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 African 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 argue that continued strong increases in power tariffs are necessary to ensure full cost recovery.

In addition, they assert 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 the adjustment towards cost reflectivity to be managed “in a careful way” so that future increases did not further under- mine the competitiveness of key industries.

Both the report and Gordhan’s response came only days after the National Energy Regulator of South Africa had 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.

Part of the reason for the high emissions was South Africa’s reliance on coal for the produc- tion of 92% of electricity.

“Despite sharp rises since 2008, your electricity prices are still among the lowest in the world and about half the 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 design- ing 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 emis- sions, 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.