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Carbon tax will motivate change

The commencement of a carbon tax on January 1 2015 serves as a clear call to action for all greenhouse gas emitters in South Africa.  Greenhouse gas emissions need to be measured and effectively managed to avoid heightened exposure to this future tax. While detractors of the carbon tax see it as a way to generate new sources of government revenue from already overburdened consumers, the tax actually has a key intention to support a resource efficient economy in aid of South Africa’s longer-term competitiveness, while stimulating investment in new industrial sectors. This tax will provide the economic motivation to achieve this objective.

The carbon tax is, however, a unique form of taxation, as any liability can be substantially reduced by companies mitigating their emissions.  Many of the large emitters will be able to reduce their exposure to the liability substantially through ensuring energy is used efficiently, partially displacing their electricity usage through on-site renewable energy generation, and reducing waste streams, amongst other areas. The technologies and knowledge currently exist to achieve many of these reductions.

There is, however, some outstanding detail of the tax policy that needs to be clarified before both large and small emitters can effectively react. These include aspects such as how the emissions thresholds will be set, the monitoring and reporting procedures to be applied, exactly how trade exposed and process emissions will be calculated, and more detail around the offsets allowance. This clarity is expected to be provided in the draft carbon tax policy, due at the end of March. 

The global economy is carbon constrained and the EU, Australia, China, South Korea and others are already implementing carbon pricing schemes, or are in discussions to commence implementation. While arguments around harming South African companies through increasing costs need to be considered, the costs of inaction (including continued exposure to rising costs of fossil fuels, significant resource wastage in the economy and penalties, or exclusion, from international markets) must also be evaluated.  With the phasing out of the electricity levy on non-renewable electricity, the initial impact of the carbon tax on electricity prices will be relatively small, while introducing a rigorous carbon pricing scheme can actually boost a country’s competitiveness as global energy prices rise and markets become more carbon aware.

Provided that the carbon tax is supported by effective policies to encourage competition within the electricity market, enable effective public transport and support green technologies, the net effect of the tax could be viewed quite differently in a few years from now.

It is without doubt that a carbon pricing scheme will increase certain costs for companies in South Africa, but it also brings about the opportunity to drive increasing efficiencies, provide water and health related benefits, and develop innovative ways to manage emissions.  There are only two years left before the carbon tax is enforced, and while there is still a way to go in finalising the tax, South African companies should begin to consider its impact on their operations and investments now, including implementing reporting systems and identifying ways to effectively mitigate the effects of the tax.  

The nature of the carbon tax proposed in South Africa is unique in that it actually encourages companies to implement activities that result in the avoidance of the tax liability. This is coupled with positive benefits that could flow from such activities such as encouraging investment in energy efficiency and renewable energy, developing new markets, encouraging the research and development of green technologies, decoupling emissions from economic growth, and in future, allowing South Africa to remain competitive in a resource constrained global economy.

Alex McNamara is a principal consultant at Camco Clean Energy, and Patrick Curran is an analyst at the same company.

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