All eyes on budget for news on SA’s carbon tax

Introducing a price on carbon is the biggest single intervention we can make to reduce our greenhouse gas emissions, writes Harald Winkler

IN LAST year’s budget speech, Finance Minister Pravin Gordhan proposed a carbon tax for the coming financial year. The plan is to introduce a carbon price at a fairly low rate, across all sectors but with a reduced burden for several.

What we know so far, beyond a 2010 discussion document, is mainly from the 2012 budget speech and review. Gordhan said “a carbon tax at R120 per ton of CO²-equivalent above the suggested thresholds is proposed to take effect during 2013-14, with annual increases of 10% until 2019-20”. It was a clear move to price carbon, although R120 is not a tax level that will transform the energy economy.

The aim of a carbon tax is to reduce greenhouse gas emissions, not to increase revenue. Revenue neutrality was to be achieved through spending on energy efficiency and ensuring poor households did not face higher energy bills. Households might, for example, benefit from an increased poverty tariff, possibly on other fuels. The Treasury has also modelled spending on reduced company or personal income tax, direct transfers, or government savings and investment. It found a modest effect on gross domestic product, which could be reduced by the appropriate recycling of revenue. With recycling into savings and investment, there was even an increase in economic output — as resources were more efficiently allocated.

The headline tax level was reduced by thresholds for energy-intensive and trade-exposed (EITE) sectors. Iron and steel, smelters, petrochemical factories and mines use more energy for every rand of product than others and would feel the effects of a carbon tax more.

Transition for these sectors is needed, but the design of the thresholds for EITEs should be improved by, for example, setting thresholds relative to sector average emissions and electricity baselines.

The most important move is to get a carbon price in place. So will Gordhan implement it this month?

Some suggest that the focus is on other issues. Eskom is asking for 16% annual increases in the present multiyear price determination for electricity. Parliament is debating how to set up an independent system and market operator.

So why should we still set a price on carbon now? Electricity prices will rise anyway, mainly due to the fact that we are in a huge investment cycle in new power plants. Tariffs will rise from historical levels assumed at 40c/kWh in 2010 to more than 100c/kWh in 2020, even up to 120c/kWh for many price paths. The Department of Energy’s 2010 Integrated Resource Plan showed such rises in all scenarios, regardless of what is built. The increment of a carbon price is small.

Which leads to another point: we have a 3.5c/kWh levy on non-renewable sources of electricity generation. That is small compared with the price increases due to the build programme.

Assuming, for rough comparison, 1kg of CO²-equivalent/kWh (it is perhaps more like 0.96kg, but close enough), this translated into R35 a ton of CO²-equivalent. How does this relate to the R120/ton tax proposed by the Treasury? The carbon tax design in last year’s budget gave the electricity sector a 60% tax-free threshold, meaning it would in effect pay R48/ton. Take another 10% for offsets, and then only 30% of the R120, or R36, is payable. Presumably Eskom and independent power producers would object to both a general carbon tax and this levy. Given the numbers above, the levy could become the tax — for electricity, but it would also apply to other sectors.

Introducing the Treasury’s carbon tax would broaden the carbon tax. Electricity supply is the largest single source of our greenhouse gas emissions. We have to clean up electricity to reduce emissions, but focusing on electricity won’t solve the problem. The key reason is to set up a system for pricing carbon. Starting at a low level, it will provide data and enable learning, including the learning that a carbon tax won’t “kill industry”. It won’t kill industry at the higher levels, either, it will only make it more resilient to a carbon-constrained future. If we do not prepare for that future, the effects of climate change will undermine any development — and will affect the poor the most.

Introducing a price on carbon is the biggest single intervention we can make to reduce our greenhouse gas emissions and to start making our fair contribution to tackling global climate change. Many will be listening closely to what Gordhan says on Wednesday of next week.

by Harald Winkler
Feb 22, 2013


• Winkler is professor at the Energy Research Centre at the University of Cape Town. These views are his own.

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