Environmental Fiscal Reform and the proposed

Carbon Tax

Sustainable Transport

University of Johannesburg

Institute of Transport and Logistic Studies (Africa)

Cecil Morden - 06 August 2015

1. Costs associated with road transport

2. CO2 emissions in the transport sector

3. Environmental Fiscal Reform

4. National Climate Change Response – White Paper (NCCR – WP)

5. Quantifying Green House Gas Emissions

6. The National Development Plan

7. Options to intervene and the rationale for a carbon price / tax

8. Carbon tax design, carbon offsets & revenue recycling

9. Alignment with carbon budgets / DEROs

10. Carbon tax modelling

11. Competitiveness / carbon leakage / BCA

12. Impact on energy prices & incentive for energy efficiency savings

13. Summary

Outline

Costs associated with Road Transport

• Private costs

– Construction

– Maintenance

• Social costs / externalities

– Congestion

– Accidents (road safety)

– Air pollution

– GHG emissions

– Noise pollution

3

4

Externalities

• “Externalities refers to situations when the effect of production (and) or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided”.

• Positive externalities (“spillovers”) : Research & Development, Health, e.g. immunization, basic education, road safety, street lighting, energy efficiency savings, etc.

• Negative externalities (“spillovers”) : Local air pollution, noise, congestion, water pollution, GHG emissions – climate change, etc.

Economic Instruments, source: Economic Instruments, Module 1d, Sustainable Transport, GTZ, 2004 , http://www.sutp.org

• Internalisation of costs which are currently imposed externally upon

persons other than the individual transport user is an indispensable

element of a sustainable transport system, but it must be achieved

step-wise, not shock-wise. Only then will full cost pricing have a chance

of being accepted by market participants and gaining sufficient political

support. (p.2)

• Economic instruments can set dynamic incentives for substitution,

technical change and the research and development of pollution

abatement technologies. (p.4)

5

GHG emissions in the Transport Sector, source: Transport and Energy, Research Findings, International Transport

Forum, Leipzig, May 2008

• Transport is responsible for 13% of all anthropogenic emissions of greenhouse

gases and 23% of world CO2 emissions from fossil fuel combustion.

• In most countries, transport CO2 emissions are growing faster than total CO2

emissions.

• Road transport accounts for, by far, the largest part of CO2 emissions from the

(transport) sector and this will remain the case in the coming decades despite

more rapid growth in shipping and aviation.

• Light duty vehicles is the largest source of CO2 emissions from transport.

• Rapid improvement of the fuel economy of light-duty vehicles and freight trucks

by about 30% would reduce emissions and may even stabilize emissions from

such vehicles over the next two decades.

• In the longer run the expected growth in vehicle fleets and usage outstrips these

fuel economy improvements, leading to rapid growth of emissions. Stabilizing

emissions from light-duty vehicles over this horizon would require fuel economy

levels of around 3.5 l/100 km (80 g CO2 / km)

6

Reducing CO2emissions in the Goods Transport

Sector, source: Transport and Energy, Research Findings, International Transport

Forum, Leipzig, May 2008

World-wide freight transport accounts fro roughly a third of transport sector

CO2 emissions. Freight activity is expected to continue to expand strongly

but there are opportunities to mitigate CO2 emissions:

• Technological innovation

– two thirds of fuel efficiency gains in trucks are expected to come from improvements in

engine and exhaust systems.

• Eco-driving

• Logistic organisation, vehicle loading and truck km charges

– Logistical improvements have also been driven by the introduction of electronic truck

kilometre charges in Switzerland, Germany and Austria.

• Model efficiency considerations

– More generally governments can influence freight modal split through a coherent policy

of charging for the use of infrastructure across the modes. In the majority of countries,

trucks are charged at levels below the marginal cost of using the roads, …. Pricing

road use at marginal cost (including congestion and environmental costs) would create

the conditions for a more efficient modal split. (p. 15)

7

Fuel efficiency standards and carbon taxes: source: Transport and Energy, Research Findings, International Transport Forum, Leipzig, May 2008

• Intervention to internalize the costs of CO2 emissions from transport

serves to both mitigate climate change and reduce oil consumption at the

same time. Carbon taxes are the preferred instrument of many

economists to achieve this because they provide incentives for

attainment of the environmental target at least cost. However, vehicle

fuel efficiency of CO2 emissions standards have some advantages, not

least in terms of political acceptability.

• … if a standard is the primary tool adopted for reducing transport sector

CO2 emissions (and the rebound effect is a problem – i.e. the cost savings

resulting from increased fuel efficiency may be taken up by additional driving or upgrading

of the power or weight of the vehicle purchase) a secondary tax element is

required – ideally in the form of a carbon tax or alternatively through fuel

taxes or differentiation of taxes on vehicle purchase or ownership. It also

increases the urgency of introducing tools to manage congestion. p.22

8

Sustainable transport instruments source: Urban Transport and Climate Change – Module 5e; giz http://www.sutp.org

9

Sustainable transport instruments – overview

Planning Land use planning

Public transport

Non-Motorised Modes

Regulatory Physical restraint measures

Traffic management measures

Regulation of parking supply

Low emission zone

Speed restrictions

Economic Instruments Road pricing

Fuel taxes

Vehicle taxation

Parking pricing

Information Public awareness campaigns

Driver behaviour training and education / eco-

driving

Technology Cleaner production

Cleaner technology

Economic instruments source: Urban Transport and Climate Change – Module 5e; giz http://www.sutp.org

• Road pricing

– The motivation for road pricing include (i) raising revenue to pay for

infrastructure, (ii) reducing congestion and (iii) reducing emissions.

