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Why a carbon tax will be useful in supporting a transition to a low-carbon future

1st April 2011

By: Saliem Fakir

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The National Treasury’s deadline for comments on the draft discussion document on carbon taxes was February 28. Business and industry have set up a special task team on the carbon tax. They do not like the idea at all and are preparing for a big fight. The debate is unlikely to be sober.

There are two tendencies emerging in the business sector – there are those who are in business for the long haul and take the view that a carbon tax is inevitable; they want certainty. Then there are those who are in business for short-term gain. Their aim is to make profits quickly and say goodbye to South Africa as soon as possible. As far as they are concerned, the carbon tax puts a spanner in the works.

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I much prefer to work with the first group of businesspeople.

There are a few reasons why, I think, a carbon tax will be useful. Firstly, the carbon tax needs to be located within a consolidated vision for a transition out of high fossil intensity and dependence. Different threads of this vision exist as fragments rather than one consolidated narrative. We need to have a better vision and better articulation of this idea of a low-carbon transition or, simply, how we can make ourselves less dependent on fossil fuels. A carbon tax is one instrument to achieve this aim, but its justification or legitimacy would be better understood if they were part of a discussion about a managed transition out of fossil fuels dependence. Currently, a carbon tax is seen simply as a revenue generator. China’s experience may be a good example of how we should do things. China’s twefth five-year plan (2011 to 2015) is a plan for a low-carbon transition. The plan sets a carbon intensity reduction target of 17% for every unit of energy used. A carbon tax will be instituted by 2013. China’s five-year plan sets a very good vision – and gives good reasons – for the carbon tax.

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Secondly, a transition is not going to be painless. The question is whether a small amount of pain now will do us a world of good in the future. There are compelling reasons why we need to get out of coal and oil sooner rather than later. A carbon tax can help finance the exit.

Thirdly, nobody is suggesting that we must be irresponsible and irrational about how we implement the carbon tax. The tax must be implemented step by step, which helps in building the architecture for a carbon tax regime as we learn by doing. This will also give the private sector and parastatals time to adjust to the new tax regime. So, we should start low, but not so low that we see no behavioural change.

Fourthly, a transition to a new energy system cannot take place without a ladder from the existing system. To kick away the ladder now will most certainly bring the roof of our future low-carbon house down. Work must be done with industry and business to get to some of the details of how the carbon tax can best be implemented.

The effects of the carbon tax on consumers will depend entirely on whether specific sectors have monopolies or not. Monopolies tend to pass costs onto consumers. In sectors that are more competitive, firms that can adjust will do so because consumers are less likely to buy goods and services from them if they pass on the increases. They will simply buy from the firm that opts to absorb the carbon tax and adjust to new solutions, as they will continue to offer goods at affordable prices.

Nobody is oblivious to South Africa’s socioeconomic challenges. How we lessen the overall burden on the poor and prevent industry from shutting down or relocating are going to be part of the challenge. But doing nothing is not the correct response. Fossil fuels pose a strategic risk to South Africa’s economy in the long term. Oil price volatility is a case in point. Price increases and continued uncertainty in supply are both inflationary and place onerous burdens on both the public- and private-sector investment decision-makers.
Coal and oil dependence will have a regressive influence on our long-term economic sustainability.

Finally, revenues generated from a carbon tax, even though they cannot be ringfenced, should be used to invest in new low-carbon infrastructure to subsidise electricity for the poor and to help industry become more competitive in the face of the threats of the imposition of border carbon taxes by countries that import our goods.

Private carbon footprint labels and standards are already being instituted and are affecting supply chain methods and responses. To be oblivious to these emerging barriers to growth is simply myopic.

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