ATC190319: Report of the Select Committee on Finance on the Carbon Tax Bill [B46B – 2018] (National Assembly – section 77), dated 19 March 2019

NCOP Finance

Report of the Select Committee on Finance on the Carbon Tax Bill [B46B – 2018] (National Assembly – section 77), dated 19 March 2019.
Background

The Customs and Excise Bill makes provision for the administration of the Carbon Tax through the Customs and Excise Act. Carbon Tax will play a role in achieving the objectives set out in the National Climate Change Response Policy of 2011 (NCCRP) and contribute towards meeting South Africa’s commitments to reduce greenhouse gas emissions. Reducing the impacts of climate change through facilitating a viable and fair transition to a low-carbon economy is essential to ensure an environmentally sustainable economic growth path for South Africa.

The Bill gives effect to the polluter-pays principle, prices greenhouse gas emissions and aims to ensure that businesses and households take these costs into account in their production, consumption and investment decisions. The tax will assist in reducing emissions and ensuring South Africa meets its commitments under the 2015 Paris Climate Agreement. It will be reviewed after three years. The South African Revenue Service (SARS) and the National Department of Environmental Affairs will jointly administer the tax.

The Carbon Tax Bill includes the detailed and revised carbon tax design features as per the Carbon Tax Policy Paper of 2013 and the Carbon Offsets Paper of 2014 and takes into account public comments received following extensive stakeholder consultation since 2011. The Carbon Tax Bill provides for the introduction of the Carbon Tax in a phased manner. This gradual approach takes cognizance of the developmental challenges facing South Africa and South Africa’s National Determined Contribution (NDC) commitments made under the Paris Agreement to reduce GHG emissions. This will also help encourage investments in and the uptake of more energy efficient and low carbon technologies.

1.Consultation process

The initial Carbon Tax Bill was first introduced in November 2015. The initial implementation date was planned for 01 January 2019 but the Minister of Finance announced postponement in the implementation date of the carbon tax to 01 June 2019 in the 2018 MTBPS speech. The National Treasury undertook an extensive consultation process (public hearings) on the Bill between since 2015. The Bill was tabled on 20 November 2018 and referred to Standing Committee on Finance (SCoF) for finalisation. The SCoF had joint meetings, workshops and public hearings with the Portfolio Committee on Environmental Affairs in Parliament. The SCoF adopted its report on the Bill on 21 February 2019. The National Council of Provinces (NCOP) referred the Bill to the Select Committee on Finance (SeCoF) on 26 February 2019. The Committee then received a briefing from the National Treasury on 06 March 2019 and held public hearings on 12 March 2019.  

The submissions on the Bill were received from 14 stakeholders, namely, the Airlines Association of Southern Africa (AASA), the Association of Cementitious Material Producers (ACMP), the Black First Land First Movement (BFLF), Sasol, PricewaterhouseCoopers (PwC), Organisation Undoing Tax Abuse (OUTA), Business Unity South Africa (BUSA), Chemical & Allied Industries’ Association (CAIA), PricewaterhouseCoopers, Sasol, Engen, World Wide Fund (WWF) for Nature, Sibanye Stillwater and Congress of South African Trade Unions (COSATU). During the public hearings, the National Treasury and the South African Revenue Service (SARS) responded to the issues raised by the stakeholders.

2.Summary of submissions made during the public hearings

This section summarises the key issues raised by the stakeholders during the public hearings held in the Parliament on 12 March 2019.

2.1Business Unity South Africa

Business Unity South Africa (BUSA) is a confederation of business organisations including chambers of commerce and industry, professional and corporate associations and unisectoral organisations. Overall, they aim to ensure that South African business plays a constructive role in the country’s economic growth.

BUSA supports carbon pricing in the economy as part of a suite of measures to address the country’s climate change. They are concerned about a number of issues that are not yet addressed by government, which include the state of the economy where small changes give rise to higher costs; policy uncertainty post-2022 for unregulated entities and lack of policy alignment between the carbon tax and the carbon budget proposed through the draft Climate Change Bill. BUSA is therefore not in a position to support the Carbon Tax Bill in its form and requests that the proposed Bill should include a requirement for alignment in this version of the Carbon Tax Bill.

