South Africa will seek to finalise its carbon tax policy by mid-year and may announce its implementation during the 2012 Budget, despite the absence of a global carbon price or a binding international agreement to deal with the climate change threat.

However, National Treasury officials have also stressed that attention will be given to economic competitiveness, as well as the sometimes “competing” imperatives of growth, job creation and poverty reduction. Therefore, any move to put a formal price to the country’s carbon “externality” will be phased in over time. In other words, any tax will seek to only partially recover the indirect costs associated with South Africa’s relatively large emissions footprint.

South Africa, which produces around 500-million tons of carbon dioxide equivalents (CO2e) yearly, ranks among the world’s 20 biggest emitters of greenhouses gases (GHG), and third when measured on a total emissions per capita basis. During the Copenhagen climate negotiations of 2009, the country voluntarily announced that it would move to reduce domestic GHG emissions by 34% by 2020 and by 42% by 2025 from a “business as usual” baseline, subject to the availability of adequate financial, technological and other support.

Speaking at a stakeholder workshop in Midrand on Wednesday, deputy director-general for tax and financial sector policy Ismail Momoniat said that 79 written responses had been received by the end of February to a carbon tax discussion document, which was released by the National Treasury in December. He also promised that further consultations would be pursued prior to the drafting of a policy paper, which should take place between April and July.

COP17 DRIVER?

Head of tax policy Cecil Morden indicated that a revised document should be presented to Cabinet by September and enter into the Parliamentary process by November. However, the process may be accelerated to enable lawmakers to assess the policy ahead of the 17th Conference of the Parties of the United Nations Framework Convention on Climate Change, or COP17, which will take place in Durban from November 28 to December 9.

The National Treasury favours a direct tax on carbon emissions, which it says will “impose the lowest distortion” on the economy, and the discussion document agues that a tax of R75/t CO2e, increasing to around R200/t CO2e “would be both feasible and appropriate to achieve the desired behaviourial changes and emissions reduction targets”.

Morden, therefore, revealed that government had decided to delay the release of a discussion document on emissions trading until August 2012 – a suggestion that was met with anxiety by the many businesses and representative organisations participating in the stakeholder workshop.

In fact, while the environmental lobby present lamented what it saw as a further delay to the implementation of the tax, business representatives questioned why governmetn had decided to narrow its focus solely to a tax rather than pursuing policy mechanisms that embraced both incentives and disincentives.

But Morden defended the move, noting that Austraila has recently reversed its decision on a cap-and-trade emmissions trading scheme and would, instead, be pursuing a fixed-price solution, which would eventually transition to a flexible trading scheme.

He stressed, too, that the tax was but one of several instruments being deployed to lower emmissions, referring specifically to demand-side management schemes that were currently being rolled out to lower power consumption.

National Treasury also dismissed calls for earmarking the carbon tax revenues for green investments, with Momoniat arguing that the allocation of revenue was pursued, through the Budget process, in an an accountable and transparent manner. The aim, he stressed was not a “sinister plot” to garner billions in additional revenue, but rather to change behaviour – it was also possible that other taxes could be lowered to ensure that the carbon tax was revenue neutral.

DESIGN NOT FINALISED

Morden refused to be drawn on how much revenue would be collected through the imposition of the new tax, saying only that the National Treasury would only make such calculations once the scheme had been fully designed and modelled. In a recent exercise, Deloitte calculated that government could collect an additional R82,5-billion, based on a price of R165/t of CO2e.

He also rejected the notion that electricity prices, which could rise by over 25% a year between 2010 and 2015, were sufficient to ensure a change in consumption patterns. The increases would make electricity prices, which had been “too low for too long”, more cost reflective. “But that cost reflectivity does not account for externalities,” he added.

However, no direct response was provided to questions about whether a market-based mechanism was appropriate in the context of a monopoly utility, such as Eskom. Precise details were also not provided as to how South Africa’s competitiveness would be sustained in the context of an economy that, under the New Growth Path, would seek to expand mining and manufacturing activities – activities that would, in all likelihood, still depend on coal-based power solutions.

Questions were also posed about the benefit to being an “early mover” in adopting carbon taxes, particularly given that South Africa’s Copenhagen offer to reduce emissions had been specifically tied to commitments of financial and technical support from rich countries, which had not been forthcoming.

But Morden warned that South Africa could not afford to adopt a wait-and-see approach, notwithstanding the lack of progress on reaching a globally binding accord. He also cautioned that a number of countries were already considering border tax adjustment policies, which could result in the imposition of taxes on products imported from countries not participating in global emissions reduction agreements.

Momoniat acknowledged that South Africa was grappling with “hard choices” and that a balance would be sought between environmental obligations and South Africa’s growth and development plans. “But we have decided that we need to act and the process we are going though now is about how best to act.”