3 South Africa EFR Carbon Tax UNEP IMF GIS Oct 2012 C Morden

8/13/2019 3 South Africa EFR Carbon Tax UNEP IMF GIS Oct 2012 C Morden

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Environmental Fiscal Reform & a

proposed Carbon Tax

Geneva : UNEP IMF - GIZ

Cecil Morden | Chief Director Economic Tax Analysis | October 2012


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Environmentally related taxes

Criteria / design considerations 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 adequatetime for adjustments;

Distributional impacts compensating measures may need to be considered;and

Adjoining policy areas is the instrument capable of contributing to other socialand economic objectives?

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Competitiveness concerns

Aims to internalise externalities to a socially optimal levelcannot be achieved overnight.

There are win-win cases where more environmentallyinformed business practices could lead to correspondingimprovements in competitiveness.

Improved environmental performance may also improve access

to certain markets e.g. exports. However, these benefits are not immediately possible in all

cases.

A phased-in approach taking account of potential impacts on

competitiveness must be adopted to give specific sectors timeto adjust.


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Distributional concerns

The poor and low-income groups are often hardesthit by negative environmental externalities.

Important for environmentally-related fiscal policy toensure that environmental instruments are pro-poorwhere possible, or at least do not place a

disproportionate burden on low-income groups. A sustainable growth path should provide protection

and support to the poor.

Development that meets the needs of the presentwithout compromising the ability of futuregenerations to meet their own needs.


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Key messages on environmental fiscal

reform Market-based instruments (e.g. environmentally-related

taxes, charges and incentives) can complement andreinforce environmentally related regulatory measures

and at the same time contribute towards fiscal

objectives;

The development of environmentally-related tax and

incentive proposals should, as far as possible, beadequately integrated into a coherent fiscal policy

agenda;

Attention should be given to the possible distributional

and competitiveness implications of environmentaltaxes and charges. The appropriate design andphasing-in of such taxes could deal with these two

important aspects.


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Existing environmentally related (with some

climate change elements) fiscal measuresTaxes

General fuel levy applied to

petrol, diesel (a component ?) Electricity generation tax

applied to non-renewable basedelectricity generation (2.5c/kWh)

Motor vehicle emissions tax

purchase tax of R75 gCO2/km foreach emission

exceeding120gCO2/km(passenger vehicles) and doublecabs subject to tax of R100 for

emissions exceeding 175gCO2/km

Incandescent globe tax of R3per globe

Tax Incentives

Tax exemption for revenues

earned from CERs (CDMprojects)

Accelerated depreciationallowances for renewableelectricity generation and biofuels

production R&D tax incentives (including

green technologies) - 150 percent income tax deduction forR&D expenses

Tax incentives for biodiversityconservation

Energy efficiency savings taxallowance (in process )

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CO Vehicle emission tax (passenger

vehicles & double cabs)(1) Motor cars and other motor vehicles principally designed for the transport of

persons (87.03(tariff subheading); 151.01 (item)):

R75 per g/km CO emissions exceeding 120 g/km

Proxy / penalty if certified emission not available:

if the engine capacity does not exceed 3000 cm:

CO emissions (g/km) = 120 + (0.05 x engine capacity in cm)

if the engine capacity exceeds 3000 cm:

CO emissions (g/km) = 175 + (0.05 x engine capacity in cm)(2) Motor vehicles for the transport of goods (87.04 (tariff subheading; 151.02 (item):

double-cab; a vehicle mass not exceeding 2 000 kg or a G.V.M. not exceeding 3 500 kg, or

of a mass not exceeding 1 600 kg or a G.V.M. not exceeding 3 500 kg per chassis fittedwith a cab

R100 per g/km CO emissions exceeding 175 g/km Proxy / penalty if certified emission not available:

CO emissions (g/km) = 195 + (0.07 x engine capacity in cm)

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Waste Water Discharge charge system

(WDCS) under consideration The department of Water affairs and Forestry has proposed the

following 3 tier charge structure:Component 1 an administrative charge based on the authorised

volume of water discharged to cover the water resourcemanagement costs.Component 2 a cost recovery charge aimed at recovering the

costs associated with mitigating the impact of waste waterdischarges including the costs of regional and specific watertreatment programmes and quantifiable downstream costs imposed

on other users. Base of the charge will either be the authorisedvolume or effluent load; and

Component 3 a deterrent charge (tax) aimed at encouragingpolluters to reduce the effluent load of water returned to the waterresource. The tax base will be the (monitored) effluent load of waterdischarges and is likely to include the following pollution forms:

salinity; nutrients; organic material; pathogens; and suspendedsolids. It is proposed that progressive rates be applied to pollutionloads exceeding certain water quality management targets.