– Where congestion management is a key objective of road pricing

schemes, reduction in GHG emissions are more likely to be achieved.

– Equity and public acceptability are always issues when implementing

charge-based measures, and this is particular so for road pricing

schemes.

• Fuel taxation

– Implementing fuel tax measures will not address the issue of

congestion, which is often a localised problem.

– http://www.GIZ.de/fuelprices for information of fuel taxation and an

international comparison of fuel prices in more that 170 countries.

10

Environmental Fiscal Reform (1)

• Environmental fiscal reform refers to the interface

between environmental and fiscal policy measures.

• It focuses more specifically on tax and expenditure

policies that yield both environmental benefits and

fiscal revenues.

Environmental Fiscal Reform (2)

• The Environmental Fiscal Reform Policy Paper (published in April 2006 ) provides a foundation to build on and support environmentally related initiatives in South Africa.

• Maintenance of a coherent tax policy framework;

• Development of a coherent process and framework to consider and evaluate environmental taxes; and

• Consider both environmental and revenue outcomes and the “double-dividend” hypothesis.

12

Criteria / Design considerations for

environmentally related taxes, 2006 paper

• Environmental effectiveness – linked to the environmental externality and aim for best design possible;

• Tax rate & revenue – tax rate to be phased-in, revenue use in terms of government priorities;

• Support for the tax – public support and acceptance is important (e.g. tax payer morality);

• Legal, technical & administrative feasibility: – Define taxable commodity - tax base; or nature of incentive;

– Setting the tax rate;

– Tax avoidance and evasion;

– Collection costs; and

– Compliance costs.

• Competitiveness impacts – may require phase in approach to allow adequate time for adjustments;

• Distributional impacts – compensating measures may need to be considered; and

• Adjoining policy areas – is the instrument capable of contributing to other social and economic objectives?

13

Environmentally related taxes in South Africa

14

R million 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

1 General fuel levy 19 190 20 507 21 845 23 741 24 884 28 833 34 417 36 589 40 320 43 685 48 467

2 Air passenger departure tax 412 440 485 541 549 580 649 762 873 879 907

3 Plastic bag levy 41 61 75 86 79 111 150 161 152 169 174

4 Electricity levy 3 342 5 103 6 323 7 984 8 819 8 648

5 Incandescent light bulb levy 64 151 144 132 72 91

6 CO2 Vehicle emissions tax 626 1 617 1 568 1 711 1 483

Sub Total 19 644 21 008 22 405 24 368 25 512 32 929 41 097 45 596 51 029 55 335 59 770

TOTAL Tax Revenue 354 981 417 334 495 515 572 870 625 179 598 705 674 202 742 651 813 834 900 015 986 283

Sub Total / TOTAL 5.5% 5.0% 4.5% 4.3% 4.1% 5.5% 6.1% 6.1% 6.3% 6.1% 6.1%

Environmentally related taxes in South Africa

15

Y-on-Y % Change 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

1 General fuel levy 6.9% 6.5% 8.7% 4.8% 15.9% 19.4% 6.3% 10.2% 8.3% 10.9%

2 Air passenger departure tax 6.8% 10.2% 11.6% 1.5% 5.6% 11.8% 17.5% 14.5% 0.6% 3.2%

3 Plastic bag levy 48.9% 22.4% 14.5% -8.1% 39.9% 36.0% 6.9% -5.1% 11.1% 3.0%

4 Electricity levy 52.7% 23.9% 26.3% 10.5% -1.9%

5 Incandescent light bulb levy 136.5% -4.8% -8.5% -45.5% 26.6%

6 CO2 Vehicle emissions tax 158.4% -3.1% 9.2% -13.3%

Sub Total 6.9% 6.6% 8.8% 4.7% 29.1% 24.8% 10.9% 11.9% 8.4% 8.0%

TOTAL Tax Revenue 17.6% 18.7% 15.6% 9.1% -4.2% 12.6% 10.2% 9.6% 10.6% 9.6%

Fuel taxes – summary table, 2015 Budget Review

16

Estimated CO2e – Mt: Fuel Combustion only –

(IEA, 2014) (1998 to 2001 = -8%) (2008 to 2012 = - 2%)

17

1998, 306 2001, 282

2008, 384

2012, 376

-

50

100

150

200

250

300

350

400

450

-

5 000

10 000

15 000

20 000

25 000

30 000

35 000

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

CO2 - Mt: Fuel Combustion only

World (lhs)

South Africa (rhs)

1.00%

1.05%

1.10%

1.15%

1.20%

1.25%

1.30%

1.35%

1.40%

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

CO2 - Mt: Fuel Combustion only

South Africa / World (%)

