Wednesday, 25 May 2016 - View the latest edition

Opinion

Could the carbon tax be good for SA economy?

Sungula Nkabinde




Energy auditor Adam Simcock says next year’s carbon tax will result in the development of a new industry that will see technology transfer and new jobs created to make up for the expected increase in unemployment caused by the higher tax burden. He says that, because large companies will be forced to invest in energy-saving and lower carbon-emitting technologies, a carbon sub-sector will develop, while energy entrepreneurs will find creative ways earn carbon credits from the government and sell them to carbon emitting businesses, who will in turn be liable for less tax.

"It will create inward investment and technology creation, because that's what it does everywhere else in the world. Because you import solar panels and inverters, and you employ staff to train employees to install them and monitor them,” says Simcock who also provides guidance on the looming tax.

According to this Moneyweb article, revenue from the tax would also boost the economy if it was invested in green energy projects.

Meanwhile, treasury has stated that the carbon tax will not hurt the economy because there will be a five-year grace period wherein Eskom will be exempt, giving energy-intensive industries like mining and manufacturing relief during that period. It also said there will be tax-free exemptions ranging from between 60% and 95% of total emissions, implying that imposed tax will only be 5% to 40% of actual emissions during this period.

Taking this into account, the effective tax rate will range between R6 and R48 per tonne of CO2e (carbon dioxide equivalent), as opposed to the R120 per tonne that is quoted in the draft bill.

“No one will achieve 95% tax reduction, because if you're claiming for this, you won't be able to claim for that,” says Simcock referring to the list of possible exemptions which among other things include offsets, or carbon credits, that companies will be able to buy.

According to The Carbon Report, carbon offsets (or credits) are gained by purchasing an equivalent carbon dioxide emissions saving certificate, which allows business to emit without being liable for tax. They can be purchased from any verifiable source, regardless of location. In South Africa, companies will be limited to credits that are 10% of total emissions.

Simcock is in the business of verifying energy usage and emissions, and awarding those certificates.

Big industry not going anywhere

In the eurozone, he says carbon credits used to be worth €22 (R384) per tonne, but due to the emergence of the carbon sector which allowed for companies to become cleaner at a faster rate,  carbon credits are now being traded at €3 (R52) each as demand has dropped.

Large companies threatening to leave South Africa because of a carbon tax are bluffing, according to Simcock, because energy is still much cheaper here than in other countries. 

Says Simcock: "Arcelor Mittal came to one of the meetings, and said, 'if you implement a carbon tax, we're off'. Really, where in the world are you going to go that you don't already operate, which has enough power for you to do what you need to do…?

"As soon as the draft tax bill came out in November last year, they raised millions of dollars to implement efficiencies in South Africa. So they're not going anywhere."

The problem is that there is still a big shortage of skills, which means South Africa does not have the human capital necessary for a carbon sub-sector to emerge. Simcock is one of very few energy auditors in the country and is the only one that is accredited by the United Nations. Secondly, there is still too much uncertainty within the carbon tax bill as it stands. What will happen after 2020, for example, remains ambiguous. But companies need more certainty because they measure the feasibility of capital investment over long periods of at least 10 years.

“After 2020, the tax will not go down. It will more than likely go up. I suspect it will go up by 10% annually for the next five years,” says Simcock.

Meanwhile, treasury is yet to release the offset paper, which will clarify how the carbon credit system will work and, according Sigfried Spänig, Arcelor Mittal's group manager of environment, it’s impossible to assess what the potential opportunities will be. 

Treasury says the carbon offset paper will be made available at the end of June.

Economy will be hit hard

But given the struggles faced by many companies in the current economic climate, the notion of a carbon tax not damaging the economy, or that it might even benefit it, is hard to swallow.

Rob Jeffery, MD of Econometrix forecasts a 6.2% contraction in the economy over the next 15 or so years if the carbon tax is introduced. He says it is going to make certain industries, which are the mainstays of any industrialising country uneconomic and destroy South Africa’s comparative advantage, which it gets from iron ore, manganese and chrome companies, all of which are major users of electricity.

“We also have the cheapest power that can be made available, and gas, both of which are somewhat harmful to the environment,” says Jeffery, adding that there are many sub-sectors that are suppliers of those industries, that are going to be affected. The amount of jobs that treasury believes are going to be created through a carbon tax are going to fall short by far.

“It's not going to directly lead to job losses. It will slow economic growth to the point where, by 2030, the GDP will be R300 billion less than it would have otherwise been. Similarly the number of people that will be employed will be 1.5 less million than would otherwise be the case,” he says 

Steel sector is in trouble

Spänig says that a carbon tax could well be the final nail in the coffin for many struggling steel producers.

“Our problem is that we can't reduce our emissions because there is no alternative technology available. So National Treasury's objective of changing behaviour will not be met when it comes to companies in the steel industry.”

He says there is a fair amount of research being done, but that it's all still being done at 'lab-scale'. Also steel producers won't be able to push the costs onto consumers because the steel industry is a price taker, which depends on global steel prices.

“It's very difficult to dictate those prices. The market is just too competitive. If all steel makers globally are exposed to a price being placed on carbon, then the playing field becomes more level," he says. 

Spanig is not only concerned about exports being affected, but we are actually competing against imports from countries where there is no price being levied on carbon. So the competition, or lack thereof, will limit their ability to pass the price onto consumers.

Says Spänig: “We're not saying that we cannot do anything. Obviously there are some initiatives that one can start, but nothing to really write home about.”

The carbon tax is meant to be implemented from January 1 2017, but the process  could be delayed by the upcoming elections. Treasury says that, while this remains a possibility, it has not been confirmed.

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