South Africa Details Carbon Tax Options

by Lorys Charalambous, Tax-News.com, Cyprus

14 December 2010

As foreseen in South Africa’s Budget Review Statement earlier this year, the National Treasury has now published a carbon tax discussion paper for public comment.

The paper follows the announcement by South Africa last year that it intends to reduce greenhouse gas emissions by 34% by 2020 and 42% by 2025 below the levels they would reach with no government action. In that respect, it is recognized that the use of market-based policy measures to price carbon will be necessary, so that the cost of climate change can be reflected in the price of goods and services.

The carbon tax discussion paper, entitled “Reducing Greenhouse Gas Emissions: The Carbon Tax Option”, discusses the economics of climate change, the role of carbon taxes in reducing emissions at the least cost possible, and compares regulatory and market-based policy measures as well as carbon taxes and emissions trading schemes.

The paper points out that the design of a carbon tax is best addressed by focusing on the definition of an appropriate tax base and measures to mitigate potential adverse impacts on low-income households and on the trade competiveness of certain sectors. It argues that the gradual phasing in of a carbon tax is the best way to deal with competitiveness concerns.

Three options for imposing a carbon tax are explored in the paper - an emissions tax applied directly on measured carbon dioxide emissions; an upstream tax on fossil fuel inputs based on the carbon content of the fuel (for example, coal); or a downstream tax imposed on the outputs or products generated from fossil fuels (for example, electricity or liquid fuels).

The Treasury concludes that “a carbon tax imposed directly on all measured emissions of carbon dioxide appears to be the most appropriate.” The second best option, it says, would be to tax fossil fuel inputs such as coal, crude oil and natural gas, based on the carbon content of these fuels.

It considers that “both options create adequate incentives to encourage behavioural changes. A tax on actual measured emissions would require appropriate institutional capacity to measure, monitor and verify actual emissions. An upstream tax would be based on the estimated carbon content of the fuel in question and could piggyback on the existing tax administrative system. In the case of an upstream tax, its design could also include a crediting system to encourage the development and adoption of technologies, such as carbon capture and storage.”

Other design considerations to be looked at include: the provision of certainty to taxpayers, with the level of tax being phased in; that the tax rate should over time be equivalent to the marginal external damage costs of carbon dioxide emissions to effect the appropriate incentives; the coverage by the tax, as far as possible, of all sectors; and that relief measures to deal with competiveness concerns, if any, should be limited and of a temporary nature.

The Treasury further recommends that “the phased introduction of the tax at initial low rates, with a commitment to phase-in increased levels of taxation over a specific time period, would provide certainty and an opportunity for taxpayers to adjust to the new tax.” This, it is said, would also “provide a strong price signal to both producers and consumers to change their behaviour over the medium- to long-term.”

Comments on the carbon tax discussion paper are to be submitted by February 28, 2011.

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