SA mulls introduction of carbon taxes, cap-and-trade mechanism

28th July 2008 By: Terence Creamer - Creamer Media Editor

Cabinet has mandated the National Treasury to investigate the possible imposition of a tax on carbon-dioxide (C02) emissions as part of South Africa's voluntary commitment to climate-change mitigation, Environmental Affairs and Tourism Minister Marthinus van Schalkwyk said on Monday.

Speaking at a briefing in Cape Town held to outline South Africa's newly adopted strategic direction and framework for climate policy, Van Schalkwyk said that Treasury would examine the most appropriate fiscal measures to support government's long-term mitigation scenario (LTMS). These could include taxes as well as incentives to help place South Africa's economy on a low-carbon growth and development path.

"We will be looking at ways to increase the price on carbon through an escalating CO2 tax, or an alternative market mechanism," the Minister elaborated, indicating that the tax could initially be introduced at low levels, but escalate to higher levels by 2018 or 2020.

He also indicated that Treasury was likely probe the creation of a ‘cap-and-trade' mechanism, as well as other possible instruments, probably involving a combination of financial penalties and incentives.

Under a cap-and-trade system, government could set a limit, or cap, on the amount of CO2 that can be emitted, and companies needing to increase their emissions would have to buy credits from those who pollute less.

South Africa, as a country, would want to pursue the system on a purely voluntary basis, but it was likely to introduce a number of mandatory elements to enforce what would then be a national policy imperative.

This was in line with South Africa's approach to international climate-change agreements, which had also seen it now formally endorse what was emerging as a global aspiration to limit to 2ºC the change in temperatures from pre-industrial levels. Climate scientists calculate that the Earth's temperature had already increased by 0,7 ºC from the start of the industrial revolution in about 1750, and there was also near consensus that human-made CO2 emissions, associated with industrial activity, was contributing to these rising temperatures.

Van Schalkwyk pointed out that the 2c/kWh tax on non-renewable energy, announced by Finance Minister Trevor Manuel in his February Budget, was already a form of carbon tax, with the Department of Environmental Affairs and Tourism (Deat) calculating that, should the tax be introduced from September as proposed, it would be the equivalent of R19/t of CO2 emitted. This, however, was relatively modest when compared with the €20/t-plus level at which carbon was currently trading on markets in Europe.

It was also somewhat uncertain whether the 2c/kWh tax would indeed be implemented this year, given that Cabinet had also endorsed a proposal that electricity tariffs be 'smoothed' over a number of years so as to avoid a destructive price spike. Indeed, the National Energy Regulator of South Africa, on granting Eskom an additional increase for 2008/9, called on Treasury to review the implementation, given that it would add to the burden already faced by consumers.

That said, Deat officials indicated that some form of tax was likely in the not-too-distant future, but stressed that the precise details of the fiscal, legislative and regulatory package would only be in place after 2012.

In fact, the department would hold a National Climate Change Response Policy Development Summit in February in the run-up to the next global climate change negotiations to be held in Copenhagen, Denmark, in December of 2009. For that reason, a 'Final National Climate Change Response Policy' would only be published at the end of 2010, and implemented from 2012.

But there was no question the LTMS itself was a progressive step for a developing-country government, particularly given that South Africa was as yet not bound by any international legal obligations to make emission reductions. It also meant that South Africa now joined only a handful of developing countries, including China, Brazil and India, in moving ahead with mitigation programmes under a so-called 'comparability-of-effort' framework canvassed at the recent global climate change gathering in Bali.

That scenario suggested differential responsibility for past pollution (with South Africa calling for legally binding commitments to force developed countries, including the US, to reduce their actual CO2 emissions by between 25% and 40% by 2020 and by 80% to 95% by 2050), but common responsibility for the future, whereby developing countries played a role in initially reducing their relative emissions before making absolute reductions as from about 2030.

In the South African context, that would translated into a "peak, plateau and decline" scenario, whereby the country's greenhouse gas emissions would increase until about 2025, a point at which they would then plateau before declining in absolute terms from around 2030.

At present, South Africa's CO2 emissions stood at about 800-million tons a year, which was likely to climb to above 1 200-million tons by 2025. Should the country succeed in reducing its absolute emissions from 2030, Deat believes the country's absolute emissions could fall again to below 600-million tons by 2050.

But to achieve this, it was proposing that the country adopted a so-called "Reach for the Goal" strategic option, which entailed not only the adoption of carbon-friendly technologies, but also regulatory mechanisms, such as mandatory targets for energy efficiency as well as changes to building standards, to enforce the adoption of green-building technologies and materials.

In fact, Van Schalkwyk confirmed that energy-efficiency targets would soon be made mandatory, probably under the power conservation programme (PCP), and that no future coal-fired power stations or coal-to-liquids facilities would be approved unless it could be shown that the development was carbon-capture and storage (CCS) ready.

It was still unclear what base year would be used to calculate the energy reduction target, but Engineering News Online understands that the upcoming PCP, which could be instituted as from October, was likely to be premised on 2006 consumption levels.

There is also little question the electricity-crisis response would now be aligned to the LTMS and give it impetus, with one Deat describing it as a "happy coincidence" that the energy-efficiency policies and strategies would now be accelerated at a time when the country was preparing to scale up its climate response.

A key element of the policy would be to diversify the energy mix away from coal and shift to cleaner coal, by introducing more stringent thermal efficiency and emissions standards for coal-fired power stations.

Deat also saw big scope for the upscaling of both renewable and nuclear energy sources over the next two decades, with the Minister rejecting the notion that the climate-change threat was being employed to steamroll through an aggressive nuclear policy.

"We, as government, see nuclear as key to our climate response plans, but ultimately we want to lay the basis for a net zero-carbon electricity sector," he said. State power utility was in negotiations with nuclear vendors that could see it adding 20 000 MW of nuclear capacity by 2025.

This also implied a major shift in South Africa's industrial-policy trajectory from one that had, hitherto, incentivised energy-intensive developments, to one that favoured sectors using less energy per unit of economic output.

Van Schalkwyk stressed that its economic modelling had demonstrated that a wholehearted adoption of low-carbon development path would not lead to job losses. He added that if South Africa invested 1% of its gross domestic product (GDP) into mitigation projects it would offset having to spend the equivalent of 5% of GDP on adaptation as the effects of climate change took their toll.

"Therefore, we are convinced that by acting now it will be much cheaper than waiting," he concluded.