The South African Institute of Chartered Accountants (SAICA) has made a call for any further carbon taxes that may be introduced in South Africa to be revenue neutral.
“The efficacy of a carbon tax should not be measured by its revenue yield, but by its impact on emissions in the context of the overall government mitigation policy,” contends SAICA chairperson of the Carbon Tax Committee and KPMG Tax Services manager Anja Finnern.
She urges business to formulate a common position on carbon tax as a matter of urgency, pointing out that South Africa is behind the international curve.
“Business must recognise the importance of helping to develop fiscal measures applicable to climate change. Allied to this imperative is the need to demand that the various State departments converge on one mitigation policy. Failure to do so is creating uncertainty and does not help business.”
SAICA Carbon Tax Com-mittee member and tax partner at Webber Wentzel Hennie Bester says that a revenue-neutral approach to new taxes means that, despite changes to the tax system, the State will not recover more (or less tax) from the taxpaying community – although the composition of that community may change owing to the introduction of such changes.
“Such an approach to carbon tax should be more attractive, from the prespective of both the tax policy and the tax-paying community as a whole, since the State will be able to show that carbon tax is not simply a new source of revenue. The overall tax burden on the economy will not change, but will spread the burden. Also, it will focus more clearly on the policy consideration underlying the tax,” says Bester.
He notes that international experience has also led to a broad consensus that revenue neutrality is the best practice for the introduction of a carbon tax. Favourable Environment In Scandinavia, the desire to reduce very high personal income tax rates created a favourable environment for the introduction of a carbon tax.
He adds that South Africa’s fiscal policy has actively aimed at dealing with ‘bracket creep’ for personal income tax payers, and a carbon tax may further boost this policy, although all of that may change in the context of the current global financial crisis.
“How such revenue is to be applied is a different issue altogether, but it is worth noting that a country with South Africa’s developmental needs will need to factor this into its broader carbon mitigation policy.”
Bester argues that carbon tax on its own will probably not be very effective in curbing emissions. “It has to be combined with, and complement, other policy mechanisms, such as a voluntary cap-and-trade system, assistance programmes, exemptions and incentives.
“A carbon tax, irrespective of its base or rate, will not only have a direct impact on those subjected to the tax, but will also have a ripple effect throughout the economy.
“It seems obvious that a unified approach will carry more weight and have greater impact on the formulation of the broader emissions policy, of which a carbon tax should be one component.”
However, it also seems obvious that high emitters will have greater direct exposure to a carbon tax, and their interests may differ from those of low, or insignificant, emitters. High emitters would be expected to seek exemption or holiday periods from the carbon tax and the support for this from low emitters will be significant.
A unified approach will only be possible if business players educate themselves on the important issues arising from a carbon tax, what the international best practices around these are, and how the tax should fit in with an overall mitigation policy.
Bester explains that a carbon tax can reduce greenhouse-gas emissions through two separate, general effects. Imposing a tax on energy will reduce energy demand because of higher prices and costs – the demand effect. But it will also induce the switching from more to less carbon-intensive energy sources – the substitution effect. However, he warns, the risk of a carbon tax becoming merely a higher cost on the economy, which may affect international competitiveness, besides others, exists when there are no viable alternatives.
Finnern believes that the best carbon tax would yield no net revenue, but would change behaviour towards the overall policy of shifting to less emission-intensive sectors.
“If a carbon tax does raise new revenues, the proceeds should be directed to capacity building for less carbon-intensive energy solutions.”