We'll all pay the price for dirty power
The introduction of a carbon tax, announced in this week's budget speech, will generate billions of additional revenue for the state - but it could add to the cost of electricity. It has already hit the share price for South Africa's major greenhouse gas emitters.
Finance Minister Pravin Gordhan said the government proposed to introduce a carbon tax at the rate of R120 a tonne of CO2 (carbon dioxide) equivalent, effective from January 1 2015. CO2 equivalent is a measure used to calculate how much global warming a particular type or amount of greenhouse gas can cause.
To soften the impact, a tax-free exemption will be included.
Peet du Plooy, the programme manager for sustainable growth at Trade and Industrial Policy Strategies (Tips), an independent research institution, said that 60% of emissions would not be taxed at all and companies could avoid paying tax on a further 5% to 10% of emissions by buying carbon credits on the open market to offset their own emissions.
But the tax could add 4.8 cents a kilowatt of electricity generated by non-renewable energy sources such as coal.
"At R120 per tonne of CO2 and a 60% threshold, the 1kg of CO2 emitted for every one kilowatt hour (kWh) of electricity in South Africa will attract 4.8c/kWh of electricity," du Plooy said.
Gordhan said the electricity levy of 3.5c/kWh could be phased out.
If so, the net impact would still be an additional cost of 1.3c/kWh, according to Du Plooy, and although marginal, could be passed on to the consumer. The treasury's preliminary estimates indicate the tax could generate revenue of anything between R8-billion and R30-billion, depending on the uptake of offsets.
Du Plooy said it could be about R20-billion but, considering that electricity at present already accounted for R9-billion, the real effect would be closer to R11-billion.
With emissions of about 550-million tonnes for the country as a whole and assuming all emitters had to pay, but with 65% of emissions exempt (the 60% threshold with 5% offset), the taxable emissions would come to 192.5-million tonnes (Mt), which, at R120 a tonne, would raise R23.1-billion.
"The assumption on full coverage is unlikely to hold, however, so I would expect revenues of R20-billion or less," Du Plooy said.
It would seem a win-win scenario for the government, which is looking for ways to increase its tax base and has made commitments to the international community to reduce carbon emissions, although big polluters are likely to be concerned about it.
According to the carbon disclosure project, Eskom emitted about 230-million tonnes for the year ending March 2012 and Sasol about 60-million tonnes a year. Based on these figures, Du Plooy said Eskom would have to pay R3-billion more and Sasol, which received no subsidy, would pay about the same, which it would have to absorb.
Cecil Morden, chief director for economic tax analysis in the treasury, said the tax-free threshold of 60% was to give companies the opportunity to adjust without resulting in unintended economic consequences. Although it would apply to industry across the board, it was aimed at new investments rather than "sunk investment".
But markets have responded negatively to the news. The shares of the major emitters such as Sasol, ArcelorMittal, BHP Billiton, Sappi and Anglo American have all taken a knock since the announcement.
Morden said the proposed carbon tax was relatively low by international standards.
Du Plooy agreed. "The South African tax level is relatively low, especially when the threshold is included, although it is expected to rise over time."
The rate would increase by 10% a year during the first phase of implementation — from 2015 to 2020. He said Australia would be implementing a cap-and-trade system in 2015, which was the equivalent of a carbon tax, with a minimum price set at AUS$1 (about R9) a tonne of CO2. France had proposed a tax of almost $25 a tonne and Finland had a tax of $30 a tonne.
Environmental groups, including Green Peace and the World Wide Fund for Nature, welcomed the tax. Although some have previously lobbied for the money to be ring-fenced for green projects, Du Plooy said good fiscal practice did not allow the treasury to tie any of its expenditures to incomes.
"In addition, unless some of the revenues are returned to the poor through tax breaks or direct transfers [subsidies], the carbon tax would fall disproportionately on the poor."
However, once a portion of the revenues had been recycled to ensure the tax was pro-poor, there was scope for "soft earmarking", Du Plooy said.
This would ensure that budget allocations to support low-carbon initiatives were roughly in line with the size of the revenues from the tax.
Gordhan said an updated policy paper on carbon tax would be published for comment by the end of March this year. — Additional reporting by Lynley Donnelly