Critical issues essential for the effective implementation of the Bill from BUSA’s perspective include finalizing the GHG reporting system and publishing the Renewable Energy Premium. Significant uncertainty remains for the taxpayers in determining their liability as regulations regarding their allowances are still outstanding.

2.2The Airlines Association of Southern Africa (AASA)

The Airline Association of South Africa (AASA) is an industry association representing the mutual interests of its airline members, which include the commercial scheduled airlines from South Africa and other Southern African States. AASA also has Associate Members which are manufacturers, service providers, suppliers and industry partners which add value to the airline industry.

Whilst supporting the goal of reducing CO2 emissions, AASA and its airline members do not in principle support the imposition of a Carbon Tax for aviation because implementing carbon taxes is not the appropriate mechanism to change behaviour and from an aviation perspective, the introduction of new taxes is not encouraged nor recommended. ASSA’s concerns about the proposed tax include that tax revenue cannot be ring-fenced for specific purposes, that National Treasury has waived the requirement for International Aviation to be subject to Carbon Taxes in South Africa and different regimes will result in an administrative burden.

AASA does not believe that the introduction of carbon taxes is a measure that will encourage reduction of emissions. In their view, there should be incentives to reduce carbon emissions or measures introduced to encourage initiatives to reduce carbon emissions and make a positive impact on the environment. They believe that in a world, where aviation is such an active facilitator of travel, communication and bringing people together, the introduction of Carbon Taxes is intended to discourage and effectively shrink air transport. In addition, carbon taxes will add another cost burden on the airlines, which in the current low economic growth environment in South Africa as well as considering the marginal nature of this business, will burden the airlines even further.

AASA recommends that the Committee considers a globally accepted scheme to encourage Aviation to reduce carbon emissions and that the Bill be amended accordingly to exclude Domestic Aviation.

2.3The Association of Cementitious Material Producers (ACMP)

The Association of Cementitious Producers (AMCP) acts as an umbrella for five South African Clinker and Cementitious material producer companies, specifically guiding and representing in their fields environmental stewardship, health and safety practices and community and stakeholder interaction.

AMCP acknowledges that carbon tax could be one of the policy instruments to facilitate a transition to a lower carbon economy, but AMCP members are very concerned about the consequences of implementation of the Bill in the current economic climate. They believe that the impact would be significant on the cement sector, resulting in higher costs of doing business. Cement producers will not be able to absorb carbon tax related costs and will pass the increase and trade exposure challenges. The impact of the tax will also have serious impact on local economic development and the broader national socio-economic impacts.

2.4The Black First Land First Movement

The BLMF, a movement whose strategic objective is the complete destruction of white supremacy is the view that the proposed Carbon Tax Bill continues in this line, failing to address either energy sovereignty, the need to industrialise or job creation. Instead, it places the burden of combatting climate change on the oppressed. In its current form, the Bill will hit the consumer hardest, as well as small and medium size businesses, directly destroying any possibility of sustainable quality job creation. The Bill will furthermore see tax rebates for white monopoly capital corporations who simply attempt to phase in emission targets. The BLMF recommends that the Committee scraps the Carbon Tax Bill, as the cost will be carried by the poor directly and increase nuclear energy generation.

2.5Sasol

Sasol has consistently argued for an approach that would see companies pay a higher tax rate, but only on emissions above the carbon budget threshold. Instead of levying a lower rate of tax on all emissions, Sasol has proposed that companies are provided an allocation on a portion of their emissions based on their carbon budget with a higher tax levied on the remaining emissions. This higher tax will serve as a penalty mechanism which incentivises least cost mitigation. In addition, companies should have the opportunity to further reduce their tax liability if they submit and comply with a plan to fully mitigate the emissions subject to tax within a set period of time, supported by a jobs transition plan which aims to mitigate job losses that may result from such emission reductions. 

