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Key carbon tax considerations for policymakers, stakeholders

16th August 2013

By: Creamer Media Reporter

  

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By: Duane Newman

 

This is the last of three articles on a major challenge for South Africa – how to implement a new regime of carbon taxes to curb greenhouse-gas (GHG) emissions without crippling industry. In our first two articles, we noted government’s commitment to curbing emissions and the recent publication of an updated carbon tax discussion paper, and looked at the ways in which carbon taxes might impact on the competitiveness of targeted industries. In this article, we look at some of the practicalities of imposing carbon taxes. We believe it is vital for businesses to closely study the recent carbon tax discussion paper.

Taxes can be designed to achieve certain outcomes, and regulators can choose specific features that will determine how the measure will affect the broader economy as well as specific individual stakeholder groups. We now identify how policy should be designed and briefly discuss who or what should be taxed, how this will lead to cuts in emissions and what should be done with the revenue.

What and Who will be Taxed?
The first key step in designing a carbon tax policy involves determining the commodities on which the tax will be levied. While it may seem obvious to tax the emissions themselves, this approach might be difficult to implement if it requires new infrastructure and operating procedures for measuring and reporting GHGs. It may only be practical for the largest emitters, such as Eskom, Sasol and large mining houses.

Many jurisdictions specify a cost of carbon, or carbon dioxide. They then calculate the embedded GHG emissions per unit of various fuels or generated power, and then apply a tax at the point of purchase. For industries such as mining, emissions intensity (as measured per unit of output) will vary significantly. It will depend on the quality of the extracted material and the amount of processing needed to isolate the mineral from the ore. By directly taxing the fuels and power, existing systems for tracking their respective distribution can be used to moni- tor and collect the carbon tax.

Additionally, regulators will need to decide on the segments of the economy that should be subject to the tax. For example, Boulder Colorado has a carbon tax levied only on electricity, and which is paid by the utility. This utility, in turn, charges its own customers. Transport fuels are often a major source of emissions, but taxing them has an immediate impact on consumers, which may be undesirable. Many jurisdictions, such as British Columbia, cover all fuels and power sold within their borders.

Where is the Opportunity to Reduce?
In addition to the practical necessity of providing data collection and enforcement, it will be the duty of regulators to identify the segments of the economy that have real opportunities to reduce emissions. For example, electricity generators such as Eskom may find it difficult to achieve meaningful emissions reductions if low-carbon generation assets, such as nuclear, solar or wind power, are not available on sufficient scale. Thus, any short-term emissions reductions can only be achieved by reducing demand or improving efficiency.

One key goal of increasing the price of emissions is to generate demand for low-carbon technologies, thereby driving innovation and creating new industries. An additional consideration when looking at the scope to reduce emissions is whether or not the technology or technologies to achieve these reductions can be sourced locally. If there is no local capacity to produce, install and operate low-carbon solutions, then the costs of compliance will be higher and the tax will cause capital to flow out of the country when the capital goods are imported.

Carbon taxes can be targeted to support specific fuels and technologies which regulators favour for use in their region. This support is not limited to investments made with collected revenues, although many regions choose to reinvest collected taxes into green projects. Both Finland and the UK, for example, mandate lower tax costs for combined heat and power facilities. Sweden’s carbon tax, on the other hand, has resulted in increased biomass use for heating and industry, because these fuels are classified as renewable.

What Should be Done with the Revenues?
Many programmes have explicit restrictions on how carbon tax revenue can be used. Initially, the National Treasury did not want to have any restrictions at all, but its approach to revenue recycling seems to have softened. The most common stipulations on the use of revenue include:

  • State investments in low-carbon and renewable technologies;
  • subsidies to low-income citizens most affected by increases in energy prices;
  • investment programmes and subsidies for key domestic industries to finance low-carbon processes; and
  • offsetting other taxes for low-carbon businesses at the expense of carbon-intense industries, thus creating a more favourable tax environment for the greener producers.

Market-based measures are important tools for incentivising GHG reduction. By reflecting the real cost of pollutants, regulators can incentivise green growth and generate significant non-GHG benefits to public health and natural resources. Fees collected through climate legislation can also be used to offset other taxes, such as corporate, income or payroll taxes, or to ameliorate the impact of carbon taxes on sensitive constituencies.

Carbon taxes can also be used to target specific sectors or activities which have been identified as having an undue impact on the emissions profile of the country. This would include taxes on coal, providing an incentive to promote cleaner forms of power generation.

 

  • Newman works for Johannesburg-based Cova Advisory and co-authored this article with Robert Kauneng, who works for Thomson Ruiters in Washington DC.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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