‘Don't stress’ about carbon tax

Cooling towers at the Hendrina Power Station in Middelburg , Mpumalanga. Treasury might want to reconsider the way it will spend the carbon taxes that it will eventually collect. Picture: Gallo Images
Cooling towers at the Hendrina Power Station in Middelburg , Mpumalanga. Treasury might want to reconsider the way it will spend the carbon taxes that it will eventually collect. Picture: Gallo Images

Treasury this week published research indicating that its planned carbon tax will achieve large reductions in future greenhouse gas emissions, while having only a tiny effect on economic growth and employment.

This glowing endorsement is, however, based on a model of the South African economy where none of the continuing government-driven investment into renewables, gas or (potentially) nuclear would take place unless there is a carbon tax.

This means that the model probably exaggerates the drop in emissions due to the carbon tax – because the energy mix has already started moving in the absence of the tax.

In response to questions Treasury told City Press by email that “yes, the generated by the model are higher as IRP has not been built into the baseline”.

“This could be done very easily, however, the intention was to isolate and measure the impact of the proposed carbon for different tax designs and revenue recycling scenarios,” said Treasury.

The prediction that the carbon tax will have a small overall economic effect also largely on the way in which Treasury uses the money is collects from the tax.

The report’s most optimistic prediction is that the carbon tax will reduce South Africa’s GDP in 2035 by 3% compared with the baseline scenario.

This assumes that Treasury recycles all the revenue as broadly as possible by giving it to all companies in proportion to their output. This would in effect mean that heavy polluters subsidise industries with less emissions.

The actual revenue recycling plan in Treasury’s 2013 carbon tax proposal didn’t work this way.

Treasury proposed to distribute the carbon tax revenue in two ways: to reduce the existing electricity levy that all power users pay, and to subsidise low-income households’ power consumption.

According to the research, any “narrowing” of revenue recycling makes the effect on economic growth worse.

If all the tax revenue is used to for instance subsidise renewables, the South African economy ends up a significant 15% smaller in 2035 than it would’ve been.

The imposition of the tax has been postponed to next year, although it will only be clear when it is to be instituted when the minister of finance gives his budget speech in February.

The research was commissioned by the Partnership for Market Readiness, a World Bank unit, on behalf of Treasury.

It uses econometric modelling to compare a “baseline” scenario without a carbon tax to various different formulations of the carbon tax, and forecasts the economic effects through to 2035.

The “baseline” assumes that the coal-heavy energy mix of 2014 would stay unchanged all the way to 2035.

The massive reduction in emissions forecast under the carbon tax seemingly relates mostly to the rise of renewable and nuclear power generation, which is assumed to happen because the tax makes coal power more expensive.

The department of energy has, however, already issued various determinations leading to massive private investment in renewable energy.

In a statement accompanying the report, Treasury held up the lowest estimated effect the tax could, according to the model, have on emissions: 33% by 2035.

This is in comparison with the baseline forecast of emissions in 2035 and does not reflect an actual reduction in emissions – they will simply increase more slowly.

The actual report predicts a higher effect of up to 50% if realistic recent economic growth estimates are used instead of the long-term assumption of 3.5% GDP growth per year in its baseline.

The research supports ArcelorMittal SA’s repeated claims that the carbon tax would be particularly harmful to it.

A sectoral analysis in the report shows that steelmaking and coking ovens – the two main components of ArcelorMittal’s business – will be the worst hit. Petrol refineries are also predicted to have significantly lower output by 2035 than would otherwise have been the case.

The report’s main conclusion is that a lot hinges on the design of the tax and the way the tax revenue is used.

Using the scenario where the taxes are given back to companies, the research shows a potentially worrying effect on people’s income.

Without the carbon tax, the real growth of wages in the economy is projected to be 13% between 2014 and 2035.

With the carbon tax being used for rebates to companies, this growth falls to 8%, according to the model.

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