The key question for South Africa is how will it be done, and how we ensure it that it does not hurt the economy, nor the poor. In any case, given the increase in electricity prices over the last few years, the tax liability of companies that have adjusted to these price hikes will be better off than companies that are stuck with old technologies or business models that make them reliant on fossil fuels or methods of production that lead to high emissions of carbon dioxide.
The carbon tax ought to help achieve three things: lower carbon intensity from improved energy efficiency or through switching to alternative energy; it ought to stimulate new growth, new technologies and enterprise; and it should encourage development of new product lines which in turn would stimulate new investments and jobs. This is why a carbon tax, unlike alarmist claims, is not a zero-sum game.
With more than 40 countries, 20 subnational jurisdictions and over 200 global companies imposing carbon pricing in some form, the writing is on the wall: a global carbon price is on the horizon. Airline emissions will be priced soon, and it is likely that shipping will be included in the near future. Basically, if South Africa does not impose carbon pricing, it will be imposed upon it. It is true that the current carbon tax proposal is not perfect, but it is nevertheless immensely better to have a flawed, but fixable, instrument in place than to have nothing at all.
Increased electricity prices already make a strong case for business and industry to invest in energy efficiency. The proposed tax price of R120 and the extent of rebates mean that the carbon tax will not change this much, with no increase in electricity price and a 1% to 4% increase in the price of fuel. It nevertheless makes sense that an initial, low-cost tax be piloted in order to iron out the monitoring and reporting structures to ensure its enforceability, while accustoming tax-liable entities to the process.
It is critical for government to adhere to the proposal to increase the carbon tax over the first phase, and when the rebates are reduced during the second phase, alternative options such as on-site renewable electricity generation and more significant efficiency investments become financially attractive. Without this increase, the carbon tax will fail to leverage any real change.
It is also important to bear in mind that those industries and businesses that act early will have an advantage, both competitively through improved efficiencies and through reduced tax liability. In effect, a carbon tax can improve business viability, by requiring investments in energy efficiency that would otherwise be uneconomic for a business.
In the transition phase the carbon tax should be used as a tool to prod change, and revenues generated from the tax should be used to assist struggling sectors and those most likely to be affected from the transfer of costs to consumers (in the first phase the effects will be negligible). In the short term there should be revenue neutrality and in the long term government will benefit its tax base through improved use of energy, new investments due to productivity, and new technology.
Accompanying the draft carbon tax bill are the just-released draft carbon offset regulations, which are an important component of the national mitigation measures. They indicate that the National Treasury has been listening to inputs from the public, and has put serious thought into the risks of carbon offsetting. At present, any tax-liable entity will be allowed to avoid some of their carbon tax liability by purchasing offsets.
The basic concept underlying carbon offsets is that a tonne of greenhouse gas is effectively the same wherever in the world it is emitted. Therefore, if the implementer of some regulated activity that emits a greenhouse gas can pay to have an equivalent amount measurably removed (or “sequestered”) from the atmosphere elsewhere, on balance he will have met his obligation.
Of course, this requires that the activity that sequesters the greenhouse gas is not itself subject to regulation, and that this removal would not have occurred anyway (termed “additionality”). Government needs to put strong requirements in place to ensure this additionality, and to regularly check that the assumptions are still valid for projects.
Offsets need careful consideration if they are not to be abused and used as false measures of progress. Offsets should reduce the overall emissions profile of the economy, not maintain the status quo or result in an increase (which is termed “leakage” in the technical jargon of the field). Offsets should not be a free pass for polluters and a financial windfall for market speculators.
There is still a need for some changes to the proposed carbon offsets structure – principally limiting it to sectors that have no alternative but to offset – but it is a necessary component of the national mix of measures required to facilitate a transition to a low carbon economy. The main risk is associated with the complexity of implementation.
Carbon offsets are a critical part of what is called the mitigation hierarchy. It is important first to both avoid emissions wherever possible through investment in renewable energy and ceasing activities that provide little benefit to society, and to reduce emissions across low energy technologies, public transport, solar water heating, and any number of means of improving energy efficiency.
