JAMES REELER: Business plea to soften carbon tax is a false economy

It is tempting to take the recent “joint position” by organised business on carbon tax as a reasonable set of proposals, given their stated commitment to decarbonisation (“Business groups unite in calling for slower rollout of carbon tax”, September 13).  

This argument, essentially for a watered-down Carbon Tax Bill, was put forward by the Energy Council of SA, Minerals Council SA, Business Leadership SA, Business Unity SA, the SA Petroleum Industry Association and the Energy Intensive Users Group at recent parliamentary hearings on the bill. It is a delaying tactic on the part of the high emitters this group represents.

To put this in perspective, consider Durban’s recent floods. As the scientific identification of climate change’s fingerprint in such events matures, the World Weather Attribution Network estimates these floods are twice as likely and 8% more intense because of global warming. They displaced more than 40,000 people, killed nearly 460 and cost more than R17bn. Pakistan’s recent floods were estimated to be nearly twice as intense as without climate change.

Similar calculations can be made for almost every drought, hurricane, flood and failed crop that occurs worldwide now that we understand how our fossil fuel appetite increases both the likelihood and intensity of extreme weather events. With the reduced ability of the biosphere to absorb these events, the urgency of this crisis can brook no further delay — certainly not to after 2035 as suggested in the business proposal.

Of course, we are all complicit in these effects. We consume products and depend on those emissions, to a greater or lesser extent. Every tonne of carbon we continue to emit has a price that will be paid regardless of taxes — it will be paid in discomfort, poverty and despair across the world. The most recent estimate of this real cost on development and economic growth is more than $180 a tonne, without even accounting for extreme events.

So when organised business in SA says it cannot afford to pay a tax of $30 a tonne on carbon in 2030 it is in effect demanding a continued subsidy of more than $150 per tonne of carbon dioxide to bolster operations. This subsidy will be paid primarily by the poor and climate vulnerable. To then suggest the tax should be diluted to save jobs is invidious in the extreme. Yes, SA’s carbon-intensive economy is starved for jobs. We would be imprudent to collapse the economy, but that is not what the Treasury is proposing.

With the generous allowances built into the carbon tax’s first-phase extension, most businesses receive in the range of a 90% discount, implying a total tax liability of no more than $2 a tonne of carbon dioxide in 2025. This price is inadequate to drive real change in corporate investments, as has been demonstrated by the slow uptake of low carbon options. The complaint that there are no allowances in the subsequent phase is a smokescreen.

The Treasury has said repeatedly that there will indeed be allowances to 2030, and the WWF believes these should be reserved primarily for development-critical sectors with unavoidable emissions, such as cement and steel (although green hydrogen will increasingly reduce emissions from the latter).

Setting aside the huge human and economic effects of surpassing 1.5°C of warming in the next few years, the next most important argument for strengthening carbon tax is economic.

A quarter of the world’s emissions now are covered by a carbon price, and this is rising annually. The EU, one of SA’s major export markets, is imposing a carbon border adjustment mechanism (CBAM) from 2026 to protect its economy from cheap, carbon-intensive products. Starting with steel, cement, fertiliser, aluminium and electricity, it will soon expand to plastics and chemicals, and also include upstream emissions for all products.

With a similar US bill, such mechanisms will proliferate over the next decade as various jurisdictions decarbonise and move to protect their national industries, affecting our access to these markets.

SA’s ArcelorMittal produces on average 2.72 tonnes of carbon dioxide a tonne of steel, potentially attracting a post-2026 EU border carbon adjustment surcharge of more than €160. A European shipbuilder importing this steel would pay this surcharge to EU-based carbon project developers or to purchase emissions certificates on the EU Emissions Trading System.

However, if that same price was imposed by the SA Treasury as an equivalent carbon tax, the importer would have no CBAM liability. Assuming ArcelorMittal passes through the whole tax cost, the shipbuilder will in effect pay the same price, and the SA fiscus has €160 to spend on social upliftment, mitigation and supporting the just transition. If the national carbon price is under €10 (as proposed in the business paper), then more than €150 is lost to the fiscus, at no benefit to ArcelorMittal or the European shipbuilder.

In truth, many SA products will be priced out of the European market because our economy is so carbon intensive. However, a high tax rate also provides an incentive to local manufacturers to reduce emissions.

The argument that such rates are unaffordable presupposes that the business will absorb all the cost. While some businesses are indeed price takers, others can pass the cost through — the real choice such businesses must make is how high to set the price; and certainly, once CBAMs become de rigeur, carbon cost will be a component of most prices.

A smart business investing early will have a lower carbon product than competitors, and therefore a lower carbon tax liability and cheaper product. This gives the early movers an advantage, but clearly there are those who would rather push the hard choices down the line.

A high tax thus encompasses both a free-market argument (the tax will incentivise a race to the bottom for carbon emissions, reduce cost and ensure products continue to access international markets) and a social responsibility transition argument (revenue recycling can incentivise the just transition and support equity).

The elephant in the room is not the predictable resistance by high-emitting businesses, it is SA’s high-carbon electricity sector. Since upstream emissions will be included in CBAM calculations, business is vulnerable to carbon prices because of their electricity consumption. Here again an adequate carbon price can help finance the transition, and policy for rapidly building out the grid to support rapid renewable energy integration is critical.

How does SA prevent our own economy being flooded by cheap, carbon-intensive products? Simple — impose a CBAM of our own. In all this there is no reason not to undertake higher tax rates in line with the recommendations of the IMF and the High-Level Commission on Carbon Pricing and Competitiveness, which both recommend that by 2030 developing nations should be imposing carbon taxes of above $50.

With climate change imminently passing 1.5°C and the climate crisis already affecting the whole world, we need to be serious about using the strongest economic tool in our arsenal: a high carbon price.

• Reeler is a senior climate specialist with WWF SA.