The odds are not good that the carbon tax will reduce emissions as coal’s future in SA’s energy mix looks secure, writes Franco Barnard
Having seen efforts in the February budget to plug a R48bn hole in the state’s finances, everyone should be aware that the government is keen to find new sources of revenue — hence the Easter weekend value-added tax hike, sugar tax implementation and a rise in fuel levies.
However, the new carbon tax, due to be launched on January 1, is not just another way to raise funds for a cash-strapped government; it is meant to have a higher purpose, a green goal. That’s the theory, anyway. It is being sold to business as part of a strategy to cut emissions — the stick. The carrot will be incentives to cut pollution, to follow the green path. Details of these remain murky apart from the S12L energy efficiency tax allowance, which will lapse in 2020.
The concern is that if a new tax that does little to meet its objectives is to be instituted, it will cease to be a green tax and will become just another method to scoop funds from Corporate SA. The key question is whether a carbon tax will significantly reduce emissions by pushing SA away from its high reliance on coal as an energy source. The odds are not good despite the government just having signed 27 renewable energy independent power producer agreements.
The evidence suggests a carbon tax will not change the way SA operates. The country has a high carbon-intensive energy mix due to its reliance on coal power stations. The economy relies heavily on manufacturing and mining, both energy-intensive industries. It is likely, therefore, that the planned carbon tax is doomed to have little effect, except as a way of raising revenue and creating a minimum tax on some struggling industries.
Coal will remain a vital part of this country’s energy mix for the next few decades and probably much longer, even though a steady move towards gas and renewables is likely.
Meanwhile, the appointment of Cyril Ramaphosa as president is likely to kill the Zuma presidency’s ambitions for a nuclear-build programme of more than R1-trillion. A new report by the Organisation for Economic Co-operation and Development, Taxing Energy Use 2018, provides some vital pointers to what can — or, more importantly, what can’t — be done with a carbon tax in SA. It is the most comprehensive report on energy taxes, accounting for 80% of global energy use, and includes SA as one of 42 countries studied.
"Some countries have introduced specific taxes on carbon with the explicit objective of mitigating carbon emissions, and some refer to environmental objectives to motivate relatively high excise taxes on energy use," the report suggests. It looks at the link between the GDP per capita of each economy and the effect a carbon tax will have on that economy.
SA is on the lower end of the GDP per capita band and will most likely be unable to afford a carbon tax. The US, Canada and Australia have high GDP per capita and impose very low, effective tax rates on carbon emissions. A table in the report shows SA has a very high carbon intensity of energy — it burns so much coal — but a relatively low GDP per capita. Together, it effectively destroys the case for a carbon tax.
The table also clearly suggests that taxes on carbon emissions are not the only factor to influence the carbon intensity of an economy. The fuel mix is shaped by what is available in a country’s immediate vicinity. It is also shaped by market forces. SA is rich in coal deposits and its solar radiation cost is at the high end by global standards.
There is almost no competitiveness in SA’s energy market. Eskom is the sole supplier of electricity, and the independent power producer programme is limping along in the face of a reluctant Eskom and deeply hostile trade unions.
Another graph in the report shows energy intensity of GDP against effective carbon tax rates. SA is shown to have a very high energy intensity per GDP and low effective carbon tax rate. The US, which has until recently been the world’s greatest carbon emitter, has a much lower energy intensity per GDP with even lower effective carbon tax rates than SA. It’s the same for Australia, India and Brazil, all of which have similar economic drivers to SA. Perhaps SA can learn from them?
If a carbon tax will not do much to reduce the carbon intensity of SA’s energy mix, why impose it? The Treasury needs the cash and should be more forthcoming about this instead of cloaking the tax in the benign glow of the fight against global warming.
In recent parliamentary hearings on the carbon tax, proponents said it had to be much higher if it was to change behaviour. It would be different if a speedy dash to renewables and nuclear were viable and affordable, as a carbon tax could then have a tremendous effect on the intensity of SA’s energy mix. Sadly, it isn’t.
• Barnard is a manager at Cova Advisory.