South Africa, a country heavily dependent on fossil fuels for its energy generation, is ranked 13th out of the 21 countries on KPMG’s 2013 Green Tax Index. The country releases 559 million metric tons of greenhouse gas a year and this figure is steadily rising. At a climate change conference in Copenhagen in 2009, South Africa committed to cutting emissions by 34%, by 2020.
Managing greenhouse gas (GHG) production can be done using tax levies or incentives. The South African government is proposing a mixture of the two. The tax can either be levied on upstream emission, which some companies can mitigate by changing the way they produce; on direct measured emissions or the downstream final product. Irrespective of the way in which the tax is implemented, it will eventually be passed through to the end user. Making a more pollutant end product more expensive will hopefully result in an environmental incentive for friendlier production.
Environmental tax isn’t new. The price of new cars already includes a form of environmental tax, which is why the discussion here isn’t whether or not to implement environmental tax but rather how the taxes should be expanded.
South Africa will be the first African country to introduce carbon tax and the second BRICS nation, after India initiated a nation-wide tax on coal produced in and imported into the country. The initial rate will be R120 ($11.5)/ton of carbon-dioxide, with various levels of exemption increasing at 10% a year during the first phase between 2015 and 2020.
South Africa’s carbon tax is postponed until 2016, in this time government will further investigate the tax’s impact on growth, job creation and other economic implications. The announcement of the tax sparked growing concern that carbon taxation may hold South African companies back.
The proposed tax will hit Scope 1 GHG emitters the hardest. These are emissions from sources that are directly owned or controlled by an entity. Sectors will receive an initial 60% discount, an additional 10% for those that compete internationally, 10% for process emissions; there is also the option for trade in carbon credits – granting another 5 to 10% relief.
According to a Nedbank Group’s sustainability carbon specialist, Marco Lotz, one of the barriers to implementation of the carbon tax is the lack of knowledge on carbon footprinting by all the stakeholders. He mentions that other aspects that should be expanded are the capacity of the institutions that audit and manage the magnitude of information that will be received by government institutions, as well defining who owns the carbon offsets.
The annual emissions of public utility company Eskom are around 228 million metric tons a year. It contributes 75% of South Africa’s carbon footprint. With a possible guaranteed discount of around 60 to 70%, further relief will need to be argued for. Eskom has mentioned it will pass on the effects of the tax to the consumer. South African consumers have already suffered through an avalanche of price increases by the utility company. Since 2008, there have been approved increases of 20% each year. An 8% annual increase, which began in 2013, will continue until 2018.
There is currently a R0.04/kWh ($1=R10.4) environmental levy on electricity included in the price consumers pay. At this stage, it will be replaced by an equivalent amount of carbon tax, leaving the price of electricity initially unchanged, proceeded by a 10% increase on the R0.04 each year.
“The current proposal will have a significant financial impact on the already high cost base of producing steel, estimated to be R630 million ($60 million) per annum. This is based on a 70% exemption and our steel production of around 5 million tons,” says steel maker ArcelorMittal – one of the country’s top emitters.
The company says that existing technologies for manufacturing steel do not allow for more carbon efficient alternatives and that there are no new technologies available either.
The estimated revenue from the tax is set at R8 billion ($764 million). There is uncertainty as to where this money will go, although there is talk of it feeding into the general state coffers, therefore not directly assisting in decreasing greenhouse gas pollution.
Government needs to ensure that the standards set are realistic and enforceable. A combination of tax, environmental regulations and investment in renewable energy projects could be the answer the world is looking for.