Carbon tax shoots itself in the foot
Sasol recently appeared before Parliament to argue against a proposed carbon tax. Many shrugged this off as just another protest by an oil company — “They would, wouldn’t they?” Perhaps it was a wrong reaction.
The treasury hopes that the proposed tax will curb our carbon emissions.
Its policy paper is entitled “Reducing greenhouse gas emissions and facilitating the transition to a green economy”.
So the first question to ask is, how can a tax reduce an emission?
The treasury argues that emissions are associated with external costs, and that to ensure correct pricing, external costs have to be taken into account. However, there are two problems. First, can we determine the external costs of our emissions?
The answer is “No!” Any impact of greenhouse gas emissions comes mainly from the emissions of countries other than South Africa. We emit only about 1% of the global anthropogenic greenhouse gases.
The second question is whether the economic theory works for greenhouse gases: there does not appear to be evidence to suggest this if treasury’s argument is carefully evaluated.
Treasury supports its case
The treasury quotes a number of examples in support of its case:
• The European Union emission trading scheme is said to cover about 45% of greenhouse gas emissions in Europe. Yet according to the latest BP Statistical Review of World Energy, the EU’s emissions grew from 3.9-billion tonnes of carbon dioxide from fossil fuels in 1990 to 3.96-billion tonnes in 2007. They have since dropped to about 363-million tonnes, largely due to the economic downturn. The best that can be said of the scheme is that it may have limited the growth in emissions. However, the price of carbon dropped to less than $3 (about R30) in April and is not expected to recover in the foreseeable future, so its impact will remain low.
• “Carbon taxes are highest in Sweden ($41 per tonne of CO2).” Emissions dropped from 57-million tonnes in 1992 to 54-million by 2007.
• “Denmark … grants a 50% refund on the tax applied to the use of steam coal by industry. Households are subjected to the full carbon tax.” Denmark went from 59-million tons in 1972 to 58-million tons in 2007.
• “Finland introduced a carbon tax in 1990 at a modest level of $1.4 per tonne of CO2 and increased the rate over time.” Finland’s emissions were 47-million tonnes in 1990 and grew to 52.6-million tonnes by 2007.
• “On July 1 2010 the government of India implemented an excise tax [carbon tax] on coal at the rate of 50 rupees (about R7.85) per tonne of coal. “In 2010, India’s coal consumption was 629.7-million tonnes. It rose to 648.7-million tonnes in 2011 and 715-million tonnes in 2012.
• “Australia’s carbon pricing regime, which came into effect on July 1 2012, will use a fixed carbon price similar to a tax for the first three years, before moving on to an emissions trading scheme from July 1 2015. The carbon price began at a rate of 23 Australian dollars (about R214) per tonne and will increase by 2.5% annually.” By July 2013 the economic damage ran to billions and thousands of jobs had been lost, which cost Julia Gillard her government. Kevin Rudd, her successor, immediately ditched the tax.
• “In 1997 [Costa Rica] enacted a tax on carbon pollution, set at 3.5% of the market value of fossil fuels.” Between 1997 and 2008 carbon dioxide emissions in Costa Rica grew by more than 60%.
• Several other countries have recently introduced a carbon tax, but it is still too early to determine the effect, if any. Some countries, like France, have considered and rejected the tax. Almost every case cited by the treasury in support of its case in fact illustrates that a carbon tax is not effective in reducing greenhouse gas emissions.
It doesn't work
We can, of course, see that it is ineffective in South Africa too. Two years ago we introduced a carbon tax on vehicles. There has been a marked rise in the number of SUVs on our roads since the tax was introduced. Economic theory does not work!
It is probable that it doesn’t work because the demand for energy is not much affected by the price of energy. In economic terms, energy is quite inelastic. This should come as no surprise. Energy is one of the absolute essentials for creating wealth. As we strive for a better, more sustainable life, we need more energy.
It seems a contradiction in terms, but we only have to recall what happened when the lights went out in January 2008 — the economy went dark too.
So, what might the economic impact of a carbon tax be? One of the treasury’s answers surprised me. Its own models show that the burden of the tax will fall four times harder on the poorest of the poor than on the average citizen, while the richest of the rich will get even richer.
So the treasury agrees that a carbon tax will have a negative impact on our growth. This is, of course, precisely what Australia found.
The data suggests that a carbon tax does not achieve what it hopes to do and slows down our development. There has got to be a better way. Back to the drawing board, treasury.
Philip Lloyd is the Research Professor: Energy Institute, Cape Peninsula University of Technology, Cape Town