Carbon Tax Bill gift-wrapped for big emitters

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By Noelle Garcin
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At last, South Africa is getting a (weak) Carbon Tax Bill

After an almost decade-long process, the South African Parliament passed the Carbon Tax Bill soon to be signed into legislation by the President, and implemented by 1 June 2019. This law enshrines the mechanism that puts a price  on carbon emissions in South Africa.

Before launching a critique of why the current text will simply not work, let’s cover carbon tax basics. The carbon tax is a fiscal instrument that internalises the environmental and social costs of greenhouse gas emissions from the production of goods and services. In short, it’s a critical tool in the fight against climate change; the greatest existential threat of our time.

This is no longer a remote threat: many South Africans in rural areas and cities from Limpopo to the Western Cape already feel the effects.

South Africa committed to take its part in tackling climate change by ratifying the Paris Agreement on Climate Change in 2016, and that includes reducing the country’s greenhouse gas emissions by up to 42% by 2025. This is no small task: it means almost halving emissions within the next six years. This is why an effective carbon tax is so important.

Greenhouse gases are negative externalities. This means that they don’t cost anything to those who emit them, whereas they generate negative costs to society as a whole by altering the climate and triggering a series of social, economic, and environmental harms. In other words, the cost of the damage they cause is not factored in the market value of the goods and services we buy. Therefore, there is no incentive to shift away from less carbon-intensive practices and products.

By taxing goods and services produced according to their greenhouse gas emissions, we correct this imbalance and nudge companies and people to change their behaviour. This can be compared to the sugar tax enforced since April 2018, which taxes high-content sugar products to reduce sugar-related health problems by encouraging reduced sugar intake by consumers.

The soon-to-be-introduced carbon tax will not be levied on individuals directly. It will apply to entities such as companies that emit greenhouse gases above a given threshold. It should drive a reduction in consumption of goods and services with higher greenhouse gas emissions, in favour of a more sustainable economic model. The climate will be much better off – and so will we.

A watered down carbon tax

Unfortunately, the Bill the Standing Committee on Finance approved on 5 February  does not nearly reach our expectations. In comments submitted to Parliament on the last two versions of the Bill in March and November 2018, African Climate Reality Project and other civil society organisations from the Energy Governance South Africa network highlighted numerous shortcomings that undermine the very effectiveness of the tax.

The two major concerns relate to the proposed price on greenhouse gas emissions, and a string of allowances and exemptions.

Too low to make a difference

As a start, the carbon tax will be levied at R120 per tonne of CO2 equivalent (tCO2e) of greenhouse gas emissions, during the first implementation phase running until 2022. During the second phase, this price will increase annually at a 2% inflation rate. The Department of Treasury further assured that the tax rate will be reconsidered from 2023, with a possibility to raise it up to R600 per tonne.

This is a wholly insufficient start. Research by the High-Level Commission on Carbon Prices indicates that a minimum carbon price should be in the range of R550 – R1,110/tCO2e by 2020 to be effective in achieving the Paris Agreement’s target of “well below 2 degrees Celsius”[1]. The imposition of carbon tax should ultimately deter carbon heavy practices or encourage a change in technology. If paying the tax is cheaper and easier than turning to new practices, big emitters will not change their tune without the incentive to decarbonise at the pace and scale required by the urgency of the climate crisis.

The latest Intergovernmental Panel on Climate Change (IPPC) Special Report on Global Warming of 1.5°C states that we have 12 years to radically reduce our heat-trapping emissions if we want to have a slight chance of keeping global warming below 2°C. Even then, as a confirmed climate hotspot, South Africa will warm twice as much as the global average. South Africa’s very own Third National Communication under the United Nations Framework Convention on Climate Change published in March 2018 raises the alarm that “A key feature of the projected climate change futures of South Africa is that temperatures are to increase drastically under low mitigation. For the far-future period of 2080-2099, temperature increases of more than 4°C are likely over the entire South African interior, with increases of more than 6°C plausible over large parts of the western, central and northern parts.” It further cites the World Bank, stating that “There is no certainty that adaptation to a 4°C world is possible” – a frightening reality for our country.