IEA: Estimated GHG { CO2e } emissions:

Sectoral Approach – Fuel combustion only

18

Mt of CO2: CO2 Sectoral Approach

Country 2010 2008

B People's Republic of China 23.84% 1 22.07% 1

United States 17.73% 2 18.95% 2

B India 5.37% 3 4.88% 4

B Russian Federation 5.22% 4 5.40% 3

Japan 3.78% 5 3.91% 5

Germany 2.52% 6 2.71% 6

South Korea 1.86% 7 1.70% 9

Canada 1.77% 8 1.87% 7

Islamic Republic of Iran 1.68% 9 1.69% 10

United Kingdom 1.60% 10 1.74% 8

Saudi Arabia 1.47% 11 1.31% 13

Mexico 1.38% 12 1.37% 12

Indonesia 1.36% 13 1.24% 17

Italy 1.32% 14 1.48% 11

B Brazil 1.28% 15 1.23% 18

Australia 1.27% 16 1.31% 14

France 1.18% 17 1.26% 16

B South Africa 1.15% 18 1.31% 15

Poland 1.01% 19 1.01% 21

Chinese Taipei 0.89% 20 0.89% 22

Spain 0.89% 21 1.08% 19

Ukraine 0.88% 22 1.05% 20

Turkey 0.88% 23 0.89% 23

CO2 emissions (metric tons per capita) in 2010

(WB, 2014)

19

0

2

4

6

8

10

12

14

16

18

20

GHG Inventory, 2010 – Estimates, DEA

20

2010: GHG Inventory (Estimates) -- Categories Emissions -

CO2 Eq (Gg)

Emissions -

CO2 Eq (Gg)

Total Emissions -

CO2 Eq (Gg)

Percentage

Contribution

1 - Energy 428 368 82.66%

A - Fuel Combustion Activities 402 817 77.73%

1.A.1.A - Electricity 236 798 45.69%

1.A.1.B - Petroleum Refining 2 284 0.44%

1.A.1.C - Manufacture of Liquid Fuels (Synfuel ) 28 611 5.52%

1.A.2 - Manufacturing Industries and Construction 41 117 7.93%

1.A.3 - Transport 47 607

Civil Aviation 3 670

Road Transport 43 440 8.38%

Rail Transport 497

1.A.4 - Other Sectors 44 684 8.62%

B - Fugitive emissions 25 551 4.93%

2 - Industrial Processes and Product Use 44 351 8.56%

2.A - Mineral Industry 4 793

Cement production 4 187

Lime production 502

Glass Production 104

2.B - Chemical Industry 1 011

2.C - Metal Industry 37 513

Iron and Steel Production 24 147

Ferroalloys Production 11 809

Aluminium production 1 468

3 - Agriculture, Forestry, and Other Land Use (25 714) (4.96%)

4 - Waste 19 806 3.82%

Total National Emissions and Removals 518 239 100.00%

International Bunkers 2 572

South Africa’s National Climate Change

Response White Paper, 2011

• South Africa‟s response to climate change has two objectives:

– Effectively manage inevitable climate change impacts through interventions

that build and sustain South Africa‟s social, economic and environmental

resilience and emergency response capacity.

– Make a fair contribution to the global effort to stabilise greenhouse gas

(GHG) concentrations in the atmosphere at the level that avoids dangerous

anthropogenic interference with the climate system within a timeframe that

enables economic, social and environmental development to proceed in a

sustainable manner.

• One of the elements in the overall approach to mitigation is: The deployment of a

range of economic instruments to support the system of desired emissions

reduction outcomes, including the appropriate pricing of carbon and economic

incentives, as well as the possible use of emissions offset or emission reduction

trading mechanisms …

21

The Poverty Impacts of Climate Change, Economic

Premise, The World Bank, March 2011. Number 51

• Over the last century, the world has seen a sustained decline in the

proportion of people living in poverty. However, there is a growing

concern that climate change could slow or possibly even reverse

progress on poverty reduction.

• This concern is rooted in the fact than most developing countries are

more dependent on agriculture and other climate-sensitive natural

resources for income and wellbeing, and that they also lack sufficient

financial and technical capacities to manage increasing climate risk

(adaptation).

• Climate change is likely to lead not only to changes in the mean levels of

temperatures and rainfall, but also to a significant increase in the

variability of climate and in the frequency of extreme weather-related

shocks.

• ...much of the poverty impact is expected to be concentrated in Africa

and South Asia, both of which would see more substantial increases in

poverty relative to a baseline without climate change.

22

Options for Intervention

• Command-and-control measures (Regulations):

– Use of legislative or administrative regulations that prescribe certain

outcomes;

– Usually target outputs or quantity, e.g. minimum ambient air quality

standards, within which business must operate.

• Market-based instruments:

– Policy instruments that attempt to internalise environmental

externalities through the market by altering relative prices that

consumers and firms face;

– Utilise the price mechanism and complement command-and-control

measures. Under certain circumstances MBIs are considered more

efficient than command-and-control measures

23

Fiscal policy to mitigate climate change:

A guide to policymakers. Michael Keen, Ian Parry and Ruud de Mooij (editors) IMF, 2012

• “.. carbon pricing should ideally form the centerpiece of mitigation efforts…”

• “Carbon pricing also strikes the cost-effective balance between different emission

reduction opportunities because all behavioral responses are encouraged up to

where the cost of the last tonne reduced equals the emissions price.