However, certain essential activities such as the manufacture of steel have no alternative to greenhouse gas emissions. As long as society depends on these activities, greenhouse gas emissions are a given; offsets are the only means of reducing total emissions from these sectors. For this reason, offset allowances should be limited only to essential activities that provide the most benefit to the economy and the poor.
The appetite for offsets from these activities should suffice to catalyse improved mitigation in sectors not currently liable for a carbon tax. Not using offsets for other sectors will prevent offsets from undermining the incentive provided by a carbon tax to improve the efficiencies and reduce intensity of processes in these sectors.
Moreover, not all offsets are created equal. While the Treasury white list of approved activities excludes many of the more egregious forms of offset generation, some have more risk associated with them than others. Curtailing methane emissions from waste or dairy manure lagoons is straightforward, readily measured, and largely uneconomic at present, and therefore is a good, low-cost option that makes sense to implement.
Fuel switch options are less simple; switching between different fossil fuel types should not be encouraged as South Africa transitions towards a low carbon economy, and the economic case for renewables makes these viable even without carbon credit finance. However, for effective fuel switching to occur, reforms in the energy sector are necessary.
A more effective means of financing the switch to renewables would be the finalisation of a feed-in tariff to allow generation of electricity by homes, businesses and larger installations.
This should be decentralised to local government.
The national offsets registry should be complemented by recording all offsets generated within the country, voluntary or regulated. If this is not done, a credit could be sold to a buyer outside the country, who will record the reduction against his regulation. It will also be captured in the national Greenhouse Gas Inventory, which is part of South Africa’s regular reporting to the United Nations Framework Convention on Climate Change. This is called “double counting”, where a single emission is claimed by two different people, and is one of the big risks of offsets. By ensuring that the national registry tracks where such credits are sold, it will enable South Africa to avoid double counting.
Moreover, government must ensure that the systems in place for application of the tax and offsets are up to the task. Given that many of the proposed offsets have a restricted credit period, it will be necessary for offset purchasers to replace credits once they expire: this means that seven to 20 years after a credit is purchased, the entity will have to buy new credits.
This is considerable longer than the usual period for which tax records are retained; government must ensure that this is adequately enforced or the validity of the offsets will be undermined.
Overall, it is encouraging to see that the government of South Africa is pushing forward with internal measures to make good on its international commitments and obligations to its own citizens to reduce greenhouse gas emissions.
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Pretoria – The first carbon tax payment will be due in early 2018, despite warnings that implementation of the tax will harm economic growth and strategic sectors such as mining and manufacturing in the short-term.
Judge Dennis Davis, chairman of the Davis Tax Committee, last week warned it was not a good time to implement a carbon tax.
He is quoted as saying companies will pass on the additional cost to consumers, especially poor consumers.
The committee’s objective is to assess South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.
However, the National Treasury says the tax has been designed to ensure that its overall impact will be not adversely affect strategic sectors once it is implemented.
In addition, treasury says, it will only have a “marginal negative impact” on economic growth over the short term.
The latest figures from Stats SA indicated that economic growth decreased by 1.3 percent during the second quarter of this year.
Treasury says the combined effect of the rates and exemptions and a reduction in the electricity levy will ensure “revenue neutrality”.
But, it also says that although the tax will be revenue neutral from a “macro-economic perspective”, it will not necessarily be neutral for companies with “significant emissions”.
Ernie Lai King, SA Institute of Tax Professionals’ (SAIT) board member and head of tax at law firm Hogan Lovells, says there has been strong plea from business and labour to follow Australia’s example to abandon carbon taxes.
The proposed tax is expected to be imposed at a rate of R120 per tonne of carbon dioxide (CO2), rising by 10 percent every year. However, if the proposed revenue recycling measures are taken into account the effective tax rate will range between R6 and R48 per tonne of CO2.
“The fear is that South African companies may be held back economically by carbon taxation, which could act as a barrier to industrial and commercial progress,” says Lai King.
He adds companies will find it difficult to influence reductions in emissions, given the dependence on fossil fuels for the generation of energy.