As teenage climate activist, Greta Thunberg would say: it is time to panic. The end-of-century projections are dependent on what we do now to reduce heat-trapping emissions drastically. Strangely enough, our legislators appear to be anything but panicking. It appears that nobody thought of sending them a copy of the March 2018 report. The timing was perfect, though: the Standing Committee was busy reviewing yet another iteration of the Carbon Tax Bill.

An endless string of exemptions and rebates

The proposed carbon tax provides for rebates or exemptions to most of the industries that are in fact the heaviest greenhouse gas emitters. These allowances enable a reduction in carbon tax liability of between 70% and 95% for a number of activities that will permit many companies to end up paying only R6 to R36 per ton emitted instead of the nominal tax rate of R120. This completely undermines the effectiveness of the carbon tax.

First off, the carbon tax system provides that entities emitting greenhouse gas above the taxable threshold shall receive a basic tax-free allowance for at least 70% of their emissions. Said differently: they will only be taxed on maximum 30% of their emissions. How is that for a start?

But wait, the system gets even more shady. The Carbon Tax Bill builds on the proposed establishment of mandatory limitations on carbon emissions, called “carbon budgets”, for companies emitting above a certain threshold. These carbon budgets are meant to be decreased regularly, so that we progress towards our national objective of reducing our carbon emissions. This is reasonable: one cannot expect that we can turn to 100% green processes and products overnight. What is unreasonable is that the Carbon Tax Bill provides that the companies complying with their carbon budget and capping their emissions within the accepted levels shall receive an additional allowance of 5% of their total greenhouse gas emissions. This begs the question: why should we reward compliance by greenhouse gas emitters? Compliance with a mandatory system is a must, and penalties should apply to those who don’t meet the terms – not the other way around.

Then, cherry on the top, the system provides for performance allowances, which reward emitters that have managed to reduce their greenhouse gas emissions. Thus, they will be rewarded twice: not only will they mechanically reduce their tax liability by decreasing their emissions, they will also be rewarded for it even though it’s a mandatory requirement as per the carbon budget system. This boils down to rewarding compliance with the law, and allowances that reward companies for not breaking the law are absurd. As if SARS would give you a rebate for submitting your annual tax return on time.

The low tax rate and excessive rebates in the proposed carbon tax will render it completely ineffective at leveraging a reorientation towards a low-carbon economy, in a timeframe consistent with the urgency of climate change and South Africa’s commitments under the Paris Agreement.

Economic blackmail

Without any surprise, the argument for a low tax carbon rate and a phased approach is an economic one. In a recent conversation with African Climate Reality Project, the Chair of the Standing Committee on Finance, Yunus Carrim, warned that it would be unwise to over-tax the productive forces given the “perilous state” our economy finds itself in. Large greenhouse gas emitters did not shy away from threatening that a stringent carbon tax would diminish South Africa’s “investment attractiveness and competitiveness”, and lead to job losses and increased unemployment. Fair enough: one must consider the economic impact of applying another tax in an already strained economic context. In fact, it is a good thing that, for instance, the Carbon Tax Bill allows for credits so that the tax will not affect the price of electricity in the first implementation phase. However, pitting economic development against climate action is not only misconstrued; it is misleading and detrimental to our sustainable developmental agenda and the just transition to a low-carbon economy.

“The carbon tax could undermine the economy. We cannot just care about the environment”, according to Carrim. This false dichotomy between economic growth and environmental sustainability has become the mantra of the current government, as illustrated by Minister of Energy Jeff Radebe’s recent declaration regarding South Africa’s “coal endowment”, following in the footsteps of his infamous predecessor David Mahlobo. It shows the economic blackmail at play – and how it influenced the legislator to accept a watered-down carbon tax..

It is ironic that government advocates a “phased approach”, after a decade of dragging its feet to set in motion the just transition called for in Chapter 5 of the National Development Plan.

We need an effective and just carbon tax that serves the interest of the people of South Africa, particularly the workers and the poor – not the interests of heavy emitting industries. We must make the carbon tax more stringent, and introduce mechanisms that soften the blow on the economically marginalised (for instance by reducing the VAT rate which has a disproportionate impact on the poor, or conditioning rebates to demonstrated increased employment).

