Eskom may pass on new tax burden

2013-03-03 10:00

Power utility didn’t factor in carbon tax when proposing tariff hikes

Eskom will almost certainly pass on its disappointment with not being granted the 16% tariff hike it had asked for to the carbon tax it will charge its clients.

Finance Minister Pravin Gordhan announced in his budget speech on Wednesday that the tax will add about R11?billion a year to Eskom’s expenses from 2015.

The state-owned power utility had warned on several occasions that it will not be able to absorb the carbon tax proposed by the Treasury, and it will be forced to load the tax on to the consumer in the form of higher tariffs.

Eskom’s application this year for a tariff hike over the next five years did not factor in a carbon tax.

If it had, it would have asked for 17.6% instead of 16%.

Eskom was still studying the National Energy Regulator of SA’s ruling this week and could not react on how the carbon tax and the 8% increase would affect its operations.

Eskom’s head of regulatory and legal affairs, Mohamed Adam, told City Press at the hearings last month that Eskom’s initial calculations, which were presented to the SA Local Government Association, did include carbon tax, but it felt that there was still too much uncertainty around carbon tax to include it in its third multiyear price determination application.

But Gordhan ended the uncertainty on Wednesday in his budget speech when he announced that a carbon tax would take effect in just under two years’ time.

The finance minister said: “Government proposes to price carbon by way of a carbon tax at the rate of R120 per ton of CO2 equivalent, effective from January?1?2015.”

The tax is aimed at putting a price on pollution and encouraging heavy emitters to change their ways, while also aligning South Africa with its international commitments to reduce its carbon footprint.

Energy analysts have calculated that the carbon tax of R120 per ton of CO2 would add 12c per kilowatt hour (kWh) on to Eskom’s electricity prices.

Eskom itself has indicated that for every R2?billion increase in its cost, there would have to be a 1c/kWh increase in the tariff.

Eskom still has some room to manoeuvre.

Personal income tax rates and thresholds

The Treasury will publish an updated version of its 2010 discussion paper on the tax at the end of this month, which will be open for further consultation.

But it is highly unlikely that the tax will be scrapped, and the discussion is likely to iron out only some of the minor details.

Adam said that on top of the 16% Eskom was asking for, it would have added another 1.6% to accommodate the tax.

Based on Eskom’s reported emission to the Johannesburg Stock Exchange’s voluntary disclosure project, the utility emitted 230?million tons over the past year. This amounts to about R11?billion a year in carbon taxes for Eskom.

The Treasury softened the blow by setting a tax-free threshold of 60% for a company’s emission.

In addition, businesses would be able to get a discount on the carbon tax if they could show active steps on how to reduce their emissions, such as fitting green technologies in their factories or participating in the carbon market.

The R120 per ton figure is also set to increase by about 10% yearly.

The tax could also be a lucrative source of revenue for the state, with Eskom’s R11?billion a good starting point.

While the Treasury was drawing up its plans for a carbon tax, consulting firm Deloitte calculated that with a tax rate of R165 a ton of CO2 emissions, the state could collect about R82.5?billion a year from companies.

The tax would not be ring-fenced to develop a green economy, but could be used for any government programme.

Based on Deloitte’s calculations, Eskom would have to fork out about R37?billion extra a year, and Sasol R9.9?billion.

South Africa is the second nation in the Brazil-South?Africa-India-China (Basic) group of countries to have implemented a carbon tax after India.

India’s carbon tax, though, has been linked to its import and export of raw coal and not to emissions.

Australia also recently implemented a carbon tax similar to South Africa’s, which led to a spike in electricity prices in that country.

Sin Taxes

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