Duane Newman, director of Cova Advisory and head of the SAIT tax incentive committee, says the basic design of the tax has not changed, but it is clear that treasury has taken some of the concerns raised into account.
Treasury said given the country’s developmental challenges, the tax will be gradually phased in. One of the proposed measures is a reduction in the electricity levy. The levy has been increased to 3.5c/kWh.
The implementation date has been set at 1 January 2017, with the first full year being from then until December 2017.
“The challenge for many companies is that the reporting periods will be out of line with their financial year end,” says Newman.
He says it is also clear that some of the carbon tax will be levied at company level on emissions at the factory, and emissions from burning petrol or diesel will be collected through the fuel levy system.
If carbon tax is collected on all fuel sold in South Africa, it could have an inflationary effect.”
Bowman Gilfillan Africa Group associate Gillian Niven says that the revenue received from carbon tax will not be ring-fenced, but will nonetheless be “recycled”.
One of the modelling exercises initiated by treasury shows that a carbon tax with broad sector coverage implemented gradually and supported by “effective and efficient revenue recycling measures will contribute to the reduction of greenhouse gas emission.
The tax design allows for certain tax-free thresholds, and the combined effect of all the thresholds will be capped at 95%.
Newman says this means a company will only pay R6 per tonne CO2 if all the thresholds were applicable, and a maximum of R48 per tonne CO2 if not.
Niven adds treasury is in the process of finalising regulations to give effect to the carbon offset scheme and is engaging the Department of the Energy and the Department of Environmental Affairs on the administration of the offset scheme. Draft regulations will be published for public comment in early 2016.
Comments on the draft bill have to be submitted by 15 December this year. A revised bill incorporating the comments will be submitted for approval by the Cabinet.
The furore over the carbon tax in South Africa that is playing itself out both in public and behind closed doors is leading to an impasse. General responses to the carbon tax have tended to be overly dramatic. For example, major emitters and users of fossil fuels say it will abruptly kill their businesses. Those in favour believe that it will lower our dependence on fossil fuels and hold economic benefits in the future.
These views have come to the fore in submissions by various stakeholders to the Davis Commission, which is reviewing the general tax system in the country. Industry has made its position clear: it does not want a carbon tax and probably never will.
However, certain parts of government, like the National Treasury, alternative energy producers and environmentalists see the importance of the carbon tax as a way of pricing an environmental externality.
South Africa has a structural issue when it comes to electricity production. The country is totally dependent on a single producer of electricity, state-owned Eskom, which derives 90% of its electricity from coal.
Some sensible approaches
There are positives and negatives that should be acknowledged.
If the carbon tax is used as a blunt instrument it will most likely do more harm than good. There are mitigation strategies.
In the first phase of implementation there could be a low-level of the tax and – given all the exemptions that are being offered, including offsets – the carbon tax’s effect would be small.
A carbon tax with revenue recycling is also possibly a better option. A carbon tax purely imposes penalties and is unlikely to win over firms and consumers. Revenue recycling allows carbon taxes to be used to either support technology shifts or cushion those who are likely to be most affected.
Some industries are likely to adjust better than others as some industries can easily adjust to new technologies or optimise their systems. Others will find it harder as investments in existing technology may still be at the start or in the middle of their full utilisation lifespan.
The effect of costs which have already been incurred in an asset that is already locked in the production system will make it expensive to switch to another technology without losing competitiveness. In highly competitive industries the switch over to cleaner technologies cannot happen without some assistance. It is simply not true to suggest that all industries and and consumers will be affected alike.
It makes more sense to upwardly adjust carbon pricing measures with improvements in implementation performance as more low carbon technologies or energy carriers are introduced into the grid system. This should be also accompanied by developing the ability of consumers to participate in distributed generation. Such flexibility makes it easier to switch to cleaner energy sources.
Why timing matters
The carbon tax has the danger of being viewed as another form of tax. In addition, South Africa already has a sort of carbon tax in the electricity levy. The levy is an environmental levy; it is a price put on emissions that come from using coal to generate electricity.
