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Carbon tax – some pragmatism is needed

7th August 2015

By: Saliem Fakir

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The furore over the carbon tax that is playing itself out in public and behind closed doors is leading to an impasse.

From the submissions made to the Davis Commission (which is reviewing the general tax system), it can be said that industry does not want it and probably never ever wants to see it implemented. Industry’s rationale? The carbon tax will kill business. In fact, some of the responses to the carbon tax have tended to be overdramatic, and the claim that the tax will kill business has no basis in reality. But there is no doubt that it will affect profitability.

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Drama aside, there will be both pros and cons, and the latter include the fact that, if it is used as a blunt instrument, it will most likely lead to more harm than good. At present, given the low level of the tax in the first phase of its implementation and all the exemptions that are being offered, including offsets, the carbon tax’s effect will be small. A ‘sort of’ carbon tax already exists in the electricity levy. We have always recommended that a carbon tax with revenue recycling is perhaps a better option than just a carbon tax as a pure measure to penalise rather than win over firms and consumers.

Secondly, some industries are likely to adjust better than others, as some industries can easily adjust to new technologies or optimise their systems. Others will find it harder as investments in existing technology may still be at the start or in the middle of their full utilisation life span.

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The effect of the sunk cost in an asset that is already locked in the production system will make it expensive to switch to another technology without losing competitiveness. In highly competitive industries, the switchover to cleaner technologies cannot happen without some assistance. Nonetheless, the general rule that all industries and consumers will be affected alike is too loose an observation because it is likely that some industries and sectors will be affected more than others.

Thirdly, South Africa has a structural issue when it comes to the electricity sector, as we are totally dependent on a single producer of electricity, which derives 90% of its electricity from coal. A carbon tax should be closely aligned with the implementation of an integrated resource plan that diversifies the energy mix in such a way that our carbon intensity declines over time. It makes more sense to upwardly adjust carbon pricing measures in close proximity to improvements in implementation performance as more low-carbon technologies or energy carriers are introduced . This should also be accompanied by liberalising the ability of consumers to participate in distributed generation. Such flexibility makes it easier to switch to cleaner energy sources if that is the intent of the carbon tax.

Fourthly, timing does matter. The carbon tax has the danger of being viewed as another ‘poll tax’. Everybody knows what happened to Margaret Thatcher after “that debacle”. Periods during which there is need for countercyclical spend to boost economic growth are not the best times to introduce new forms of levies and taxes. South Africa sorely needs more economic activity, and one area of concern is the energy crisis. There is great urgency to address the crisis and to diversify our exports base. In weak economic cycles, ‘generosity’ towards contributing more taxes and levies tends to be constrained across the board and not just where large firms are concerned.

On the pros side, South Africa has international obligations to deal with its high emissions profile, even though we have resolved to do this on condition that international climate finance is available to support scaling cleaner energy solutions. A carbon tax or pricing not only signals our commitment but also indicates that we are mobilising domestic resources to reduce our carbon emissions. In doing this, we should also make every effort to secure long-term sources of climate finance from the international community.

We believe that, in all likelihood, some form of international carbon pricing regime will be implemented by the major economies and our key trading partners. We should work in anticipation of this. It is reasonable to assume it is several years away and, since economies take a long time to adjust to new conditions, the carbon tax’s aim is to allow systemic adaptation to this eventuality in the global trading arena. If we do not do this, we will most likely face penalties, as airlines are already being threatened with the European Union’s emission taxes for air travel.

Finally, carbon taxes will disincentivise future carbon-intensive investments and encourage the investment world to start pricing this in as a risk factor in the way future investment decisions and capital allocations are made. A new class of climate- friendly investment opportunities will emerge over time and this is good for economic diversification.

Pragmatism should prevail. Perhaps the current electricity levy should be converted into a carbon tax as it is already in place. Some time should be given for adjustments and the focus must be on reviving the economy and changing the energy mix, at both utility level and distributed generation level to allow consumers to switch to other energy sources.

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