• Moreover, the carbon price provides a strong signal for innovations to improve

energy efficiency and reduce the costs of zero- or low-carbon technologies.

• By definition, regulatory policies on their own, like mandates for renewable fuel

generation and energy efficiency standards, are far less effective as they focus

on a much narrower range of emission reduction opportunities.

• A reasonable minimum price to aim for seems to be around $20 per tonne, under

either least-cost climate stabilization or damage valuation approaches.

• Establishing a credible time path for progressively rising carbon prices is also

important to create stable incentives for long-term, clean energy investments”.

24

Rationale for a carbon tax / price

• A carbon tax is a means by which government can intervene by way of a market

based instrument to appropriately take into account the social costs resulting

from carbon emissions.

• A carbon tax seeks to level the playing field between carbon intensive (fossil fuel

based firms) and low carbon emitting sectors (renewable energy and energy

efficient technologies).

• Although this option does not set a fixed quantitative limit to carbon emission

over the short term, a carbon tax at an appropriate level and phased in over time

to the “correct level” will provide a strong price signal to both producers and

consumers to change their behaviour over the medium to long term.

• “The introduction of a carbon price will change the relative prices of goods and

services, making emission-intensive goods more expensive relative to those that

are less emissions intensive. This provides a powerful incentive for consumers

and businesses to adjust their behaviour, resulting in a reduction of emissions”.

25

The Core Policy Mix – a carbon price, energy

efficiency and technology policies (IEA 2011)

26

National Development Plan 2011:

on Climate Change

• “Emissions of carbon dioxide and other greenhouse gases are changing the

earth‟s climate, potentially imposing a significant global cost that will fall

disproportionately on the poor (p.35)”.

• “…. South Africa can manage the transition to a low-carbon economy at a pace

consistent with government‟s public pledges, without harming jobs or

competitiveness (p.51)”.

• “By 2015 … carbon-pricing mechanisms have been put in place (with appropriate

exemptions). These are supported by a wider suite of mitigation policy

instruments that target specific mitigation opportunities (p.214)”.

• “…. reduce carbon emissions from the electricity industry from 0.9kg per kilowatt-

hour to 0.6kg per kilowatt-hour”.

• “… it is possible to both reduce greenhouse gas emissions from electricity

production and still grow the minerals and mineral processing sectors”.

27

Carbon Tax Policy Proposal - timeline

28

Environmental Fiscal Reform Policy Paper

(2006)

LTMS

(2007)

Carbon Tax Discussion

Paper

(Dec 2010)

NCCR- WP

(2011)

Carbon Tax Policy

Paper

(May 2013)

Carbon Offsets Paper

(April 2014)

Legislative Process & Alignment

with Carbon Budgets

(2015)

Carbon Tax Implement

ation

(mid 2016)

Proposed carbon tax design features (1)

• A carbon tax at R120 per ton of CO2e above the suggested thresholds

with annual increases of 10 per cent until 2019/20 is proposed as from

middle 2016 (1 July ?) .

• A basic tax-free threshold / allowance of 60 per cent is proposed.

• Additional tax-free allowance for process emission (10%)

• Additional relief for trade-exposed sectors (maximum 10%)

• A maximum 5% allowance for above average Performance – Z-factor

• Carbon budget allowance of 5%

• Carbon offsetting allowed to reduce carbon tax liability (5% or 10%)

• Tax-free thresholds will be reduced during the second phase (2020 to

2025) and may be replaced with absolute emission thresholds thereafter.

29

30

Carbon Tax Design:

Tax Base Considerations (1)

• The carbon tax will cover all direct GHG emissions from

sources that are owned or controlled by the relevant entity

(Scope 1) emissions.

• These emissions relate to (i) energy use (i.e. fuel

combustion and gasification) and (ii) non-energy industrial

processes.

• For all stationary direct and process emission sources -

based on fuel inputs with approved emissions factors, or an

approved transparent and verified monitoring procedure.

• For non stationary ghg emissions (i.e. liquid / transport

fuels) the carbon tax to be incorporated into the current fuel

tax regime – an add on.

31

Carbon Tax Design:

Tax Base Considerations (2)

• Entities that engage in activities that produce direct GHG

emissions will be liable for the tax and will need to submit

their tax returns based on their own / self assessment of

emissions.

• Department for the Environment (DEA) is working on the

development of mandatory reporting requirements of

emissions in South Africa for economic sectors through the

National Atmospheric Emissions Inventory System (NAEIS),

which shall begin in January 2016.

• The NAEIS / DEA will help the verification process of the self

reported GHG emissions for the purpose of the carbon tax

liability. (for SARS‟ auditing purposes)

32

Revenue Recycling

• In general, “full” earmarking of specific tax revenue streams

are not in line with sound fiscal management practices.

However, the efficient recycling of revenue is important.