It is probably not a good idea to introduce new forms of levies and taxes during periods of slow growth. Generosity towards contributing more taxes and levies tends to be constrained across the board and not just with large firms at such times. The South African economy has only averaged a growth rate of 3.1% from 2000-2014 over the past five years and more. The country is in an economic cycle that needs counter-cyclical spending where government has to lead fiscal spending to boost economic growth.
South Africa has international obligations to deal with its high emissions profile. A carbon tax or pricing would not only signal the country’s commitment but also that it is mobilising domestic resources to reduce carbon emissions.
The country should also make every effort in securing long-term sources of climate finance from the international community. International climate finance is available to support scaling cleaner energy solutions.
South Africa should work in anticipation of a move by the world’s major economies and its key trading partners to introduce some form of international carbon pricing regime. It is reasonable to assume this is several years away.
South Africa, like other countries, would take a long time to adjust to new conditions. The proposed carbon tax’s aim is to allow systemic adaptation to this eventuality within the global trading scene. Failure to abide by any new global regime would lead to the country facing penalties, in the same way that airlines are already being threatened with the European Union’s emission taxes for air travel.
Pragmatism should prevail
The aim of a carbon tax is to disincentive future carbon intense investments. It will also encourage the investment world to start pricing this as a risk factor in the way they make future investment decisions and capital allocations. A new class of climate friendly investment opportunities would grow with time and this is good for economic diversification.
The priorities for South Africa should be:
The current electricity levy should be converted to a carbon tax as it is already in place. The conversion of the levy into an emissions or carbon tax is at least a way of establishing a long term carbon price and will start giving some level of certainty to various economic agents that they need to absorb once the grace period is over.
Some time should be given for adjustments to the introduction of the tax.
The focus must be put on reviving the economy and changing the energy mix both at utility scale and at the distributed level to allow consumers to switch to other energy sources.
And finally, carbon tax should be more closely aligned with the implementation of an integrated resource plan that diversifies the energy mix in such a way that our carbon intensity declines over time.
With the high price of electricity, the vagaries of supply and the looming carbon tax, manufacturers should be considering alternative energy sources. With me now in the News Leader studio to talk strategy and cost is Duane Newman from Cova Advisory.
Duane welcome, you were at the manufacturing Indaba in KwaZulu-Natal this week, what effect are the power shortages and the energy crisis having on manufacturers in that area?
Duane Newman: Electricity is one of the big challenges for manufacturers today, I think from two angles. One is security of supply, can you actually get power? So if you are a manufacturer you can’t manufacture half a widget, you need to manufacture a full widget. And the other one is price…so these days it’s becoming more about security of supply and less about price.
BDTV: Is there much anger against Eskom? I guess there is…
DN: Yes I think there is.
BDTV: Understandably so. Well let’s talk about both of those issues. Should they be separate or should the high cost of electricity in South Africa, and the vagaries of supply, should they be dealt with separately or is there one solution for both?
DN: Most companies need to have a coordinated strategy to deal with electricity and power at a strategic level. So from 2008 until today most guys have been focusing very much on price. The debate has moved a lot more to security of supply and saying where am I going to get my power from? So if Eskom isn’t going to be the solution for me, what is the solution? Is it renewable energy, is it self-generation of power. The reality is when you start to talk about co-generation plants and manufacturing your own power, the question is do we have the skills and ultimately do we have the money to put up our own power plant?
BDTV: Yes, so if a manufacturer had come to you today, is there a one size fits all solution?
DN: No, never okay. The reality is we’ve actually been doing quite a few projects assessing, looking at companies, saying how can they solve their electricity or energy problem? Some companies have got the money so they can fund the solution if they need a technical solution, others don’t have the money so they’re actually looking at a way of how can we actually get a project funded? And the reality is projects are always competing in a large corporate say manufacturing entity, saying okay we’ve got this project we can do, which is say a manufacturing project versus an energy project. And the question is what’s priority? What gives you the best return and can we get things like a government grant or a tax incentive to help us?
