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Taxing Dilemma

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Taxing Dilemma

8th July 2011

By: Terence Creamer
Creamer Media Editor

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The National Treasury is planning to finalise its thinking on the possible imposition of a carbon tax later this year. It has requested input from stakeholders and has received something like 80 written responses.

One of these came from South African power utility Eskom, which is South Africa’s largest carbon dioxide (CO2) emitter. The utility burnt 124.7-million tons of coal in the year to March 31, 2011, and produced 230.3-million tons of CO2. In fact, the coal-heavy State enterprise produces about 1 t of CO2 for every megawatt hour of production and in 2010/11 it produced 224 446 GWh.

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In its response, which has not been made public, Eskom reportedly warns that it will not be able to absorb the tax and that it will be forced to pass on the full cost to consumers in the form of higher tariffs – a serious threat, given that prices increased to 40.3c/kWh in 2010/11, nearly double the 2009 level, and will rise to 65c/kWh by 2012/13.

The utility has also indicated that it could apply for two more increases in the 25%-type range during the next round of increases, which would run from 2013 to the end of March 2016, even before any carbon tax is considered. In line with the formula used to calculate Eskom’s revenue requirement, a R2-billion increase in Eskom’s costs currently translates into a 1c/kWh increase in the tariff.

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The utility’s primary energy costs have already increased to R38.8-billion and now include R5-billion for government’s 2c/kWh environmental levy, which became effective on July 1, 2009.

In its 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”.

But a number of the responses, including Eskom’s, raise concerns about the possible economic, employment and electricity price implications.

In its annual report, Eskom warns that planning and construction lead times for any migration to a low-carbon baseload scenario may take as long at ten years and involve significant investment. It, therefore, calls for a macro- economic study to determine the effects of such a tax on the economy.

Others are also concerned, with the National Planning Commission noting recently that, while South Africa’s resource-intensive economic path is likely to be unsustainable, the costs of a low-carbon transition would not “fall evenly” and export sectors could “suffer”.

It also warns that any additional jobs that might arise in so-called green industries would need to be set against the potential job losses in the mining industry, as more expensive energy constrains the sector’s activities. The 30-page document even questions whether it is possible to reduce carbon emissions and environmental impacts while remaining a competitive commodity exporter.

Some are more strident, saying that South Africa cannot afford to put existing competitive industries at risk and should actually be looking to expand those industries to promote wealth and job creation.

Another strong argument against such taxes is that, in the absence of a global agreement and few signs of any tangible economic upside from being an early adopter, South Africa should exercise caution.

On the other hand, government is painfully aware that it needs to more than nudge business in a more sustainable direction. How to achieve that without a tax, which would force business to begin internalising a dangerous externality, is extremely unclear.

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