Finally, to ensure that the incentive for companies to continue innovating and looking for alternative mitigation options, the tax design should provide the option for companies to generate and sell offsets if they are able to find mitigation options below the fixed threshold set.

Sasol requests that the carbon tax design be amended to reflect an aligned Carbon Tax and Budget approach. Alternatively, an amendment to commit the Minister of Finance to align to the Carbon Budgets during the second phase of the carbon tax and outline how transitional arrangements will be addressed would suffice. The Committee can also postpone the promulgation of the Carbon Tax to align to the promulgation of the Customs Control Act 2014, Customs Duty Act 2014 and Customs and Excise Amendment Act 2014. The Customs Control Act non-compliance framework aligns to that of the Tax Administration Act, thereby providing some relief to taxpayers during the transitional and implementation phase of the Carbon Tax legislation. Lastly, Sasol recommended Legislation or Rules that are amended to allow the deduction of the electricity levy from the Carbon Tax liability to avoid double taxation.

2.6PricewaterhouseCoopers

PriceWaterhouseCoopers (PWC) views the tax period for the carbon tax operating from 1 June 2019 to 31 December 2019 as problematic as the tax is levied on carbon emissions for the tax period. However, carbon emissions are reported to the Department of Environmental Affairs in terms of the Greenhouse Gas Reporting Regulations for a full calendar year and not for a portion of the year. Accordingly, the proposed effective date is not in alignment with the Greenhouse Gas Reporting Regulations on which the tax is intended to be aligned and will create significant compliance and administration burdens should the proposed effective date be implemented.

To illustrate, taxpayers will have to measure emissions for both the entire 2019 calendar year as well as separately for the period 1 June 2019 to 31 December 2019 for purposes of determining the carbon tax liability. This will create a substantial additional compliance burden on taxpayers. Secondly, the intention was that SARS would be able to confirm the emissions reported for purposes of the carbon tax with those reported under the Greenhouse Gas Reporting Regulations with the Department of Environmental Affairs. This will not be possible in the first tax period and will therefore create a difficulty for SARS to verify the emissions reported for carbon tax purposes, a difficulty which is likely to be passed on to taxpayers to support the emissions reported for purposes of the carbon tax, resulting in further compliance burdens and potentially protracted disputes.

PWC is therefore of the view that this is a fatal flaw of the Carbon Tax Bill, and that the only possible way in which this can be addressed is to make the first tax period for the Carbon Tax to operate from 1 January 2020 to 31 December 2020.

Finally, it was always intended that the carbon tax would be fiscally neutral. In this regard, it is concerning that the Budget suggests that the forecast revenues of R1.8 billion from the carbon tax on fuel is now proposed to be used as a revenue raising instrument with no corresponding increase in expenditure to recycle these revenues. This is most concerning as the limited negative economic impact of the introduction of the carbon tax was highly dependent on the revenues from the carbon tax being recycled.

The result is that, if the carbon tax is implemented without the revenues being recycled as was indicated would be the case, it could result in a significant detrimental impact on the economy and on employment, something which the country can ill-afford at this juncture.

2.7Organisation Undoing Tax Abuse

The Organisation Undoing Tax Abuse (OUTA), was established to hold those in authority who abuse their power with respect to tax payer’s money to account and believes that it is environmentally responsible to ensure that government reduces the carbon footprint due to climate change.   They support an environmentally sound development and the principle behind the need for the carbon tax. Their concerns are about the impact of high air pollution levels posing a health risk upon the citizens of Mpumalanga; that emissions baseline data has not been collected and normalised per industry, that there is no substantive assurance that this will promote behavioural change by polluters, that quantification and costing of the administrative burden of this tax has not been unpacked or clarified, that diverse economic scenarios and implications have not been thoroughly modelled only a few implications were analysed.

OUTA recommended that the proposed Carbon Tax must not be implemented in the current economic conditions and not in its current format; that the energy sector reforms must be introduced first, to unbundle Eskom; that the state of readiness must be ascertained prior to implementation, that the National Treasury should delay the June 2019 implementation date of the carbon tax and that government should take cognizance that implementation of the proposed tax would be grossly unfair to motorists and consumers.