BDTV: Yes…so a manufacturer comes to you and says I don’t have much money but I want to save costs on my Eskom bill and I want security of supply, what do you say to them? There’s no money…
DN: So then you’ve got other solutions…you look at them and say fine okay, can we partner you with what we call an energy services company? What will the energy services company do, it will sit with you and say fine, what do you need? They will incur the cost, and what they’ll do is, they’ll then take a percentage of the savings of whatever they’ve saved you, so that there’s a more efficient energy…
BDTV: So there’s no outright cost?
DN: So there’s no initial outright cost, they will then take a percentage of the savings, whatever they save you on that new installation of a, say, co-generation plant or whatever.
BDTV: Are there any government tax subsidies?
DN: Interesting question…government I suppose puts things in two big boxes, a cash grant where they’ll potentially give you some kind of reimbursement, so if you spend R100 they’ll give you R30 back. There’s a programme called a Manufacturing Competitiveness Enhancement programme, it’s been around for two or three years now, and they will help you…give you some sort of cost sharing grant for those costs. The other one is a programme called an Energy Efficiency Tax Incentive called Section 12L that’s contained in the Income Tax Act and that’s an energy efficiency incentive. So if you’re going to be doing anything in your production facility to actually use less power, they’ll give you 95c per kilowatt hour saved. So it could be quite a lucrative…
BDTV: So it’s obviously something which you should look at.
BDTV: What about a manufacturer who has a bit of money, is the answer solar?
DN: It depends on what he is manufacturing…say for a mining company as an example, solar, the sun shines when? During the day…so it might be useful if he’s got a plant that operates during the day, but at night?
BDTV: He could use a Tesla storage facility?
DN: Yes maybe okay, but there’s still a lot of challenges these days around storage. I think that technology is still catching up …the panel technology.
BDTV: Yes. So any company nowadays has to deal with sustainability issues such as electricity, power, looming carbon tax and water, are companies now…are Chief Executives of manufacturing companies more open to getting somebody like yourself in to give specialist advice or is sustainability still a bit of a dirty green word?
DN: Yes…if you use the word sustainability or climate change I still think it’s very much a dirty word…
BDTV: It’s a turn off?
DN: Yes I think it is, but these issues are becoming real business issues now so CEOs are realising it’s not really about saving the planet, it’s really about the survival of their company. It’s also things like…look about the carbon tax. Carbon tax is coming and the reality is, can the country afford… can a manufacturer today who’s got increasing electricity prices afford a carbon tax? Our view is not.
BDTV: Well it is something which is happening and which tax legislation isn’t out but there are promises or threats in that line.
DN: Yes that’s right.
BDTV: But it is so important for companies to see this not as a green issue but these are key risks and key opportunities to business. Thanks so much for coming in today Duane.
South Africa isn’t ready to launch a carbon tax because there are insufficient alternatives to fossil fuel energy, a City of Tshwane official said.
“Ninety-five percent of our energy requirement is still very much fossil fuel-based,” Dorah Nteo, the chief sustainability specialist for the municipality, said this week. “We have not allowed the infiltration of enough renewable” power sources, she said.
A proposed carbon tax would be delayed from this year to 2016 to allow time for public consultation and the drafting of legislation, former finance minister Pravin Gordhan said in 2014. Draft legislation on the levy will be published later this year, his successor, Nhlanhla Nene, said in his budget.
Eskom is struggling to meet demand with aging plants following years of underinvestment. While the department of energy has approved 79 renewable power projects from private companies with a capacity of 5 243MW, Eskom is also building two coal-fired power plants with a potential combined output of 9 564MW.
“A carbon tax can play a role in achieving the transition to a low carbon economy and South Africa’s commitment to help in the international efforts to reduce greenhouse gas emissions,” the committee said in April.
“These commitments and aspirations should also take into account any possible negative economic and social impacts of the carbon tax.
“What has been introduced effectively is the fuel levy for your motor vehicles, rather than your broader carbon tax,” Nteo said. “That is because with cars you have a choice between big cars or small ones, there are alternatives.”
Source: The Citizen
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