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South Africa Explores Carbon Tax Policies

by Lorys Charalambous, Tax-News.com, Cyprus

20 October 2011


Within a white paper delineating South Africa’s climate change policy, the government has called for a range of economic instruments, including market-based instruments such as carbon taxes and emissions trading schemes, together with tax incentives.

In the white paper, issued by Water and Environmental Affairs Minister Edna Molewa, the South African government has given its key carbon-emitting sectors, including energy and transport, two years, to October 2013, to finalize ‘carbon budgets’. Those budgets should abide by the official objective that the country’s greenhouse gas emissions (GGEs) should peak in the period from 2020 to 2025, remain stable for around a decade, and decline thereafter in absolute terms.

In introducing the climate change policy, Molewa emphasized that the government would work with the significant emitting sectors, so that they could be given the time needed to transition to less carbon-emitting production, while also managing the inevitable impacts of change through interventions that would sustain South Africa’s economic development.

The white paper reiterated the role of environmentally-related taxes to complement other policies to address climate change. It was recorded that the government has already introduced the electricity generation levy, motor vehicle emissions tax, a range of tax incentive measures to support renewable energy investments, and the proposed energy efficiency savings tax allowances.

As part of the process of exploring more comprehensive reforms for addressing climate change, the National Treasury has already published a carbon tax discussion paper in December 2010, which elaborated on the role for carbon taxes as a policy measure to stimulate behavioural changes among producers and consumers in favour of less energy intensive, lower-carbon emitting alternatives.

It was confirmed that the National Treasury will continue to develop carbon tax policy, such that the tax rate should, over time, “be equivalent to the marginal external damage costs of GGEs to affect appropriate incentives. However, in the absence of an international climate change agreement and therefore a global GGE pricing system, a partial, rather than full, internalization of the externality will be considered as an interim measure.”

In addition, consideration will be given to whether the tax applies to GGEs or a proxy for such emissions, such as fuel inputs or outputs. Should a proxy tax base be used, however, the levy of the tax according to the carbon content of fossil fuels will be considered.

Measures will be also be taken, either in tax design or through complementary expenditure programmes, to offset the burden such a tax will place on poor households; and, to address potential negative impacts on industry competitiveness, the introduction of carbon taxes at initial low rates, with a commitment to phase-in increasing levels of taxation over a specific period, will be considered, giving taxpayers an opportunity to adjust to the new tax.

A phased implementation of the tax towards a comprehensive coverage of all economic sectors is believed to be desirable and will be considered, and, although the full earmarking of revenues is not regarded as being in line with sound fiscal policy principles, some form of on-budget funding for specific environmental programmes will be considered.

TAGS: South Africa | environment | tax | economics | business | tax incentives | fiscal policy | carbon tax | Africa

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