• Revenue recycling mechanisms for structural adjustment:

– tax shifting: reducing OR not increasing other taxes

(potential phasing-down of the electricity levy)

– a range of environmental tax incentives, including Energy

efficiency savings tax allowance

– “soft” earmarking (on budget allocations): enhanced free

basic energy / electricity programme, improved public

transport, Carbon Capture and Storage rebate

The carbon offset component of the carbon tax has a dual purpose:

• To serve as a flexibility mechanism that will enable industry to deliver least

cost mitigation, i.e. mitigation at a lower cost to what would be achieved in

their own operations, and thereby lower their tax liability; and

Policy intent of carbon offsets scheme

33

• To incentivise mitigation in

sectors or activities that are

not directly covered by the

tax and/or benefiting from

other government

incentives, especially,

transport, AFOLU, waste.

Carbon offsetting under the carbon tax

• It is proposed that initially carbon credits developed under certain

internationally recognised carbon offset standards be permitted.

• A potential domestic standard would primarily cover the types of projects

that are not well catered for under international standards.

• A specific set of eligibility criteria for carbon offset projects has been

devised to ensure effective implementation of the offset mechanism:

– Projects that generate carbon offset credits must occur outside the

scope of activities subject to the carbon tax.

– Only South African based credits will be eligible for use within the

carbon offset scheme.

– Carbon offset projects registered and / or implemented before the

introduction of the carbon tax regime will be accepted subject to certain

conditions and within a specific timeframe.

– Lists of both eligible and ineligible projects should be introduced.

34

Alignment between DEROs / Carbon Budgets and the

Carbon Tax Design

• It is envisaged that during the first phase of the carbon tax (2016-2020)

the carbon budgets will be indicative.

• During this period, the total emissions minus all the relative tax free

thresholds will be the reference point.

• During the period 2016to 2020 companies participating in the carbon

budget process will qualify for an additional 5 per cent tax free allowance

in terms of the carbon tax.

• During the subsequent tax phases (from 2021 onwards), the alignment

could be designed around carbon budgets as absolute thresholds

(absolute units of MtCO2-eq.), with the carbon tax applying to the

emissions above that level.

• Benchmarking

35

Carbon / energy tax – modelling references

• Van Heerden, J., Gerlagh, R., Blignaut, J., Horridge, M., Hess, S., Mabugu, R. &

Mabugu, M. (2006). Searching for triple dividends in South Africa: Fighting CO2

pollution and poverty while promoting growth. The Energy Journal 27 (2): 113-

141.

• Pauw, K. (2007). Economy-wide modeling: An input into the Long Term

Mitigation Scenarios process, LTMS Input Report 4. Cape Town, Energy

Research Centre. http://www.erc.uct.ac.za/Research/LTMS/LTMS-intro.htm

• Kearny, M. (2008). Modelling the impact of CO2 taxes in combination with the

Long Term Mitigation Scenarios on emissions in South Africa using a dynamic

CGE model.

• Devarajan, S., Go, D.S., Robinson, S. & Thierfelder, K. (2009). Tax Policy to

Reduce Carbon Emissions In South Africa. Policy Research Working Paper

4933. World Bank

• Alton, T., Arndt, C., Davies, R., Hartley, F., Makrelov, K., Thurlow, J., & Ubogu,

M. (2012). The Economic Implications of Introducing Carbon Taxes in South

Africa. Working Paper No. 2012/46. UNU-WIDER

36

Carbon Price Modelling Studies in SA

37

University of

Pretoria,

2006

University of

Cape Town for

Long Term

Mitigation

Scenarios, 2007

World Bank,

2009 University of

Cape Town,

2008

National

Treasury, 2010

Type &

scope of

modelling

Static CGE

model based

on 2000 SAM

Static CGE

Model based on

2000 SAM

Static CGE

Model based on

2003 SAM

DCGE

model based

on 2000 SAM

Dynamic CGE

model based on

2005 SAM

Carbon

pricing

modelled

Tax rate of

R35 ($3.8) per

tCO₂ emissions as:

Carbon

tax

Fuel tax

Electricity

tax

Energy

tax

Tax rate

simulations of

R25 ($2.73) to

R1000 ($109)

per tCO₂.

Energy input tax

imposed on coal,

crude oil and gas

Tax rate of R96

($10) to R165

($18) per tCO₂:

- Pure carbon

tax (based on

carbon content)

- Excise tax on

energy inputs

(coal, gas and

crude oil)

- Sales tax on

energy-intensive

sectors

Tax

simulations

as of 2007

study, but

imposed as a

sales tax on

used of

commodities

producing

high levels of

emissions to

impact

economic

behaviour

Tax rate of

R100 ($11),

R150 ($16.5) &

R200 ($22) per

tCO₂:

- Tax imposed

upstream on

fossil fuel inputs

- Tax is

introduced

gradually over a

10-year period

(from 2012).

