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Carbon tax – we must be prepared for what others may throw at us

7th June 2013

By: Saliem Fakir

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Minds become focused when things get real rather than abstract. This is what is beginning to happen since the National Treasury released its new discussion document on the carbon tax and the Minister of Finance announced that a carbon tax would become effective in January 2015.

Even if South Africa did not implement a carbon tax, would we be subject to carbon pricing in terms of goods and services from other countries? The answer is, yes, this is beginning to happen. The European Union (EU), while acting unilaterally on this issue, is hellbent on pushing through a carbon price on emissions from the aviation industry. This has become the subject of intense debate in the International Civil Aviation Organisation following threats of countermeasures or other forms of punitive retaliation by China, the US, India and other countries.

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About two years ago, when this debate about border tax adjustments (BTAs) – which is when other countries impose a carbon tax or price on your goods – was still nascent, this writer was involved in a study of what the imposition of BTAs would mean for South African exports from two of our major trading partners and export areas.

Under the South African Renewables Initiative (Sari 2011), a hypothetical threat assessment was undertaken for a carbon border tariff. It was found that R85-billion worth of exports could be vulnerable to costs of R5.4-billion a year. One expert opinion suggests that it is increasingly likely that carbon border tariffs will be imposed by importers like the EU and the US from 2020 onwards. Seventy-one product categories could be covered by EU tariffs, accounting for some €5.4-billion in trade.

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The BTAs could have major implications for South Africa. Assuming partial equilibrium and a carbon tax of US20c/t, the total amount payable per year would be €380-million. The charges are equivalent to an ad valorem tax of over 10% in the iron and steel sector and the nonferrous metals sector. The biggest payment (€104-million) would come from iron and steel producers. Other sectors that would be affected include gold (€89-million), platinum (€80-million) and coal (€68-million).

For the US, 13 product categories are covered, accounting for some $2.4-billion in trade. Assuming partial equilibrium and a carbon tax of US20c/t, the total amount payable would be $210-million. The charges are equivalent to an ad valorem tax of over 10% for nonferrous metals and 9.7% for the iron and steel sector. The biggest payment ($159-million) would come from nonferrous metals (gold and platinum). Other sectors that would be affected would be electro- metallurgical ferroalloys (iron-rich alloys of steel) and basic iron and steel, which would pay $28-million and $10-million respectively.

The study concluded that global markets could increasingly penalise carbon-intensive goods and services. It is already becoming clear that some tariff adjustments or BTAs based on the carbon content of goods are becoming attractive to many countries and these adjustments are backed with sound economic theory. The rationale behind increased border adjustments is the desire to ensure a level playing field in international trade, while incorporating the cost of climate damage into the prices of goods and services. In recent times, these adjustments have been prompted by the need to facilitate domestic economic resurgence in the countries introducing these adjustments.

Current trends seem to indicate that, worldwide, one form or another of carbon pricing mechanism will be in place in the next decade or so – most certainly in countries boasting the largest share of global gross domestic product or output. These trends have to be observed and understood for the sake of South Africa’s economy. Certain export- led sectors are likely to be more vulnerable than others, as has already been indicated. The impact may be worse if the goods are exported to countries that are implementing, or will, in the near future, implement some form of carbon pricing. For instance, between 1990 and 2009, the EU was a dominant trading partner for South Africa, but its importance is declining, with East Asia becoming increasingly important. BTAs undertaken by the EU would affect export sectors and the competitiveness of South African industry.

It could well be the case that, with the emerging trend to link emissions trading schemes between continents, typefied by what Australia and the EU are proposing, a blanket carbon pricing system across the world could be the norm in 10 to 20 years, especially if China moves from its pilots to total national coverage for carbon pricing. South Africa will have no option but to adopt a countervailing system and has the choice to make a nominal start early or simply delay the options until a future date. The cost and benefits of starting early, compared with delaying carbon pricing, have to be assessed. However, given the fact that adjustments take a long time, some form of early start – even at minimum thresholds – will allow the system to gradually adjust to the necessary changes.

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