South African companies must investigate the implications of a carbon tax, the details of which will be released soon, corporate law firm Webber Wentzel has said.

The National Treasury has previously confirmed with Engineering News Online that the discussion document on carbon taxes would be released for public comment by the end of July or beginning of August.

Treasury head of communications Jabulani Sikhakhane explained that comments on the document would be captured, and where possible, the document would be refined to reflect comments received. It would then be submitted to Cabinet for endorsement.

He said that any changes, or announcements, would be made at the time of the Budget or the Medium-Term Budget Policy Statement.

Carbon tax is described as an environmental tax on emissions of greenhouse gases, and it is a flat tax, as opposed to a progressive tax.

The three ways to levy a carbon tax were: to tax the final consumer; to tax dirty output; or to tax the producer of the emissions. The discussion document would outline the approach that the country intended to pursue.

Webber Wentzel partner Hennie Bester recommended that a unified approach among business was the best way to understand how viable the carbon tax was in achieving its policy aims.

"However, a unified approach will only be possible if business players educate themselves on the important issues arising from a carbon tax, what the international best practices around these are, and how it should fit in with an overall mitigation policy."

REVENUE NEUTRAL TAX PREFERRED

Bester hoped that such a tax would be revenue neutral, but warned that businesses should plan for the alterative scenario as well.

A revenue-neutral approach to new taxes simply meant that despite changes to the tax system, the State would not recover more, or less tax, from the taxpaying community - although the composition of that community may change.

Thus, if emissions were taxed, tax collection elsewhere would be eased, for example there could be rebates or incentives for low-carbon dioxide (CO₂) emitting growth.

Bester added that such an approach to carbon tax would be more attractive, both from the tax policy side, and to the taxpaying community as a whole, since the State would be able to show that carbon tax was not simply a new source of revenue. The overall tax burden on the economy would not change, but would place such burden at different places.

Also, it would focus more clearly on the policy consideration underlying the tax.

Bester said that the imminent introduction of the CO₂ vehicle emissions tax was a case in point: the overall observation was that this tax was a new source of State revenue - because it was not accompanied by corresponding relief elsewhere.

"Insisting on revenue neutrality is a reliable method for keeping the State honest about the purported policies underlying these new taxes," Bester said.

International experience also indicated that revenue neutrality was a best practice for the introduction of a carbon tax.

In Scandinavia for example, the desire to reduce very high personal income tax created a favourable environment of the introduction of a carbon tax.

South Africa's fiscal policy has actively aimed at addressing "bracket creep" for personal income taxpayers, and a carbon tax could further boost such policy, although, added Webber Wentzel, all of that could change in the context of the current global financial crisis.

Bester stated that the way in which such revenue was to be applied was a different issue altogether, but "it is worth noting that a country with South Africa's developmental needs will need to factor this into its broader carbon mitigation policy".

TAX BASE, AND RATE, IMPORTANT

Bester says the impact of a carbon tax depended on its rate and its base - for example, whether it would be imposed on emitters of carbon, producers of carbon intensive energy, or on the users of such energy.

Extensive modeling in this regard, according to the Long term Mitigation Scenario (LTMS) planning project of the South African Cabinet, has shown that a carbon tax was a highly effective instrument in combination with other policy mechanisms such as a cap-and-trade mechanism, assistance programmes, exemptions and incentives.

"A carbon tax, irrespective of its base or rate, will not only have a direct impact on those subjected to the tax, but will also have a ripple effect throughout the economy. It thus seems obvious that a unified approach will carry more weight and have greater impact on the formulation of the broader emission policy of which a carbon tax should be one - very important - component".

However, it also seems obvious that high emitters will have greater direct exposure to a carbon tax, and their interests may thus differ from that of low or insignificant emitters.

High emitters would be expected to seek exemption or holiday periods from the carbon tax and the support for this from low emitters would be very significant.