Carbon Price Modelling Studies in SA

38

University of

Pretoria, 2006 University of Cape

Town, 2007 World Bank, 2009 University of

Cape Town,

2008

National Treasury,

2010

Revenue recycling measures modelled

- Direct tax break, labour and capital - Indirect tax breaks to all households (VAT) - Reduction in the price of food

- Production subsidies

for nuclear or renew-

able energy and biofuels - Food subsidies - General VAT & PIT subsidies - Household transfers

- Reductions in

distortionary indirect

taxes: production

taxes, sales taxes,

value-added taxes, and

import tariffs

- Lump sum transfers

to households

- Examines

scenarios

associated with

the Long Term

Mitigation

Scenarios

modelling

- Recycling: VAT, PIT,

CIT, transfers to

households and/or government investments

Results - Model finds potential

for double or triple

dividends (GHG

reduction, GDP growth

& poverty reduction) if

revenue is recycled

through lowering existing taxes

- All taxes yield an

emissions dividend, with

carbon tax being the

most effective

- The food tax hand-

back reduces poverty

more than other recycling measures.

- A tax of R75 per tCO₂ and increased to

around R200 per ton seems appropriate.

- It

- Food subsidy yields

the most positive

result, with marginal

increases in GDP at low levels of taxation.

- Revenue recycling

schemes (biofuel, food

VAT) have a positive effect on employment.

- Tax >R600 per ton:

Coal to liquid plants not viable.

- All taxes drive a 15%

reduction in CO₂ emissions

- A direct carbon tax

imposes the lowest

distortion compared

with taxes on energy or

energy-intensive

sectors.

- If revenue is recycled

to reduce pre-existing

tax distortions, the net

welfare cost becomes

negligible;

- The impact on the

GDP or consumption is

generally less than 1

per cent

- If CO2 tax is

combined with

tax relief or re-

investment of

additional

revenue ,

economic impact

is positive

- CO2 tax is

effective in

reducing CO2

emissions

- Employment for

semi- and

unskilled labour

rise with increase

in investment

- With R200 tax

emissions decline by

34% by 2020 and over

42 per cent by 2025,

relative to the baseline.

- If carbon tax revenues

are recycled via VAT

rate, it leads to a smaller

negative impact on GDP (–0.2) by 2035.

- Reductions in CIT or

PIT see the GDP

decrease by 0.4 per cent by 2035.

- Recycling revenue by

increasing government

savings and investment results in positive gains.

Policy responses to carbon leakage: how to

support sectors at risk – vivideconomics, 2015

• Policy makers have considered and/or adopted a range of policy

instruments to reduce the risk of leakage when designing a carbon

pricing regime. These instruments can be split into two main groups:

(i) measures that are integrated into design of a carbon pricing scheme,

or „integrated measures‟ such as free allowance allocation, and

(ii) measures that are external to and operate in parallel with the carbon

pricing scheme, typically known as „complementary measures‟. These

include cash transfers to offset some of the carbon cost firms face,

rebates on non-carbon taxes, direct support for emissions reduction

projects and energy efficiency measures.

• Three main forms of integrated measures are either operating in practice

and/or have been discussed heavily in the relevant literature:

– free allowance allocations;

– administrative exemptions; and

– border carbon adjustments (BCAs).

39

40

Border Carbon Adjustments (BCAs) - 1

• BCAs form part of policy proposals by some countries targeted at countries not participating in global emissions reduction agreements.

• What are BCAs?

– Taxing imports according to emissions associated with their production at the same carbon price as domestically produced goods and services.

– Imports will be taxed at a rate equal to the “domestic” carbon tax / carbon price.

– Exports (rebate ?)

• BCA‟s seek to achieve two objectives:

– Provide competitiveness offsets for domestic producers.

– Address possible carbon leakage concerns – reduction of emissions in a taxing country results in increases in emissions in other countries.

• BCA‟s

– Will impact negatively on countries that don‟t take appropriate action to price carbon.

– Might also impact negatively on global trade.

– Can be difficult to implement

– Will have to consider WTO provisions

Border Carbon Adjustments (BCAs) - 2

• …. the domestic industry may themselves be import intensive, so a

border tax (carbon adjustment) on the import side could have ambiguous

effects.

• …. Border carbon adjustments will be very information intensive.

• Border carbon adjustments should not be seen as a simple panacea to

competitiveness issues created by a carbon tax. Source: ITTCC – Industry Task Team on Climate Change (2011), South Africa

• Provide a symmetric BCA based on the domestic carbon content of

goods produced in carbon-intensive, trade-exposed industries. The

carbon tax to be imposed on imports and rebates on exports (for

fabricated and manufactured goods, the South African input-output table

would be used to calculate the appropriate direct and indirect emission

factor. ) Source, NERA Economic Consulting, December 2011

• How practical would such calculations be?

• Yes for homogenous products such as fuel, but for others?

41

Energy sector & carbon pricing

• Pricing energy appropriately is important to ensure that the external costs

of climate change and other environmental damages are reflected in the

price of energy and that the relative prices between carbon intensive and

low carbon technologies are correctly reflected.

• The current regulatory framework for determining the prices of liquid fuels

(petrol, diesel, paraffin and gas) does not allow for a pass-through –

either in full or in part – of the carbon tax imposed at refinery level. The

electricity sector is however able to pass on the carbon tax to final

consumers.

• Consideration could be given for a pass through mechanism of the

carbon tax within the liquid fuel sector. However such an intervention

must still ensure that appropriate incentives are maintained for changes

in both production and consumption patterns.

