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Holier than COP?

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Holier than COP?

25th March 2011

By: Terence Creamer
Creamer Media Editor

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The South African government is entirely correct to apply its mind to the issue of carbon pricing. While debates continue to rage in the media (including this publication) about whether human activity is indeed contributing to accelerating climate change, the science has become less and less equivocal.

That science is pointing quite decisively to the reality that the build-up of greenhouses gases as a result of industrialisation is influencing the climate in a way that threatens the natural and built environments. It also indicates that mitigation is becoming increasingly urgent, while the need for adaptation is beyond doubt.

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However, while leadership is needed in this crucial area, I fear that South Africa’s preferred instrument for mitigation could, if pursued unilaterally, trigger socioeconomic fallout that could have short-term effects that are potentially as damaging as climate change could be over the longer term.

There will be serious first-mover disadvantages associated with the proposed carbon tax regime. It will be implemented at a time when the cost of doing business in South Africa, particularly within the productive sectors, is rising at a pace that could undermine competitiveness.

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Besides the power price increases that have already been sanctioned, including average tariff hikes of 25% a year between 2010 and 2013, Eskom has already indicated that its funding plan is premised on an additional two increases of 25% for 2014 and 2015. Logistics costs in South Africa remain high and will increase with the introduction of tolling, while government and the private sector have not been able to moderate wage expectations in recent years, owing to the reality that, despite huge unemployment, skills remains scarce (not to mention the power of organised labour).

Moreover, the structural reality is such that South Africa’s energy is going to depend on coal for many years to come. And, given recent events in Japan, resistance to any nuclear programme could well force even more coal-fired generation into the mix.

Therefore, the imposition of a carbon tax is unlikely to change behaviour significantly, as consumers have little, if any, choice. Instead, it will raise costs, as Eskom, Sasol and others pass the tax on to consumers.

In other words, the tax proposal could well reduce the overall competi-tiveness of the productive economy quite literally at the same time that the New Growth Path is calling for an upscaling of mining, beneficiation and manufacturing to create five-million new jobs by 2020.

That’s not to say that the National Treasury is wrong to be considering the framework. The possibility that countries could impose border tax adjustment sanctions on products from countries not participating in global emissions reduction agreements appears to be a real, albeit distant, threat. But the focus should be on pushing for an asymmetrical binding international deal that levels that playing field rather than moving our industrial base to an artificial pitch, while everyone else is still playing on grass.

Only once there is global visibility on the price of carbon and enforceable commitments, parti-cularly from the big emitters, should a tax, or a trading scheme, be deployed. Until then, other less distortionary instruments should be pursued to create the incentives and disincentives needed to nudge this economy onto a lower carbon path.

Did we not learn a painful lesson when trying to be ‘holier than GATT’ – the General Agreement on Tariffs and Trade – in the 1990s, which helped precipitate widespread deindustrialisation. Should we now be ‘holier than COP’?

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