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 March 2014

1. Introduction

1.1. Subject of the report

The subject of this report is to report back to the National Assembly (NA) on the Portfolio Committee on Energy’s 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) .

1.2. Background

The high 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.

South 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 and protected. 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. Climate change 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.

Some 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 South Africa. 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 fuels. 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.

1.3. Objective

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.

2 . Opening remarks by the Chairperson of the PCE, Hon SJ Njikelana

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.

The Chairperson noted that issues relating to carbon tax have been always debated in Parliament’s 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 Africa’s 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 Treasury’s view

Mr Ismail Momoniat , 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 government’s policy position on carbon tax. Government’s proposal on carbon tax was developed and further refined through a consultative process.

A carbon 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 future.

National 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 them. 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)

Ms Jane Molony , 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.

According 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 sector have , 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 end-of-life effects.

According 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.

2.3. ESKOM

Ms Gina Downes , Corporate Advisor on Environmental Economics: ESKOM, argued that it would be “inappropriate” to introduce a carbon tax in South Africa’s energy sector at the moment.

According 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 Africa’s 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.

The 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 ESKOM’s 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 Africa’s power sector, as suggested in the Integrated Resource Plan, might be difficult to access.

2.4 . Sasol

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.

Mr Behrens 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.

According 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.

In a 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 Africa’s international competitiveness, due to the fact that a significant proportion of South Africa’s exports are energy-intensive exports.

2.5. Business Unity South Africa (BUSA)

Dr L. Lotter , 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.

BUSA 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.

BUSA had 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 Africa’s economy. Dr Lotter 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 implemented.

Another 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

Mr Anton Molden , 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.

2.7. Energy Intensive User Group (EIUG)

Mr M Rossouw , Chairman, Energy Intensive User Group (EIUG) reiterated the need for every stakeholder to work together on the issue of climate change. 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.

Creating a 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.

The EIUG 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. Also, since 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)

The South 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.

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 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 brunt.

2.9. Energy Research Centre (ERC) - University of Cape Town

Professor H. 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 is an important issue and the Energy Research Centre’s 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 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 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.

Globally, carbon tax has 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, will go a long way in determining the success of carbon pricing. 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 regulation.

3. Discussions

According to Mr L Greyling (MP – PCE) carbon tax is one of the best ways to mitigate climate change. Mr Greyling 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.

Mr Greyling also stated that it will be crucial that South Africa solicit financial and technological support from the international community in order to achieve South Africa’s goal on climate change. He further stated that the SA Renewable Initiative ( SARi ) funding be obtained to assist the incremental cost of renewable energy programmes. According to Mr Greyling pointed out that this funding ( SARi ) 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.

According to Mr Momoniat 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.

National Treasury further pointed out that the various stakeholders (those participating in the Roundtable) opposing carbon tax were not 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 Africa’s 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 Africa’s 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 stakeholders.
• 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 climate change.

5. Way forward

The 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.