Carbon tax – be careful of future trade measures

4th December 2015

By: Saliem Fakir

  

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The National Treasury has released a draft Carbon Tax Bill and has invited interested parties to submit comments by the middle of this month. There are design and implementation issues with the tax; however, what is important is not so much the tax but whether an implicit carbon price or tax should be introduced.

The choice of the route of the tax is largely a result of the fact that it reduces an administrative burden as it is cheaper and easier to administer. Even if one were to go for an emissions trading scheme, the long-term net effect of such a system – in terms of pricing carbon – would be the same.

We need one form of carbon price or another to ensure that our carbon intensity is reduced over time. Some of our trading partners already have some form of energy or carbon tax in place. By 2017, China plans to implement a domestic cap-and-trade system. This wider application follows pilot trials that began in 2012. The November 2014 agreement between China and the US includes a US commitment to reduce emissions by between 26% and 28% below 2005 levels by 2025, and a Chinese commitment to peak carbon emissions and nearly double the nonfossil portion of its energy mix by 2030.

One can read these as the signals of a new global regime that will come into play progressively.

The price of carbon can also be measured indirectly through regulatory measures, making it harder in many countries now for coal plants to be built or financed. The most recent is the decision by the Organisation for Economic Cooperation and Development to reduce or completely eliminate subsidies for coal plants above a certain capacity or of a specific technology type.

The European Union (EU) already has an emissions trading scheme and is looking to implement one for the aviation industry once there is a global agreement under the auspices of the International Civil Aviation Organisation. The global economic environment is gravitating towards a low-carbon dispensation and using some form of carbon price to get there. Support for a carbon price comes from 74 countries and 23 subnational entities, together responsible for 54% of global emissions and 52% of global gross domestic product.

The EU aviation tax – which most people expect to be made effective in one form or the other – is already driving new technological innovations in the aviation industry. These vary from improvements in existing technology, such as the use of solar power and changes to the fuel mix by introducing aviation biofuels that can lower the carbon intensity of existing fuels. For its part, South African Airways is working with Boeing to develop new types of aviation biofuels using nonfood crops.

The carbon tax or price can induce a shift away from path dependence, and we are seeing that some form of financial stress can drive companies to push in the direction of innovation and improvements. Technological innovations can take time to develop and be adopted widely. It is often better to do this pre-emptively than wait until the last minute. The illusion of fossil-fuel abundance can reduce the incentive to do something about the future. A carbon tax is a useful nudge for companies and governments not to be complacent.

In South Africa, heavy emitters are making light of the future. They want to do nothing and do everything in their power to stall or stop any legislation or regulation (whether for air pollution or climate-related measures) dead in its tracks. Major emitters like power utility Eskom and petrochemicals giant Sasol, as well as others, have already pushed out the implementation of the Air Quality Act and are now seeking to do the same to climate-related measures.

Globally, as the latest Carbon Disclosure Project (CDP) report shows, more major multinational corporations are seeking global carbon price certainty than those that are not. Many are working the effects of an inevitable global carbon price onto their balance sheets, even though this is currently voluntary. South African corporate CDP members should follow the example of their overseas counterparts.

Those who are not, such as Exxon-Mobil (which once did extensive pioneering work on climate change), are now the subject of investigation by the New York Auditor General for failing to disclose to its shareholders the possible risk climate change will pose to the long-term financial sustainability of the company. For almost four decades, Exxon chose to hide the findings of its own scientist, who warned of the long-term effects of climate impacts on the fossil fuel industry, and decided to essentially deceive shareholders and the public.

The case against Exxon follows a previous precedent-setting case against Peabody Energy by the very same Auditor General for failing to adequately disclose the impacts of climate risks on its own bottom line, given the extent of Peabody’s investments in coal.

Of course, caution must be exercised in the way the carbon tax is used. It should not be a blunt instrument. Contrary to what has been misconstrued as the Davis Tax Committee’s (DTC’s) view that it is against the carbon tax, the DTC has merely warned about timing and emphasised the need for a better understanding of the negative impacts of the carbon tax on the economy and consumers. This is a legitimate concern. The DTC never called for the scrapping of the idea.

Big corporates’ tactics of stalling, blocking and undermining an amicable resolution around the carbon tax are irresponsible and unhelpful.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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