2.8Chemical & Allied Industries’ Association

The Chemical and Allied Industries Association (CAIA) represents the interests of a large proportion of the chemical industry in South Africa. The Organisation is concerned that the impact of the Bill and the associated legislation has not been fully determined, that the assessments done by the National Treasury do not comprehensively consider the potential negative socio-economic impacts such as on inflation through the addition of the tax to the price of liquid fuels, the punitive nature of the tax, particularly in the road transportation sector and where there is other combustion of liquid fuels, lack of ring-fencing of revenue, administration of the tax through the Customs and Excise Act, which might require extensive consultation with SARS, the confusion and uncertainty that might come with deductibility of the tax, the effect of the tax on competitiveness, waste sector emissions required to be reported will cause an administrative burden, carbon offsetting requiring more flexibility as a part of the Carbon Offset Regulations and ultimate regime, lack of policy certainty, which is insufficient to foster a healthy environment conducive to investor, business certainty, lack of mitigation opportunities and the reservations by the Democratic Alliance, which include that the revenue from carbon tax should be ring-fenced.

2.9Engen Petroleum

Engen Petroleum is an African based oil company focused on the refining and marketing of petroleum and petroleum-based products, and the provision of fuel retail convenience services throughout South Africa and many African countries. They support the need for the country to transition to a lower carbon society and believe that there are mechanisms to achieve that, however there are still many issues with the Carbon Tax system that includes the Carbon Tax Bill, Customs and Excise Act, and Carbon Budgeting that is leading to confusion, uncertainty and an increased burden on business.

Engen Petroleum opines that the use of the Customs and Excise Act for administration of the Act problematic as it has categorized greenhouse gas emissions as a commercial commodity and treats it the same as other goods. If licensing will be required for multiple facilities, this would be an increased burden on business and is not aligned with the DEA GHG Regulations. Additional confusions with the Act include contrasting information in the C&E Act vs the Carbon tax bill regarding timelines for payment of tax; the manner in which current allowances will be applied, alignment between the carbon tax and the carbon budget systems, a double penalty, the budgets and tax post 2020 and 2022 that still needs to be addressed and the consultations that were promised.

Engen is of the view that there is still opportunity for improvement in the proposed Carbon Tax system, and that the issues raised by business need to be adequately addressed before implementation.

2.10Congress of South African Trade Union

The Congress of South African Trade Union (COSATU) believes that all South Africans need to work together to halt climate change and move to a sustainable green future. Government needs to act and lead and that it must have serious multi-pronged plan.

The trade union accepts that errant industries that can but refuse to change must pay and play their part and that this may include penalising them financially. However, COSATU is deeply concerned that the carbon tax is government’s only plan.

The union went on to say that once again workers are being made to pay for the sins of the looters who have threatened the state with bankruptcy and polluters who threaten the planet with catastrophe.

COSATU endorses the Standing Committee on Finance’s recommendation to the 6th Parliament that government be required to report quarterly on the implementation of the Presidential Jobs Summit Agreement and in particular the Nedlac Carbon Tax Jobs and Just Transition Report.  This should be a joint process involving the finance, trade and industry, economic development and environmental affairs committees and departments.

COSATU thus proposed that any carbon tax revenues generated must be invested in green economy jobs targeting workers who may have or may lose their jobs as a consequence of the transition. Furthermore, government should provide incentives to industries, that invest in and create new, permanent and decent green economy jobs. Other proposals include that Eskom tariff hikes be limited to inflationary levels and that Government unveils a mitigation plan for the poor to cope with expected increase in prices as a consequence of the carbon tax.

2.11Sibanye Stillwater

 Sibanye-Stillwater is an independent, global precious metal mining group, producing a unique mix of metals that includes gold and the platinum group metals. We submit that the current economic climate is not conducive to the introduction of a carbon tax.