• A carbon price / tax will influence future investment decisions and reduce

the price-cost differentials between fossil fuel-based electricity and

renewable energy.

42

Electricity generation levy

• The levy implemented on 1 July 2009 on the production / generation of

electricity from non-renewables including coal, petroleum-based fuels,

natural gas and nuclear. The objectives were:

– Complement demand side management efforts

– As a first step towards developing a carbon tax to achieve long term climate

change objectives

• Electricity generated from renewables and qualifying cogeneration are

excluded from the levy

• This levy now also incorporate provision for the funding of energy savings

measures such as the SWH, previously included in the electricity tariff and

funding to rehabilitate some of the roads that were damaged due to the

large volumes of coal trucks in some of the Provinces.

• To ensure the effective pricing of carbon and facilitate the structural change

currently taking place in the energy sector, a gradual phasing-down and

restructuring of the current electricity levy will be considered

43

Impact on fuel prices

44

CO2 emissions kg / litre

CO2 emissions tons/litre

Cents / per Litre - for

R10 per ton of CO2

40% Taxed = 60% Tax Free :

cents / l

100% Taxed = 0% Tax Free : cents / l

petrol 2.343659 0.002344 2.30 11.20 28.10

diesel 2.681548 0.002682 2.70 12.90 32.20

Fuel taxes in 2015/16

Cents / litre

Assumed carbon tax (at 60% tax free

threshold) cents/litre

% of fuel taxes in 2015/16

Assumed carbon tax (at 0% tax free threshold

cents/litre

% of fuel taxes

in 2015/16

petrol 413.00 11.20 2.71% 28.10 6.80%

diesel 398.01 12.90 3.24% 32.20 8.09%

Average % household consumption expenditure by expenditure

deciles (2010/11 IES) - (1)

45

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Food and non-alcoholic beverages

0.0%

10.0%

20.0%

30.0%

40.0%

Lower 2 3 4 5 6 7 8 9 Upper

Housing, water, electricity, gas and other fuels

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Lower 2 3 4 5 6 7 8 9 Upper

Transport

0.0%

5.0%

10.0%

15.0%

20.0%

Lower 2 3 4 5 6 7 8 9 Upper

Miscellaneous goods and services

Electricity, Fuel & Transport Services: Average % household

consumption expenditure by deciles (2010/11 IES) - (4)

46

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Lower 2 3 4 5 6 7 8 9 Upper

Electricity as a % of TOTAL Expenditure- by expenditure decile

Fuels and lubircants as a % of TOTALExpenditure - by income decile

5, 9.2%

7, 7.0%

8, 4.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Lower 2 3 4 5 6 7 8 9 Upper

Transport services as a % of TOTALExpenditure - by expenditure decile

Passenger transport by road as a % ofTOTAL Expenditure - by income decile

Energy Efficiency Savings Tax Incentive

• The energy-efficiency savings tax incentive (EESTI) was introduced in

November 2013 to complement the proposed carbon tax. The EESTI will run

until January 2020. Some of the carbon tax revenue will be recycled through the

EESTI.

• The EESTI allows businesses to claim deductions against there taxable income

for energy-efficiency saving measures – measures in kWh equivalent.

• The rate at which the deductions is calculated will been increased from

45c/ kWh to 95 c/kWh.

• As at end of April 2015 (slightly over a year in operation) about 3 826 MWh of

potential energy savings was lodged from about 74 registered projects and more

than 100 users are registered in the system. Some of the projects come from the

most energy intensive users are large in the size of potential energy savings.

47

Summary and next steps

• Policy development & public consultation with regard to a carbon price /

carbon tax in South Africa commenced in 2010

• The Climate Change Response White Paper in 2011 provided the

broader policy context for a carbon price / tax as one a suite of measures

to address the challenge of clime change and the transition to a low-

carbon economy

• The proposed design of the carbon tax tries to address concerns about

the impact of higher energy prices on low income households and on the

international competiveness of South Africa firms (especially the mining

& manufacturing sectors ).

• The emission trading schemes in China and the carbon tax initiatives in

Mexico, Chile and other developed and emerging economies should be

noted.

• The Carbon Tax Bill will be submitted to Cabinet for approval for

publication for public comment.

48

Thank you

Questions?

