South African power utility Eskom has warned that it will not be able to absorb the carbon tax proposed by the National Treasury in a recent discussion document, and that it will be forced to pass on the full cost to the consumer in the form of higher prices.

The utility, which burnt 124.7-million tons of coal and produced 230.3-million tons of carbon dioxide (CO₂) in the year to March 31, 2011, reports that it has submitted a “strong” response to government. The group is South Africa’s biggest emitter, producing about 1 t of CO₂ for every megawatt hour of production.

The National Treasury has issued a discussion paper on a proposed tax and has indicate that it will seek to finalise its policy ahead of the 2012 Budget.

In the paper, government says it favours a direct tax on carbon emissions, which it says will “impose the lowest distortion” on the economy. In fact, the discussion document asserts that a tax of R75/t carbon dioxide equivalent (CO₂e), increasing to around R200/t CO₂e, “would be both feasible and appropriate to achieve the desired behavioural changes and emissions reduction targets”.

Eskom CEO Brian Dames says the response highlights Eskom’s concern about the possible implications for the economy, employment and electricity prices. But he says it will not be “very useful” at this stage to make its full response available to the public.

FD Paul O’Flaherty notes that for every R2-billion increase in Eskom’s cost there will have to be a 1 c/kWh increase in the tariff, which has already increased to 40.3 c/kWh from 31.9 c/kWh in 2010.

In line with the increases approved by the National Energy Regulator of South Africa, power tariffs are set to increase to 65 c/kWh by 2013 and Eskom has indicated that it may apply for a further two increases of 25% a year for the tariff determination period from 2013 to 2016.

The utility’s primary energy costs rose to R38.8-billion in 2011 from R29.1-billion, including R5-billion for government’s 2 c/kWh environmental levy, which became effective on July 1, 2009.

In its annual reports Eskom also warns that planning and construction lead times for any migration to a low-carbon base-load scenario may take as long at 10 years and involve significant investment.

It also calls for a macroeconomic study to determine the effects of such a tax on the economy.