They have noted that the carbon tax bill proposed to come into effect from 01 June 2019 makes reference to the Department of Environmental Affairs to verify and certify sequestration. Their concern is that the mechanism for this is unlikely to be in place by 01 June 2019. However, the Minister of Finance has mentioned in the latest Budget Speech that a carbon levy will come into effect from 05 June 2019 where a levy of 9 cents per litre will be applicable on petrol and 10 cents per litre will be applicable on diesel. The formula in section 6 of the current carbon tax bill is not consistent with the announcement by the Minister of Finance.

The largest portion of the carbon tax would be on purchased electricity from Eskom. Considering that the electricity mix is determined by government policy through the Integrated Resource Plan (IRP), it would be unfair to pass-on any tax to the end user. It is proposed that renewables and low carbon alternatives be maximised in the energy mix as far as possible.

Sibanye-Stillwater requests that the carbon tax not be introduced due to the dire economic consequences it will have on especially our marginal operations, and overall profitability, competitiveness and ultimately, our sustainability as a mining company that is adding value to a range of national Government imperatives including economic growth, job creation, social upliftment and driving its transformational agenda.

2.12The South African Iron and Steel institute

The South African Iron and Steel Institute (SAISI)’s concerns are that the tax load will be highly disproportionate to the earnings potential of iron and steel manufacturers, even with the allowances being considered; that there is no alternative technology that can be used to produce steel and reduce emissions to the extent required, so the effect of the Carbon Tax would not incentivise a change in behaviour, but rather be a penalty; that the industry would be exposed to imports not subject to a similar tax making the South African industry potentially uncompetitive; that the ability to pass on the Carbon Tax to customers is limited, especially for the export market, thereby reducing potential export revenue for South Africa, the complexity of the tax, the issue of choice regarding energy sources and the timing of the tax. Other concerns include revenue neutrality on the price of electricity, carbon tax pass through for Petroleum Sector, addition of a Carbon Tax to liquid fuel prices and complexity of the tax payable. 

SAISI is not supportive of the proposed Carbon Tax as proposed in The Bill. The fragility in which the South African iron and steel industry finds itself in should be treated with extreme caution and the potentially unintended consequences and risks alerted to should not cause the downfall of a strategic industry. It is an important sector that is worth protecting especially in light of the fact that steel will always remain an important commodity, also when adaptation measures may need to be implemented to abate the effects of climate change.

2.13World Wide Fund for Nature  

The World Wide Fund (WWF) for Nature supports a carbon tax, as one tool needed for the necessary just transition to a low-carbon economy. They have made the case for such a transition, including 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.

The WWF requested that the Committee should ensure that implementation of the tax meets the Minister’s 2019 deadline and make the tax stronger, so that it can be effective for the purpose it is intended to serve. Three proposals for consideration are that the tax rate is too low to be effective for its purpose of re-orientating the whole economy, that the allowances reduce the tax to a token and that increases allowed for in the draft Bill don’t address the problem.

2.14AccelorMittal South Africa

AccelorMittal South Africa (AMSA)’s concern with the Carbon Tax in its current form is that it may have unintended and possibly irreversible consequences for the economy. The current Bill, by not imposing the tax on imports, is creating an unfair playing field to the detriment of SA manufacturing. SA will continue to need and consume the same amount of steel so it will just be imported at lower prices with the result of more emissions per ton of steel due to scope 3 transport emissions. Given the current economic weakness in SA, the impact on industry at this stage will be significant. The consequent threat to the primary steel industry in SA will likely result in the loss of critical steelmaking capacity and jobs. Currently, no industrial carbon-free technology solution to produce steel exists; the ability to reduce emissions through behavioural changes is very limited. There may be an additional impact if inputs are also taxed such as electricity.

AMSA recommended that in the event of the Carbon Tax legislation being implemented, the Committee should consider ensuring a level playing field for South African manufacturing and in the absence thereof, exemption to be considered, focus on the global emissions from acquiring a ton of steel for SA, find the right balance to ensure a path of economic growth, tax treatment of loss making companies to be investigated further, the timing of the proposed tax should be reviewed, the Bill and the methodologies proposed to calculate a company’s Carbon Tax liability should be made significantly simpler and that failure to do so would result in significant negative consequences for the iron and steel sector and the SA economy as a whole.

