Finance Minister Pravin Gordhan openly disagreed with the Organisation for Economic Cooperation and Development’s (OECD’s) assessment that, notwithstanding a doubling in electricity prices since 2008, South Africa tariffs remained too low and needed to rise “substantially” to cover costs, reduce emissions and eliminate implicit coal subsidies.

In its ‘Economic Survey of South Africa 2013’, the third to be released by the OECD since 2008, the authors argued that continued strong increases in power tariffs were necessary to ensure full cost recovery.

In addition, they asserted that further increases would offer one of the simplest measures for unwinding the prevailing implicit subsidies for coal and electricity.

However, Gordhan described further tariff increases as a “delicate issue” and indicated that government would prefer that the adjustment towards cost-reflectivity be managed “in a careful way” so that future rises did not further undermine the competitiveness of key industries.

Both the report and Gordhan’s response came only days after the National Energy Regulator of South Africa surprised many by granting State-owned power utility Eskom yearly increases of only 8% for the five year period from 2013 to 2018 – the utility had sought yearly hikes of 16% over the period.

But OECD secretary-general Angel Gurria pointed out that South remained among the most emission-intensive middle-income countries, ranking forty-seventh in per capita greenhouse-gas emissions in 2008 – at 10.3 t of carbon dioxide-equivalent, the country was 43% above the global mean.

“This is close to the average of upper-income countries – that’s one area where you look like a developed country, but you don’t really want to,” Gurria quipped during a media conference in Johannesburg on Monday.

Part of the reason for the high emissions was South Africa’s reliance on coal for the production of 92% of the electricity consumed.

“Despite sharp rises since 2008, your electricity prices are still among the lowest in the world and about half of prices in the OECD and remain below marginal cost,” Gurria added.

The OECD also supported South Africa’s proposed introduction of a carbon tax, but questioned the complexity of the design being pursued.

“In designing climate change mitigation policies, favour broad and easy-to-implement instruments with limited demands on administrative capacity, such as a simple carbon tax,” the OECD argued.

Gordhan acknowledged the energy-intensive nature of the South Africa economy, which required a proactive response from both government and the private sector.

He also reaffirmed that government remained committed to reducing emissions, evidenced by the country’s renewable-energy programme, as well as the proposed introduction of some form of carbon tax from 2015.

However, he was concerned that an immediate transition to cost-reflectivity in the electricity sector could “harm” the country’s competitiveness and would impose a large cost burden on households.

Gordhan indicated that it, thus, disagreed with the OECD on the issue of the best electricity price path and the way South Africa employed coal in its power generation mix.

“These are, I’m sure the OECD will concede, country-based decisions, which we have to make on the basis of circumstances,” he concluded.

In his presentation, Gurria agreed that the further price hikes should be managed to ensure that the adjustment costs are minimised and the poor safeguarded.