As is, the Carbon Tax Bill raises a number of issues in terms of effectiveness, consistency with other policies and commitments, and economic justice. Some argue that an imperfect instrument is better that nothing at all, and that the tax can (will?) be strengthened over time. This line of reasoning hardly holds up in the face of the urgent task at hand: reducing our greenhouse gas emissions by 42% within the next six years and achieving net zero emissions by 2050.

A flawed public participation process

Since the Carbon Tax Discussion Paper introduced in 2010, and the first iteration of the Carbon Tax Bill in 2015, there has been extensive public consultation on the proposed carbon tax. This is commendable, and should be the norm for any piece of legislation that deals with a matter that concerns all citizens.

However, not all have had equal opportunities to engage in this process and have their voices heard. The Chair of the Standing Committee on Finance of Parliament himself deplored the under-representation of economically marginalised citizens and communities, unlike well-resourced stakeholders from the private sector and large NGOs. Civil society raised this problem regularly to the Committee. As in other instances, some NGOs have taken upon themselves to facilitate broader participation with their limited , when Parliament could not provide for it. However, this was not just a matter of financial capacity. Calls for a far-reaching and informative public participation process that would allow for constructive involvement of diverse sections of society remained unanswered.

In the meantime, private sector stakeholders had all latitude to weigh in on the discussions, a fact that Carrim acknowledged willingly. The successive iterations of the Carbon Tax Bill showed that carbon-emitting companies have had a far greater influence on the carbon tax system than stakeholders who advocated for more progressive and ambitious measures to penalise greenhouse gas emitters. Repeated submissions calling for an increased tax rate and reducing the exemptions and rebates have been systematically disregarded. The Standing Committee of Finance did not provide feedback on how the submissions on the successive drafts of the Bill informed the Committee’s review of the Bill, arguably due to a lack of capacity. But one just needs to compare the various iterations of the proposed legislation since 2015 to see that the tax rate and allowance provisions have remained unchanged – worse, allowances have actually increased in the latest versions. This shows that the legislator has systematically opted to disregard environmental and climate-related concerns despite mounting evidence that the more we wait, the more drastic our shift must be.

Another disturbing fact is that the minimum tax-free allowance has gone from 60% to 70% – a last-minute material change introduced by Treasury that was not subjected to public scrutiny before the Standing Committee of Finance adopted the Bill on 5 February 2019. It raises the question of the transparency of the process. While the Committee Chair insisted that only “radically new” ideas from the public would be considered at this stage, the legislators saw no harm in introducing a change at the eleventh hour that further weakens the effectiveness of the carbon tax system.

Political courage

One would assume that when government opts for an inefficient carbon tax in the name of growth and jobs, it would compensate by making policy choices that ensure that the necessary transition takes place regardless – for instance by adopting a long term energy strategy that phases out fossil fuels to achieve low-carbon energy generation. Yet the draft Integrated Resource Plan published in 2018 failed to do just that.

We are living a crisis and our reaction must be commensurate with the stakes involved. We must not satisfy ourselves with incremental measures to protect the status quo and private interests. When your house is on fire, you don’t ask the firemen to spare water because you’re not sure you can afford it. This kind of attitude is precisely what brought us to the current crisis. We are beyond switching off the light when we leave the room, installing energy-saving bulbs, or promoting cycling and recycling. This will not save our planet, and it puts the blame in the wrong place. It is a system-change that we need now. By failing to push for an efficient and just carbon tax, our elected representatives have shown that they lack the political courage to do just that.

The greatest tragedy of climate change is that regardless of where emissions come from and who is responsible for them, we will all be affected. It is our collective responsibility to demand from our representatives that they put our tax-payer money where their mouth is, and pass legislation that will drive the urgent transition to a low-carbon economic model. The time of making statements about South Africa’s commitment to tackling the climate crisis that don’t translate into immediate, ambitious, forward-looking solutions is over.
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[1] High-Level Commission on Carbon Prices, 2017. Report of the High-Level Commission on Carbon Prices. Washington, DC, World Bank. Available at https://www.carbonpricingleadership.org/report-of-the-highlevel-commission-on-carbon-prices/, accessed 30/11/18.  [T]his Commission concludes that the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030”, converted to Rands using exchange rate on 30/11/18.
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Pressed for time? Read a shorter version of this article published on the Daily Maverick.
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