The article below, first published in the Daily Maverick on 6 September 2022, sums up our submissions and explains why the proposed amendents fall far short of what is needed to reflect the true cost of emissions and the urgent need for polluters to pay for these emissions.
National Treasury and SARS invited comment by 29 August on a suite of tax legislation. This included proposed amendments to the Carbon Tax Act, 2019 (CTA), foreshadowed in Finance Minister Godongwana’s February 2022 budget speech, in which he called the carbon tax the “main mechanism to ensure we lower our greenhouse emissions”.
Looking at the current state of and proposed changes to South Africa’s carbon tax, that is a dismal prospect.
One of the Paris Agreement’s three main goals is to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. It is not controversial that taxing carbon emissions is a powerful tool to change behaviour – and redirect capital – by altering economic incentives. If carbon were priced correctly, so that it reflects the actual costs of emissions to society, this would be transformative in limiting the worst impacts of the climate crisis.
The idea of a carbon tax is that the burden and responsibility for the damage from greenhouse (GHG) emissions is shifted back to the emitters. Those companies that wish to continue emitting are liable to pay carbon tax (what is called the ‘polluter pays’ principle); alternatively, to limit the tax liability, emitters must transform their operations to be lower-carbon, or wind them down responsibly.
But what rate of carbon tax will shift finance flows onto a Paris-aligned path? Globally, most carbon prices are still significantly below what climate science dictates is required: less than 4% of global emissions are currently covered by a direct carbon price within the range needed by 2030.
Understandably, carbon-intensive companies – keen to protect their competitiveness and bottom-lines – want to keep the tax as low as possible, by continuing to externalise the costs of their emissions onto the rest of society, and ultimately the fiscus.
In the first quarter of this year, the world’s largest energy companies made almost $100 billion in profit. This starkly demonstrates that the industries responsible for the majority of carbon being pumped into the atmosphere remain hopelessly inadequately-disincentivised to change the way they do business.
The same is true in South Africa. When our carbon tax rate is evaluated against expert recommendations (including those made by local organised business) as to the tax rate required to comply with the goals of the Paris Agreement, it falls far short. In other words, to avoid locking our country even further into carbon-intensive investments, and instead to incentivise investment in cleaner technologies, South Africa has to price emissions much more highly.
We must also understand and expose the link between government lethargy on climate action and the unprecedented lobbying activity, by the fossil fuel industry and associated industry associations, to weaken, delay and oppose climate-related regulation.
Anti-climate lobbying: pervasive and powerful
Following much debate over almost a decade – including intense opposition and lobbying from carbon-intensive industries – government legislated a carbon tax in June 2019, through the CTA.
To give companies more time to prepare, the carbon tax was introduced in phases; with the first phase intended to run from 1 June 2019 until the end of 2022, and the second, from 1 January 2023 to 2030.
The carbon tax started at the base rate of R120 per ton of carbon dioxide equivalent (tCO₂e) emissions. In the first phase, the rate increased annually by inflation plus 2%, and, from January 2023, was intended to increase annually by inflation.
To provide “significant emitters time to transition their operations to cleaner technologies through investments in energy efficiency, renewables, and other low-carbon measures”, significant tax-free emission allowances were granted in the first phase of the tax – ranging from 60% to 95%. Once these exemptions are taken into account, the effective tax rate is about US$2 per tCO₂e and could be as little as R6 ($0.4). There were further steps taken to minimise the impact of the first phase of the tax, including a package of tax incentives and revenue recycling measures.
In his February 2022 Budget Speech, Minister Godongwana announced that the first phase of the carbon tax, with its significant tax-free allowances and other benefits, would now be extended for an additional three years – until 2026. No explanation was provided for this decision, but the draft explanatory memorandum (“the memorandum”) for the Taxation Laws Amendment Bill states that this is “to ensure an orderly just transition and assist with the economic recovery due to the COVID-19 pandemic … [A]ligning the carbon tax rate adjustments for the period 2023 to 2025 with the extension of the first phase is an important price signal to companies to continue to transition their activities towards low carbon cleaner business practices and to take early action”.
Predictably, as set out below, it appears that, instead of using this extra three-year grace period for the purpose envisaged in the memorandum, some fossil fuel companies and their industry associations will continue to oppose the weak tax, arguing it will have dire socio-economic impacts, but ignoring the socio-economic impacts of failing to mitigate climate change, which their operations are exacerbating with every ton of CO₂ emitted.
Not only is the tax rate far too low to incentivise a just transition to a low-carbon economy and to ensure that the “polluter pays”, but the proposed amendments make no reference to the process or timing for the extensive tax-free allowances in phase 1 to fall away from 2026. With such extensive allowances applicable, even a much higher tax rate would continue to be ineffective in driving the change required to ensure urgent decarbonisation.
What’s more, although the 2022 Budget Review referenced an increased carbon tax rate applying to emissions that exceed the carbon budget to be allocated in terms of the Climate Change Act (once eventually enacted), this provision has been removed from the current version of the Climate Change Bill. There is currently no penalty or increased tax liability attached to exceeding a carbon budget.
Fossil fuel companies and their lobbyists have succeeded in:
- delaying the carbon tax for about a decade;
- securing a very low tax rate for phase 1;
- securing enormous tax-free allowances for phase 1;
- securing a very low escalation rate for the tax; and
- ensuring the three-year extension of phase 1 of the carbon tax, inclusive of the significant tax-free allowances.
Despite all of this, Sasol, the Minerals Council and others representing fossil fuel interests are now pushing back even against the current weak proposed amendments to the carbon tax rate and future plans to do away with allowances. Lobbyists are arguing that the tax will have a negative impact on their businesses.
That, of course, is precisely the purpose of a carbon tax: once polluters are forced to internalise the costs of their emissions, they will decarbonise and transition to lower-carbon operations.
Enormous potential and benefit
Of course the design of an appropriate and effective carbon tax goes far beyond the rate of the tax. Carbon pricing must form part of a supportive policy package. As with all taxes, carbon taxes affect some people more than others – what is called their distributional impact. Revenues from carbon taxes must ensure that the poor have access to clean and safe energy, must be used to invest in communities as part of the low-carbon just transition, and must help vulnerable communities adapt to inevitable climate impacts.
Failing to take more significant steps to reduce emissions in the short and medium term, will require steeper and deeper emission reduction cuts in future, with more severe consequences for our economy and the majority of people in South Africa.
Let’s not squander the opportunity that a well-considered, consequential and ambitious carbon tax presents.