Should we have a carbon tax to promote a low-carbon economy?

16th April 2010 By: Saliem Fakir

The question of the merits of a universal carbon tax compared with those of a cap-and-trade system is a source of considerable debate among policymakers. Some time soon, the National Treasury should be releasing a discussion paper on the matter, and this may or may not settle the issue.

South Africa produces 65% of Africa’s and 1,5% of the world’s carbon dioxide emissions.

Whatever format the tax will take, the pass-on effects and the ability to recycle the tax proceeds for further investment in low-carbon options have to be weighed carefully. The tax should be judged in relation to other taxes and subsidies that are already factors in production costs.

A carbon tax on its own would not lead to a low-carbon future but it certainly would nudge South Africa along the right direction.

Elements of a carbon tax regime are already being put in place. For one, we have a 2c/kWh tax and then there is a flat emissions tax for cars.

The debate is more about whether the full environmental and social costs should be incorporated and how, where and when this should take place.

In general, there should be a shift away from subsidising fossil fuels to adding a carbon resource tax to fossil fuels – coal should, at least, be subject to this as a way of accommodating the externality costs associated with coal mining, transport and shipping.

This is something that has not come to the surface in the manner being proposed here. It has implications for the coal industry and costs for consumers, especially poor households, which still rely on raw coal for heating and cooking.

It may not be an idea that would particularly fly in South Africa but it requires some consideration.

The proposal on emissions taxes could be dealt with in a much more interesting way. This is as much a thought experiment as it is a serious engagement to deal with the debate with a slightly different tack.

Here, I go out on a limb but would receive no conciliation if I did not, at least, air these views.

Given that Eskom is the biggest emitter and is wholly owned by the State, there should be a policy framework that obligates Eskom to reduce its share of coal-fired electricity from, say, 90% to 60% of total contribution or whatever it takes to meet specific emission targets.

There should not be a tax but Eskom should be obligated to make this shift. One of the obligations would be to factor in the cost of the tax Eskom would have had to pay but to convert it into an equivalent top-up fee for renewables as part of an expanded renew- able-energy feed-in tariff.

Eskom should be required to either implement its own renewables projects, where the subsidy can accrue to itself, or be forced to buy renewable electricity from the market within a certain timeframe.

The second-biggest emitter in South Africa is Sasol. A special ‘feebate’ system should be considered for Sasol, where a carbon tax that is, in effect, a surcharge is charged for every ton of carbon emitted.

For every ton of emissions that Sasol avoids through improvements it undertakes, it should get 50% of the savings back as a rebate but the rest in investments in new low-carbon solutions (these would be accompanied by depreciation benefits, a research and development tax rebate and other benefits already in existence).

If these obligations are not fulfilled, both Eskom and Sasol should be subject to penalties which are either 100% of the carbon tax or 70% more. These numbers should be treated as merely hypothetical. They are meant to illustrate a point and not to be definitive.

A third category of big emitters comprises energy-intensive users like the smelters. A specific ‘green’ obligation could be a con- sideration that takes into account the transfer costs of a fossil levy and a carbon tax.

This could be the residual amount in the form of a special levy that is dedicated to the development of renewables and could be levied as part of the electricity charge or as an annual tax based on the total electricity consumed.

In return, this category of big emitters could be issued with a ‘clean carbon certificate’, or something of that sort, which entitles them to protection from future border tax adjust- ments imposed by importing countries.

The current debate is too narrow and is borrowed from elsewhere. We should, at least, try to have a carbon tax regime that suits our own political economy.

The key principle, though, is that, where we tax, we demonstrate tangible, economically feasible and transformative benefits by reallocation to low-carbon solutions.