Carbon tax in South Africa – No longer just hot air

Jon Duncan

Jon Duncan

Since 2010, the debate concerning the net effect of pricing carbon in the South African economy has been contentious, with concerns ranging from international competitiveness and financial impact to local industry and labour concerns.

South Africa is a significant global emitter of green-house gases (GHG), with a heavy reliance on fossil-fuel based energy. In order to contribute to tackling climate change, the country has a dual responsibility to honour its international emission reduction commitments and to reduce its GHG emissions in line with the National Development Plan (NDP). Government’s announcement of a market-based carbon pricing mechanism is an important step towards shifting the economy to a low-carbon growth path by initially targeting the most carbon- and energy-intensive companies.

Long walk to carbon tax

South Africa is not alone in its climate and carbon tax endeavours — by November 2018, 46 national and 24 subnational jurisdictions had already put a price on carbon.

On February 19 2019 the South African Carbon Tax Act was passed in Parliament, and the following day it was formally announced during the National Budget speech. The Act includes a R120 per tonne carbon tax for primary GHG emitters, a carbon tax on liquid fuels, economic incentives for energy efficiency, and the use of carbon offsets as a means of reducing tax burden. It will be implemented in a phased approach, with the first phase extending from June 2019 to December 2021, escalating at 2% above the consumer price index annually.

From an investment perspective the market impact is anticipated to be mostly muted for Phase One, owing to carbon allowances and offsets, which will result in an effective tax rate of between R6 and R48 per tonne. Phase Two, from 2022 onwards, envisages a higher tax to begin aligning with global rates. Depending on the revised rates, the impacts in Phase Two could materially impact high-intensity carbon emitters.

Taking heed of climate change

Given the economic implications of the scientific consensus around climate change, it is not surprising to see the financial ecosystem seeking out ways to minimise market risks, while at the same time capitalising on the emerging opportunity set. What is becoming apparent is that there is firm recognition by the market of system limits imposed by climate science on the global economy. At the same time we see continued capital flowing to renewable energy infrastructure, supported in part by innovation in the green bond market, which continues to grow. The implications here are hard to ignore. While the global context is material when it comes to climate change risk, the local context faces a number of social risks, which constitute the triple challenge of poverty, inequality and unemployment.bHowever, the reality is that climate change will only serve as a multiplier of this triple challenge within the South African context and therefore needs to be all the more urgently addressed.

What this means for long-term investors

On the upside, the transition to a low-carbon economy presents long-term investors with a range of new market opportunities. Renewable energy, energy efficiency, energy storage/charging, green property and green bonds are some examples of nascent growth areas. Specialist infrastructure, private equity and impact funds provide institutional investors with vehicles to access these markets.

A carbon tax of nine cents per litre on petrol and 10c/l on diesel will apply, which will be carried by the consumer. These impacts will likely remain, becoming part of the fuel levy adjustments – which for 2019/20 are 29c/l for petrol and 30c/l for diesel. Continued fuel cost increases and the expanding electric vehicle market will drive cost parity in time. Already luxury car brands are positioning themselves in South Africa; there are five new additions to the local market with average battery ranges varying between 400km to 480km.

From a national budget perspective the tax is intentionally planned to be revenue neutral. The first phase will be characterised by a combination of tax incentives and revenue-recycling measures as means of managing the economic impact.

Symbolically the carbon tax is an important step for the South African economy in decoupling economic growth from carbon intensity. The ultimate aim of a carbon tax is to disincentivise future carbon-intensive investments and improve energy efficiency by utilising alternative and cleaner technologies.

Jon Duncan is head of responsible investment, Old Mutual Investment Group