South African Finance Minister Pravin Gordhan announced in his budget speech that a carbon tax will be implemented in the next financial year that runs from 2013-2014. The proposal is to implement the carbon tax at a fairly low level, and then define an increasing price path over time. It is a cautious approach but this is finally an announcement that a carbon tax will be implemented, which is a major step for a developing country like South Africa. [Note: South Africa’s annual carbon emissions were among the top 20 in the world, while their per capita emissions rank them much lower and emissions over time rank lower. Their energy use predominantly comes from coal and four-fiths of carbon emissions are due to energy use and supply.]
While more details are expected sometime this month when the Treasury Department issues its next discussion document, some information on the potential details are available in the South African Budget Review (pg. 56). The next document is expected to contain details on the exact design of the carbon price. A carbon tax of $16 per ton is expected (South African Rand 120 per ton of CO2e) in 2013, with annual increases of 10 per cent through 2019.
However, the effective level of the tax is not entirely clear at this point but it is expected that a portion of each sector’s carbon pollution will excluded from the price. The Budget Review (pg. 196) outlines that all sectors will have 60% of their pollution excluded from the price. And some industries may get greater exclusions from a portion of the rate (i.e., having a lower effective rate). Some energy-intensive and trade-exposed (EITE) sectors—such as cement, iron & steel, and aluminum— will get these larger exemptions. These exemptions would decrease the effective tax rate. For example, the cement, iron and steel, aluminum and glass sectors are expected to pay only 20% of the rate — $3 per ton (R 24). The waste, forestry, and agriculture sectors will be completely excluded from the price (see the figure for the effective rate over time).
As a result, in 2013 when the price is expected to go into effect, the effective rate will be around $6 per ton (R 48), rising by 10% per year from 2013 – 2019. Current signals indicate that in 2020 the effective rate will be about $16 per ton (R 120 / t CO2-eq) with the exclusions. They might be revised in further discussion on the carbon tax.
The basis for these exemptions is not clear as our own work has suggested that they be linked to the share of energy as total costs (or carbon intensity). And a structured approach would require that firms seeking a lower tax rate would agree to an emissions reduction plan.
The Budget Review does recognize that it is crucial to recycle the revenue that is raised. Broadly speaking the proposal goes in a good direction. The revenues might be used for energy efficiency and to support low-cost households. The latter is crucial and the modalities of implementing it will hopefully be elaborated, e.g. through an extension of the poverty tariff to a greater diversity of fuels used by poor households.
To have a larger effect in reducing emissions, more will be needed. Based on analysis of carbon taxes we have done, it would seem that current price levels are not enough to change the structure of our economy. Whether it is further strengthened would depend in no small measure how ambitious climate action by other major countries turns out to be, including the U.S.
While this proposal is not perfect, having a rising carbon price of any kind is a major move for South Africa. The details matter so stay tuned.
This is a guest post from Harald Winkler, on staff at the Energy Research Center of the University of Cape Town in South Africa. He is a leading researcher on climate change and energy policies in South Africa and in international global warming negotiations.
Photo: solar hot water heater on house in South Africa; courtesy of: Abri_Beluga.