3.Committee observations and recommendations

1. The Committee noted the extensive consultation process that the National Treasury embarked on since the Bill was first introduced.

3.2The amendments made to the Bill by the Standing Committee on Finance take into account comments of stakeholders namely: Section 6, section 17, and schedule 2 referring to: other transport, domestic aviation and waste incineration.

3.3The implementation date of the carbon tax has been changed from 1 January 2019 to 1 June 2019. To ensure an effective carbon tax policy, a review of the impact of the tax will have to be conducted after at least three years of implementation of the tax and will have to take into account the progress made to reduce by GHG emissions, in line with South Africa’s NDC comments.

3.4Changes to rate and tax –free thresholds will have to follow after the review, and be subjected to the normal consultative provinces for all tax legislation.

 

 

The Select Committee on Finance, having considered the Carbon Tax Bill [B 46B—2018] (National Assembly – section 77), referred to it, and classified by the JTM as a section 77 Bill, reports that it has agreed to the Bill without amendments.

 

DA reserves its position on this report.

 

Report to be considered.

 

 

ANNEXURE

 

COMPLIANCE WITH THE MONEY BILLS AND RELATED MATTERS ACT

 

1.         Requirements when amending a money Bill

 

Section 8(5) of the Money Bills and Related Matters Act, 2009 (Act No. 9 of 2009) requires that in amending a money Bill, Parliament and its committees must ensure an appropriate balance between revenue, expenditure and borrowing; the impact on the fiscal framework; and, take into account all public revenue and expenditure. Other requirements contained in section 8(5) of the Act relate mostly to expenditure. 

 

Section 11(3) requires that in amending a revenue Bill Parliament and its committees must:

a.         ensure that the total revenue raised is consistent with the approved fiscal framework and Division of Revenue Bill;

b.         take into account the principles of equity, efficiency, certainty, ease of collection;

c.         consider the impact on the composition of tax revenues;

d.         consider regional and international tax trends; and

e.         consider the impact on development, investment, employment and economic growth. 

 

Section 11(5) requires that the Minister of Finance must be given 14 days to respond to any proposed amendment. On 30 January 2019 the Minister indicated that he supports the proposed amendments.

 

Section 11(6) provides that the report of the Committee must motivate amendments in terms of sections 8(5) and 11(3); and, include comments from the Minister on any proposed amendment.

 

 

 

 

 

The Carbon Tax Bill is a money Bill, specifically a revenue Bill.

 

2.         Potential impact of the amendments

 

1. Impact on tax revenue

 

The proposed amendments to the calorific value for other bituminous coal from 0.0192 to 0.0243 TJ/ tonne implies that the emissions from using this type of coal for energy and non-energy purposes would be higher. This will mean a proportionally higher tax liability for an entity. 

 

The proposed increases in the level of tax-free allowances from 60 to 70 per cent for certain industrial process emissions and an increase in the total tax-free allowance to 95 per cent to be aligned with other process emissions activities could result in a marginal decline in the total revenue from these activities.  

 

Given that the number of companies impacted would be relatively small and that currently process emissions accounts for less than 9 per cent of total GHG emissions, the tax revenue implications or revenue foregone can be expected to be marginal for this relatively small subset of industrial processes. 

 

1. Equity, efficiency, certainty and ease of revenue collection

 

The proposed change to the calorific value will result in a more equitable carbon tax regime where taxpayers that use the lower quality and higher emission other bituminous coal would now be subject to a higher level of tax rather than being taxed similar to the lower emitting sub-bituminous coal. 

 

This will also result in a more economically efficient outcome and ensures that the higher emitting other bituminous coal faces a higher carbon tax. The correct pricing of the emissions and price differential between the two types of coal will maintain the policy intent of the carbon tax and strengthen the economic incentive mechanism by encouraging a shift away from the higher emission coal use towards lower carbon fuels including renewables. 

 

The change in the allowances addresses an anomaly in the current treatment of process emissions. For industrial process activities where it is difficult to reduce emissions from these activities, the inclusion of the process allowances and the increase in the total tax-free allowance will help to address any unintended adverse impacts on the competitiveness of these industries.

