Energy subsidies tripled since 2017, hitting R172-billion in 2020

Energy subsidies more than tripled, from R58-billion to R172-billion, between 2017-18 and 2020-21 with the lion’s share allocated to fossil fuels, a new report has found.

The research by the International Institute for Sustainable Development (IISD), an independent think tank, said the government spent almost R67-billion on bailouts for carbon-intensive companies, particularly Eskom (R56-billion in 2020-21) and R43-billion to support the oil and gas industry. In addition, carbon tax exemptions cost the country a further R45-billion in lost tax revenues. 

The report, South Africa’s Fiscal Energy Policies, explores the extent to which the country’s energy fiscal policies are aligned with goals to develop a robust domestic energy system that can provide low-carbon energy at a fair cost to all.

Pollution costs

Pollution from the use of fossil fuels costs South Africans at least R550-billion annually in environmental harm and damage to human health, the report found.

“Comparing fossil fuel subsidies, tax and non-tax revenues and externalities reveals that social costs are five times higher than revenues, with an annual net cost to society of R550-billion.”

The social costs that were estimated were from climate change and air pollution-related deaths and lost working days from fossil fuel combustion. Although there is uncertainty about these estimates, “the overall finding that social costs far exceed revenues is likely to be correct or even understated”.

South Africa imposes taxes on fossil fuel consumption, production and incomes, as well as charges for some externalities and fuel-related costs (such as transport). In 2019-20, total revenue from fossil fuels was R100.5-billion, constituting 2% of GDP and 7.4% of general revenue. 

Environmental taxes

The report describes how environmental taxes are in place for carbon and nitrogen oxide emissions — albeit with many exemptions — air travel, passenger vehicle purchases based on emissions, electricity generated from coal and incandescent light bulbs. But current environmental taxation does not match the social costs associated with the combustion of fossil fuels, it stated.

“The public are paying the price for the use of fossil fuels and are paying a much greater bill than the government,” said Chido Muzondo, the report’s co-author, at a webinar to launch the report.

Fiscal policies — subsidies, taxes and grants — are key tools that governments can use to reach their energy and climate targets, but “right now in South Africa, billions are spent propping up the existing fossil fuel system”, said Muzondo. “These subsidies represent an enormous cost to the public budget and take a heavy toll on people’s health and the climate.”

The report found that pollution associated with fossil fuel use places a heavy cost on the country’s residents. 

Muzondo said that among the recommendations was a need for a review of current energy fiscal policies and that the revenue generated by efficient pricing of fossil fuels could be used as targeted support for vulnerable households. “Increasing fossil fuel taxes is an important stage in the energy transition.”

Urgent need to reform

The report found that fossil fuel subsidies are too high. The team of authors recommend reforming or reducing bailouts provided to Eskom, ending exemptions to the carbon tax and increasing transparency on energy fiscal policies.

A senior economist at think tank Trade & Industrial Policy Strategies,

 Gaylor Montmasson-Clair , said the urgency to reform is evident. 

“Change is required and continuing on a business as usual approach is really not an option. The degree of inequalities in the country are persisting when you reflect on the fact that 43% of households in South Africa are energy poor. That is … a reminder that we need to certainly shift gear when it comes to energy access.”

The technology for a transition is unfolding rapidly, he said. “We cannot ignore that we are part of a global ecosystem, and if we don’t start shifting, the world will shift us at our expense and very clearly through border carbon adjustments, which are carbon taxes at the border of some countries. 

“These are coming. The EU has made announcements from 2023 it will have taxes on our exports to the EU, notional from 2023 and effective from 2026. That’s not a lot of time to adjust. And these will be conditional on the carbon intensity of our economy and whether or not we have adequate policies in place.”

Environmental taxes, he said, had been “woefully inadequate” perhaps with the exception of the plastic bag levy and the incandescent light bulb levy. “And they worked because the alternatives were easy, industry was on board and consumers could shift pretty easily. All others have not worked, because they’re either too low or there’s just no alternative … You can see that quite strikingly with the levy on renewable energy, you can see that with our carbon tax on motor vehicles.”

On the average South African car, the carbon tax is around R6000. “That is not going to shift the consumer at all … We also have to acknowledge that globally the evidence shows that carbon pricing to date, hasn’t really had an impact on emissions because it’s often too low, not implemented properly and is not part of a bigger package. This approach that we can just have carbon pricing that’s going to solve all our problems is extremely misguided because evidence to date shows it doesn’t work.” 

The urgency to reform is important. “We need to be mindful of doing that in an inclusive way, using the right tools to make sure we don’t push the burden once more on consumers, particularly on low-income consumers, when we should be putting it on polluters.”

Bailouts don’t account for true cost of coal

According to the report, bailouts distort the price of electricity generated from coal, failing to account for its true cost (externalities) and “making the price of electricity generated from coal seem cheaper than it actually is”. 

“Coal is the most underpriced fossil fuel in South Africa. It is estimated that the retail price would need to double to internalise its social costs. The exemption of coal from the carbon tax is particularly problematic given that the combustion of coal has the highest CO2 emissions of any fossil fuel. Eskom’s power plants do not comply with emission standards, resulting in significant amounts of toxic air pollutants and increasing social costs.” 

Coal taxes, ideally based on carbon and air pollutant content, need to increase not only to incorporate externalities related to emissions, but also to raise the funds needed for a just transition for workers, pension funds and mine site remediation because the industry inevitably declines as low-cost, low-carbon renewable energy replaces coal, according to the report. 

Although taxes on coal will affect electricity prices, these can be mitigated through targeted assistance to vulnerable consumers using coal tax revenues.

Make carbon tax tougher

Memory Machingambi, an economist in the treasury, said it regards climate change as the biggest risk facing humankind and acknowledges the need for globally coordinated action. 

“Well-designed carbon pricing measures provide adequate incentives for behaviour change of business and consumers and encourage a shift towards lower carbon and energy efficient technologies and practises in the short term, and dynamic incentives for investments in research development and technology innovation over the medium to longer term.”

She said a key tool is the carbon tax, “which can still be made tougher and wider” to meet South Africa’s commitments to reducing greenhouse gas emissions, adding that announcements for the second phase of carbon tax proposals would be made in the upcoming budget.

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Sheree Bega
Sheree Bega is an environment reporter at the Mail & Guardian.

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