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Proposed carbon offset mechanism flawed, argues energy advisory firm

Proposed carbon offset mechanism flawed, argues energy advisory firm

Photo by Reuters

7th January 2015

By: Natalie Greve

Creamer Media Contributing Editor Online

  

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As South Africa readies for the introduction of a contentious carbon tax in 2016, local greenhouse gas (GHG) and energy management advisory firm EcoMetrix has argued that current restrictions on projects eligible to provide carbon offsets – a single element of the proposed suite of carbon emission reduction measures – would debilitate the effective implementation of a local carbon credit market.

A carbon offset was described by National Treasury as an external investment that allowed a firm to access GHG mitigation options in a manner that was cheaper than an investment in its own operations and typically involved investment in specific projects or activities that reduced, avoided or sequestered emissions.

Carbon offsets were aimed at enabling firms to cost-effectively lower their carbon tax liability, while incentivising investment in GHG mitigation projects that delivered carbon emissions reduction at a cost lower than the proposed carbon tax.

The carbon tax formula, as announced in the 2013 National Budget, allowed for a basic tax-free threshold for emissions above a minimum 60%. Other elements of the formula included additional transitional allowances, including the carbon offsets, which could increase the tax-free threshold by up to 90%.

Published for comment in April 2014, Treasury’s Carbon Offset Paper proposed that several carbon offset project types be excluded from the scheme, including projects that would be developed inside the carbon tax net.

This was aimed at avoiding a scenario in which the potential “double-counting” of financial benefits from GHG mitigation created distortions in the envisaged local carbon credit marketplace, with the entity generating the credits being able to potentially sell the credits to other entities for lower prices than projects in sectors that were not covered by the tax.

Other projects excluded from this scheme on this basis included energy efficiency projects owned or controlled by companies that were covered by the carbon tax, as well as cogeneration projects and fuel-switch projects implemented as part of activities that were owned or controlled by companies covered by the carbon tax.

Opposing this rationale, EcoMetrix noted in a statement that the development of offset projects within the tax net and the trading of these offsets between affected parties should be allowed if the offset mechanism was to become a meaningful component of the overall carbon tax.

EcoMetrix partner Lodewijk Nell asserted that the shortfall of the current design was that, while the 60% tax-free threshold softened the impact of the tax, it also reduced the benefit of emission-reduction projects of affected parties within the carbon tax net by 60%.

“While a project outside the tax net can receive up to R120/t for emission reductions, the net financial benefit for a project within the tax net would only be R48/t or less, depending on the total of the tax-free threshold and additional tax-free allowances,” he noted.

Adding that the current design could favour more expensive options outside the tax net, Nell outlined that related mitigation activities outside the tax net may cost more than within the tax net, owing to a higher incentive for investment in projects outside the mechanism.

These additional costs were compensated by a higher net reward per ton of carbon dioxide, mitigated up to a maximum of R72/t or higher.

“This inadvertent effect goes against the principles of favouring least-cost options – a principle core to carbon offsetting mechanisms globally,” he held.

EcoMetrix partner Henk Sa argued that a further shortcoming of the offset principles was that collaboration between affected parties was not incentivised.

By allowing offsetting within the tax net, affected industries were incentivised to assist each other in achieving emission reductions and jointly reap the rewards by selling offsets to one other.

“In this way, affected industries, comprising of the largest companies and emitters in the country, can look together for least-cost mitigation options. Enabling offsetting would incentivise these collaborative efforts and may substantially increase the impact and desired change in behaviour the carbon tax is seeking to achieve,” asserted Sa.

He added that affected parties in the energy and manufacturing sectors should be allowed to obtain “extra benefit” when collaborating with likewise affected parties to finance low-carbon solutions.

“[They] are the ones financing the carbon tax scheme in the first place. One may even debate in this regard if it makes sense to limit offsetting to between 5% and 10% of total emissions,” he said, adding that allowing offsets within the tax net would create “substantial” trading volumes.

However, the firm noted that its criticisms were provided in acknowledgment of the fact that the primary objective of the carbon tax was not to generate revenue for State coffers or establish a carbon accounting process serving reporting obligations, but rather to provide an effective price signal to carbon-intensive industries.

The carbon tax regime was expected to be introduced on January 1, 2016.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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