Carbon tax: Don’t throw the baby out with the bath water

Legend has it that back in the day, when a bath was, at best, a fortnightly affair, the entire household would share the same bath water. The lord of the house would bath first, followed by the men; then the lady and the women would bathe and lastly it would be the children and the baby's turn. By that time the water would be so dirty that the baby could scarcely be seen and so the maids were cautioned not to accidentally throw the baby out with the bath water.

Today, the idiom is used to suggest an avoidable error in which something good or essential is eliminated when trying to get rid of something bad or inessential. The numerous heavy-weights who are weighing in against the carbon tax run the risk of suggesting precisely that: rejecting the essential along with the inessential.

At this stage, both champions and critics of the tax have a point.

From the champion's perspective; it's no longer just about high greenhouse-gas emissions or where South Africa stands globally on the list of emitters that matters. It is about the basic inflation-related costs associated with an ongoing over-dependence on fossil fuels and the country’s balance sheet. Sound arguments for the carbon tax are those which call for a long-term view of our economy.

The recent fuel price hikes (and the whopper planned for next month) are a good reminder that the price volatility of oil affects us all, particularly when 95% of our crude oil requirement is met through imports. South Africa's cheapest and easiest-to-mine coal deposits are said to have reached peak production.

Availability of coal from new deposits will require extensive and expensive new infrastructure, and there are questions about the quality of this new coal. Clearly fossil fuels are a business and investment risk. But this gets little attention in the debate on carbon tax because the focus is almost always on emissions and costs.

The tax can be used to encourage reduced emissions by shifting our economy towards less energy consumption and less carbon intensive sectors, it can generate economic wealth and create jobs by diversifying the country’s export base and competitiveness through new technologies. And in doing so, it can free up the valuable resources currently going into managing the inflationary effects of coal and oil dependency, and so increase investments in the development objectives of the economy.

These are some of the positives, but in its current form, critics of the tax have a point as well. Without some significant shifts in design, the net effect of this tool intended for good threatens to become a cost burden to consumers and the economy. 

Electricity tariffs are one such element of the tax which requires shifting. The reality of the electricity sector is that Eskom holds a monopoly on electricity supply. Consumers have no choice when it comes to either energy supplier or technology. As it stands, there will be pass-through costs arising out of the tax in electricity in addition to an existing environmental levy in the tariff if the structure of the sector is not changed. At best, end users may reduce electricity consumption, but this can not be the end goal of a growing economy – we have to enable users to choose more efficient technologies.

The tax will not suddenly change the fuel mix for electricity production unless the tax itself is used to support a new profile for the sector through a revenue recycling model. Despite the tax, we will still be stuck with an electricity system that is dependent on the pace of government procurement through Eskom or the Independent Power Producer process to bring down the overall carbon intensity of the grid.

For the tax to show positive effects and for emitters to reduce emissions there must be workable alternatives. While some emitters and energy intensive users may be able to self-finance their low carbon options, others will not, especially in industries that are already uncompetitive.

The tax will also need to be supported by policies, which remove non-price barriers to provide long-term price certainty and reduce risks to green investment and low carbon technologies. But in order for government to action such a shift, and to ensure that our energy, fiscal and industrial policies continue to speak to each other, improved understanding of alternative technologies is required.

Elements of the tax design also need improvement to enable a modal shift in the transport sector from road to rail in the case of freight, and from private to public transport in the case of passengers. In a country where public transport is limited and often unreliable, the number of vehicles on our roads continues to grow. Road congestion harms our economy in other ways too: reducing productivity, increasing our imports of oil and increasing spend on roads which could and should be used for better social ends.

The carbon tax is a useful and necessary instrument. While we don’t believe that the perverse impacts of the tax are government’s intention, there is a clear need for design improvements to ensure a stronger link between the tax and the strategic objectives of a low carbon economy.

While the tax in its current form includes a number of problematic elements which should indeed be redesigned, the carbon tax itself is essential. The alternative of evading the tax will make the country more reliant on fossil fuels, resulting in adverse consequences for economic, social and human development in the country.

In order to keep the baby and toss the bath water, we cannot only think of the short term, but must consider what is most necessary for the long-term sustained growth of our economy.

Saliem Fakir is head of WWF South Africa’s Living Planet Unit. Manisha Gulati is an energy economist with WWF South Africa’s Living Planet Unit. The unit's work is focused on identifying ways to manage a transition to a low-carbon economy.

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