Carbon tax: a misguided call?
The carbon tax could impose heavy costs on industry in exchange for little environmental gain as long as delays in energy reform block firms’ ability to reduce their carbon intensity
SA’s new carbon tax will impose a blanket cost increase on SA firms, further weakening growth and raising unemployment at a time when the economy is under immense pressure.
Though the inclusion of various tax-free allowances should help firms shoulder the burden initially, uncertainty over the carbon tax regime to be followed after 2022 and the failure to align it with SA’s other climate change instruments are likely to undermine SA’s attractiveness as an investment destination and delay its economic recovery.
The tax, which has been set at R120 a ton of carbon dioxide equivalent emissions, takes effect on June 1 despite huge opposition from the private sector, including Business Unity SA (Busa), energy-intensive users and the Minerals Council SA.
Opponents of the tax argue that, given the current state of the SA economy, a carbon tax is neither necessary nor suitable.
"It’s extremely costly, very difficult to collect and is in effect a tax on the poor," says energy specialist Rob Jeffrey. "It will put up the cost of goods and slow down economic growth. It has a devastating effect on industry, including the many heavy industries, like mining and steel, that are intensive energy users but essential for a developing economy like ours."
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But it’s not just large energy-intensive firms and big polluters that stand to be affected. Consumers will also be hit in the pocket.
Motorists can expect to pay a carbon tax of 9c/l on petrol and 10c/l on diesel from June 5, which will rake in an additional R1.8bn for the fiscus this financial year. This is on top of the 15c/l increase in the general fuel levy that took effect on April 3.
The aim of the carbon tax is to enable SA to meet its climate change commitments under the 2015 Paris Agreement. Currently SA’s greenhouse gas (GHG) emissions are within the limits of the so-called peak, plateau and decline trajectory area, and unlikely to increase above this line before 2022 to 2025.
The tax appears to have been drafted in a manner that prioritises revenue collection over environmental mitigation
In fact, the Minerals Council’s modelling shows that, given its low-growth trajectory, declining electricity usage and falling carbon intensity, SA will likely meet its GHG emission reduction targets (13%-14.5% by 2025 and 26%-33% by 2035) without a carbon tax.
"We aren’t climate change denialists but must ask, practically, if this is the time [to introduce the carbon tax] given the stress the gold and coal industries are under," says Minerals Council CEO Roger Baxter.
The council says the tax will threaten the viability of many operations and result in roughly 6,836 net mining job losses.
Worse, because the tax appears to have been drafted in a manner that prioritises revenue collection over environmental mitigation, it is also unlikely to achieve its desired intention of shifting behaviour away from carbon-intensive energy and products, according to the Industry Task Team on Climate Change (ITTCC), a sister body of the Energy Intensive User Group.
The ITTCC fears that the way in which the carbon tax is designed could result in large economic disruptions and costs to industry in exchange for only minimal environmental mitigation, as the effective tax rate is gradually increased.
This is problematic, as the intention of the policy should be to drive behaviour change over time and not result in significant job losses," says ITTCC chair Shailendra Rajkumar.
Another concern is that because the tax is not aligned with the department of environmental affairs’ mandatory carbon budget regime — designed to further reduce GHG emissions — for phases beyond 2022, firms could suffer a double penalty.
This has increased the level of policy uncertainty in industry, which affects firms’ long-run planning and curbs potential investment, something the country can ill afford, Rajkumar says.
Given the structure of SA’s electricity sector, the ITTCC says the Integrated Resource Plan and carbon budget regime would have been more suitable vehicles for driving structural economic change.
"The carbon tax should not have been implemented," says Rajkumar. "Rather, the focus should have been on cohesive policy development and the consolidation of key environmental, energy and trade policy instruments."
Peter Attard Montalto, head of capital markets research at Intellidex, agrees that the tax is "a bad idea", as the government’s delay in reforming SA’s energy sector has blocked the very shift away from carbon intensity that the tax seeks to encourage.
"I think freeing up all the energy policy blockages, combined with the underlying improvements in the energy-intensive nature of the economy, would all have a far more positive impact on climate change commitments than the tax," he says.
Though he concedes that the existence of large tax-free allowances should help prevent the tax from being a major drag on the economy initially, he still expects it to dampen SA’s latent economic recovery this year and further detract from investment.
Busa warns that the effect of the carbon tax on the economy has been underestimated and that unresolved policy issues around the tax will further erode investment.
It argued strongly in the parliamentary committees debating the tax that the cost of doing business in SA is already "excessively high" and that having to pay carbon tax on fuel and on direct emissions on top of SA’s already high fuel and electricity costs would be inflationary and render the cost of doing business untenable.
"Even with the allowances provided for in the Carbon Tax Act, the costs of doing business are anticipated to rise," says Jarredine Morris, Busa’s energy and environment manager. "Given the current state of the economy, these are costs that business and consumers cannot afford."
Busa and the Minerals Council are also irked by the fact that the government has failed to address several unresolved policy issues raised by the Carbon Tax Act before promulgating the legislation.
First, there is a lack of policy alignment between the carbon tax and the carbon budget system. The government has promised to ensure alignment, but nothing has happened.
Second, consultation has not yet begun on the post-2022 carbon tax regime, which hinders firms’ ability to estimate their future tax liabilities.
What it means
Given the state of the SA economy, a carbon tax is neither necessary nor suitable
Several other issues essential for the effective implementation of the tax and tax planning remain outstanding. These include the fact that SA’s reporting system for verification of GHG emissions has not been finalised, the renewable energy premium has not been published, and regulations regarding various allowances (including carbon offsets, performance benchmarks and trade exposure) are still outstanding.
All this policy uncertainty inhibits firms’ ability to estimate their future tax liabilities and so is likely to delay or prevent long-term fixed investment projects from going ahead, says Baxter. "We need much greater certainty."
The bottom line is that the government has still not realised that regulatory clarity and the creation of an enabling business environment are essential to generating fixed investment. Until it does, jobs and growth will remain elusive.
But at least the environmental lobby is happy. Local environmental activists have welcomed the tax as a "significant first step", but called for even more stringent action from the government, including the passing of the Climate Change Bill.
"We commend the president for putting wheels to this long overdue issue," says Morné du Plessis, CEO of WWF SA. "The purpose of the tax is to improve human health, contribute to climate commitments and give resilience to the environment as much as to the economy. During the second phase, we will have to ramp up our transition ambitions significantly."