 

There will be no further implication for the overall costs of administering the tax as the same system will apply with no further changes to the system being needed. 

 

1. Composition of tax revenues

 

Taking into account the additional revenues due to the calorific value adjustment and the expected decline in revenue collection due to the increase in the tax free allowances for additional industrial process activities, the total revenue impact is expected to be marginal and could be partially offset. 

 

There would be no net impact on the composition of tax revenues due to the various revenue recycling measures provided under the carbon tax including the energy efficiency savings tax incentive and the commitment to a neutral impact on the price of electricity for the first phase of the tax up to December 2022. 

 

1. Regional and international trends

 

The Carbon Tax Bill gives effect to the polluter-pays-principle and helps to ensure that firms and consumers take these costs into account in their future production, consumption and investment decisions which also assists in reducing GHG emissions and ensuring South Africa meets its NDC commitments as part of its ratification of the 2015 Paris Agreement. The World Bank’s States and Trends in Carbon Pricing Report notes that about 45 national and 25 subnational jurisdictions have already implemented carbon pricing initiatives.

 

To date Mexico, India, Chile and Colombia have also implemented some form of carbon taxation measures. Brazil is exploring a carbon price. The Ivory Coast and Morocco are also exploring a carbon tax. Singapore and Argentina are scheduled to implement a carbon tax in 2019. Canada proposed a national carbon tax starting in 2019 for those provinces that have not implemented a carbon price in line with specific national criteria (i.e. a minimum carbon price). 

 

The scope of carbon pricing initiatives through carbon taxation is increasing rapidly and is becoming a major part of country policy strategies to achieve the NDCs under the Paris Agreement.  As more countries introduce carbon pricing measures, the potential impact on industry competitiveness will be reduced significantly and the opportunities for the growth of new clean industries will rise considerably. 

 

1. Development, investment, employment and economic growth

 

The impacts of climate change could be devastating for South Africa, imposing costs through extensive droughts, anticipated especially in the West; rising water levels along the coast; and increased in-migration from other countries as droughts spread in less resilient countries. A failure to control GHG emissions could lead to a loss in international competitiveness, an increased vulnerability to trade, and investment measures, which would effectively entail other countries imposing a carbon price on South African exports.

 

The phased approach to the introduction of the carbon tax and the high tax-free thresholds will help to cushion sectors and provide entities with the flexibility to choose how and when to reduce emissions based on their own assessments of costs and benefits. The carbon tax will also protect South Africa’s exports from border carbon adjustments (carbon related import tariffs / charges) that could be imposed on exports to other countries that are already pricing carbon. To avoid potential negative impacts on growth and employment also requires that private and public investors significantly diversify investment from the historic trajectory, which has been dominated by large-scale mining and industrial activities.

 

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 are used, i.e. the revenue recycling measures. 

 

A modelling study on the current design of the carbon tax was undertaken through the Partnership for Market Readiness project of the World Bank and the report entitled: “Modelling the Impact on South Africa’s Economy of Introducing a Carbon Tax” is publicly available.  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 study shows that the carbon tax will have a significant impact on reducing South Africa’s GHG emissions and would lead to an estimated decrease in emissions of 13 to 14.5 per cent by 2025 and 26 to 33 per cent by 2035 compared with business-as-usual. The carbon tax will have a marginal impact on the economy’s average annual growth rate which will be 0.05–0.15 percentage points below business as usual.

 

The phased introduction of the carbon tax at a relatively, low modest rate initially and increased over time to the “correct level” will provide a strong price signal to both producers and consumers to change their behaviour over the medium to long term. The tax will help to change the relative prices of goods and services, making emission-intensive goods more expensive relative to those that are less emissions intensive and providing a powerful incentive for consumers and businesses to adjust their behaviour, resulting in a reduction of emissions.  The revenue recycling measures will help to mitigate any possible short-term negative impacts on the economy and jobs.

 

The proposed changes to the bill are marginal and will not significantly impact the overall results discussed above. It is important to note that 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 which were not quantified and included in the model.