the externalities associated with energy use, those who
bear the cost of fossil fuel exploitation and carbon tax did not necessarily
benefit from it.
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 is also problematic.
More importantly, however, there is an urgent need to address the question of
how the carbon tax proposal would ensure that poor households do not bear the
2.9. Energy Research Centre (ERC) - University of Cape Town
H. Winkler, Director of the Energy Research Centre: University of Cape Town,
commended the agreement among stakeholders on the need to reduce carbon
He emphasised, however, that
no single instrument or sector could do it all.
Pricing is an important issue and the Energy Research Centres analysis
pointed to the fact that the proposed carbon tax rate is not sufficient to
transform the energy sector. The minimum threshold would be to apply R120 to
40% of emissions, which will have a bigger marginal effect on the sector.
It is also
important to distinguish between economic instruments at the domestic level and
at the international level. Domestically, the centres 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 is 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 will go in the long term, as this information would be
extremely important to investors.
Dr A. 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 suggest that the development of institutional mechanisms and designs took about five to seven years.
It is not
entirely true that South Africa is taking the lead on carbon emission reduction
among developing countries, as activities from some developing countries are
widespread. It is also important that South Africa acts speedily on carbon
emission in order to strengthen its legitimacy and position in the ongoing
international negotiations on climate change.
carbon tax has been widely recognised as an economic rationale to increase the
efficiency of the economy. The way in which measures
on carbon pricing would be implemented, and what other measures would be
implemented with them, will go a long way in determining the success of carbon
Regulation of carbon tax is
also important, and it is not presently clear how a carbon tax will 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
to Mr L
(MP PCE) carbon tax is one of the
best ways to mitigate climate change. Mr
further pointed out that if there is a carbon tax, it will be appropriate to
ensure that the electricity tariff does not increase, as this would be a way to
mitigate the effect of a carbon tax on the economy.
also stated that it will be crucial that South
Africa solicit financial and technological support from the international
community in order to achieve South Africas goal on climate change. He further
stated that the SA Renewable Initiative (
funding be obtained to assist the incremental cost of renewable energy
programmes. According to Mr
pointed out that
this funding (
) is also available to developing
countries, but National Treasury does not have the appropriate funding model to
be able to access these funds.
Mr Momoniat (DDG: National Treasury) emphasised that it is important to have a long-term perspective on climate change, and a failure to act without delay could be costly to South Africa. A decision by South Africa to defer its actions can possibly lead to job losses in the long run.
the Department of Environmental
Affairs should have been part of the discussions, as it would have been
beneficial to have heard their perspective and the Department could have
assisted in clarifying the policy position government is putting forward.
Treasury further pointed out that the various stakeholders (those participating
in the Roundtable) opposing carbon tax
proposing alternatives. According to the National Treasury apart from a carbon
tax, it would be inappropriate to do nothing.
A carbon tax is merely a means to an end, and the emphasis should be on
the outcomes of having a carbon tax. National Treasury stated that the
intention with the carbon tax proposal is to come in very low and to eventually
step it up.
ESKOM stated that the models used in the development of the carbon tax proposal does not have the level of sophistication needed to identify holistically, what the impacts thereof is going to be.
BUSA stated that an entity that reduces its emission to the required level will not pay tax, and a carbon tax would come into effect only with a failure to meet the specified target.
Mr Shaun Nel (EIUG), raised concern regarding the level of inter-departmental coherence in government, noting that there is a high level of non-alignment in South Africas numerous plans of action on climate change.
Mr Rossouw (EIUG) questioned why a country like South Africa, which emits about 1% of carbon, could not rather be a fast follower than a leader on carbon pricing.
Mr D Ross (MP: Standing Committee on Finance) noted that there is a need for a broader perspective and discussions if carbon tax is to be introduced. South Africas economy is not growing, and what will be crucial is what the impact of a carbon tax will have on the economy.
Mr Momoniat stated that there is alignment among government departments on the carbon tax issue. All the relevant departments are 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 is coordination and coherence among departments on climate change, although it might not necessarily be complete coherence.
4. Closing remarks by the Chairperson
It is the important that a balance be struck between process and
content with the intention of getting an optimal outcome. Therefore the PCE
has a role to play in ensuring the achievement of the desired balance on
the outcome, and would be working on achieving this with all relevant
The quality of the process will bring trade-offs, as it is
impossible to agree on everything.
The Chairperson highlighted that there is a common understanding
and agreement, amongst all stakeholders that there is a need to act on
5. Way forward
roundtable discussion is the first round of engagements on carbon tax, and the
Portfolio Committee on Energy, will be scheduling further engagements and
discussions on carbon tax in the future. When scheduling these engagements and
discussions, it will be imperative that all the relevant parliamentary
committees, government departments and entities form part of the discourse.
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