PIT, VAT & CIT as a % of total tax revenues

50

42.7%

37.1%

27.5%

10.4%

2008/09, 27.2%

19.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

19

94

/95

19

95

/96

19

96

/97

19

97

/98

19

98

/99

19

99

/00

20

00

/01

20

01

/02

20

02

/03

20

03

/04

20

04

/05

20

05

/06

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

Tax

to G

DP

rat

io

Fiscal year

Tax as a proportion of National Budget Revenue for top three taxes

Personal income tax

Value added tax

Corporate income tax

The tax to GDP ratio

51

Tax revenue by instrument as a % of Gross Domestic Product

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

Individuals 7.77% 8.10% 8.04% 8.03% 8.13% 8.29% 8.58% 9.12%

VAT 6.93% 6.41% 5.80% 6.50% 6.20% 6.46% 6.58% 6.74%

Companies 6.45% 6.87% 5.29% 4.70% 4.92% 4.79% 4.91% 4.79%

Fuel levy 1.09% 1.03% 1.13% 1.22% 1.19% 1.21% 1.21% 1.25%

Specific excise 0.84% 0.84% 0.83% 0.81% 0.82% 0.85% 0.80% 0.84%

Customs duties 1.22% 0.94% 0.77% 0.94% 1.11% 1.17% 1.22% 1.05%

STC / Dividends 0.95% 0.83% 0.61% 0.61% 0.71% 0.59% 0.48% 0.55%

Sub Total 25.26% 25.02% 22.46% 22.81% 23.09% 23.37% 23.80% 24.33%

Three (PIT, VAT, CIT) 21.16% 21.37% 19.13% 19.23% 19.25% 19.54% 20.08% 20.65%

Tax / GDP 26.38% 25.95% 23.47% 23.86% 24.11% 24.46% 24.93% 25.47%

Budget Revenue / GDP 25.78% 25.28% 22.72% 23.80% 24.02% 23.68% 24.25% 24.54%

Allocations - Department of Transport

52

R'000 2012/13 2013/14 2014/15

1 Departmental baseline 23,021,852 28,418,447 29,725,696

SANRAL: National Road Agency: Capital 6,394,541 7,515,300 7,849,560

SANRAL: National Road Agency: Coal haulage 648,910 665,498 696,111

PRASA: Passenger Rail Agency of SA 7,481,110 10,710,959 13,865,547

Compensation of employees 381,322 405,748 430,101

Other 8,115,969 9,120,942 6,884,377

2 Conditional Grant to Local Government 5,589,135 5,912,264 6,184,228

Public Transport: Infrastrcuture & Network

Operations

3 Conditional Grant to Provincial Government 13,093,000 13,735,539 14,367,374

Provincial Road Maintenance 8,540,479 8,952,830 9,364,661

Public Transport Operation 4,552,521 4,782,709 5,002,713

4 Net additions (e.g. PRASA) 571,313 156,960 3,100,381

5 TOTAL 42,275,300 48,223,210 53,377,679

Transport - National - Budget Allocations

Fuel levy was flat in real terms up to 2008, then increased thereafter

53

0

50

100

150

200

250

300

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Fue

l le

vy (

cen

ts p

er

litre

)

Fiscal year

Fuel levy in c/litre for petrol (real and nominal terms)

Fuel levy - petrol (Nominal)

Fuel levy - petrol (Real: 2008 as base year)

Fuel levy revenues have been decreasing as a share of tax and GDP

54

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

19

94

/95

19

95

/96

19

96

/97

19

97

/98

19

98

/99

19

99

/00

20

00

/01

20

01

/02

20

02

/03

20

03

/04

20

04

/05

20

05

/06

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

Fue

l le

vy r

eve

nu

es

(R m

illio

n)

Fiscal year

Fuel levy revenue as percentage of tax revenues (LHS) and GDP (RHS)

Fuel levy as % of total revenues (LHS)

Fuel levy as % of GDP (RHS)

Fuel (Petrol & Diesel) usage – fuel efficiency

55

3.77

4.38

8.15

2

3

4

5

6

7

8

9

10Litres of Fuel / R' 000 GVA

Litres P / R'000 GVA

Litres D / R'000 GVA

Litres Total / R'000 GVA

Petrol & Diesel Sales

56

Petrol Diesel Total Petrol Diesel Total

Million Litres % % %

2014 11 344 13 168 24 512 46% 54% 100%

2013 11 153 11 890 23 043 48% 52% 100%

2012 11 714 11 262 22 976 51% 49% 100%

2011 11 963 11 225 23 188 52% 48% 100%

2010 11 455 10 170 21 625 53% 47% 100%

2009 11 313 9 116 20 429 55% 45% 100%

2008 11 077 10 071 21 148 52% 48% 100%

2007 11 558 9 757 21 315 54% 46% 100%

2006 11 279 8 708 19 987 56% 44% 100%

2005 11 165 8 115 19 280 58% 42% 100%

2000 10 396 6 254 16 650 62% 38% 100%

1995 10 153 5 432 15 585 65% 35% 100%

1994 9 629 5 110 14 739 65% 35% 100%

1990 8 633 5 280 13 913 62% 38% 100%

1985 6 561 5 062 11 623 56% 44% 100%

1980 3 945 3 391 7 336 54% 46% 100%

Taxes on Petrol : Q3 2014, Source: IEA

57

44.9% 43.0%

39.8%

25.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Taxes on Petrol as % of Pirce: Q3 2014

Fuel tax GST / VAT

Petrol pump prices – Dec 2014: US$

58

Retail pump price - Petrol December 2014:

US$ Unleaded*

Country Price incl. Taxes

Indonesia 0.95

Nigeria 0.60

UK 1.94

Norway 2.45

Turkey 2.23

Australia 1.35

South Africa 1.23

China 1.24

Brazil 1.45

India 1.14

Argentina 1.55

Zambia 1.60

Malawi 1.88

Source: Bloomberg / Associates for International

Research Inc. (AIRINC) /Europes Energy Portal

(1 December 2014)