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Environmentally related taxes

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R million 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

1 General fuel levy 19 190 20 507 21 845 23 741 24 884 28 833 34 417 36 589

2 Air passenger departure tax 412 440 485 541 549 580 649 7623 Plastic bag levy 41 61 75 86 79 111 150 161

4 Electricity levy 3 342 5 103 6 323

5 Incandescent light bulb levy 64 151 1446 CO2 Vehicle emissions tax 626 1 617

Sub Total 19 644 21 008 22 405 24 368 25 512 32 929 41 097 45 596

TOTAL Tax Revenue 354 981 417 334 495 515 572 870 625 179 598 705 674 202 742 651

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


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Environmentally related taxes Y-o-Y

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Y-on-Y % Change 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2010/11

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

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

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

4

Electricity levy 52.7% 23.9%

5 Incandescent light bulb levy 136.5% -4.8%

6 CO2 Vehicle emissions tax 158.4%

Sub Total 6.9% 6.6% 8.8% 4.7% 29.1% 24.8% 10.9%TOTAL Tax Revenue 17.6% 18.7% 15.6% 9.1% -4.2% 12.6% 10.2%


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Fuel Sales, litres - million

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Fuel levy petrol cents / litre:

(Nominal and Real = 2008 prices)

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Fuel levy as % of budget revenue:2011/12: R36.6 billion; 21.7 billion litre; 50 800 MtCO2

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Fuel levy as % of GDP

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Rationale for a carbon tax

The external costs of GHG emissions are not reflected in the marketprices of certain goods and services, e.g. energy

A carbon tax is a means by which government intervenes to take intoaccount the appropriate 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 (renewableenergy and energy efficient technologies).

An alternative or in some instances complementary mechanism to pricecarbon by way of an emission trading scheme can be considered overthe longer term, however such a mechanism is probably not feasible inSouth Africa over the medium term

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Carbon Pollution Reduction SchemeAustralias Low Pollution Future,

White Paper Volume 1, December 2008

The consequent economic cost (of GHG emissions) is not currentlyreflected in the costs of business or the price of goods and services because firms face no cost from increasing emissions, the level of

emissions is too great. Unless businesses and individuals bear thefull responsibility for their consumption and production decisions, thelevel of carbon pollution will remain too high (page xxv).

Placing a limit, hence a price, on emissions has the potential to

change the things we produce, the way we produce them, and thethings we buy (page xxvi).

The introduction of a carbon price will change the relative prices ofgoods and services, making emission-intensive goods more

expensive relative to those that are less emissions intensive. Thisprovides a powerful incentive for consumers and businesses toadjust their behaviour, resulting in a reduction of emissions (pagexxviii).

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A framework for considering market-based instrumentsto support environmental fiscal reform in South Africa,

April 2006 (p.17)

As a signatory to the UN Framework Convention on Climate Change(UNFCCC), South Africa has no current obligations to reduce itsgreenhouse gas emissions although this situation may change post

2012.

However, partly due to the fact that the South African economy has oneof the highest energy intensities in the world (i.e. energy consumption perunit of output), improvements in energy efficiency and the promotion of

renewable energy sources have been highlighted as an importantcomponent of the Department of Minerals and Energy (DME) futureenergy policy. The DMEs proposed Energy Bill would allow the Ministerof Minerals and Energy to establish a National Energy Efficiency

Program to regulate energy efficiency matters. With respect to climate change adaptation, a National Climate Change

Response Strategy was adopted in 2004 that highlights potential areasfor government intervention to both mitigate and adapt to the effects ofclimate change.

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Carbon Tax vs. Emissions Trading

Carbon Tax

Price certainty fixed price Emissions reductions

quantity uncertain Administration and

compliance piggy back onexisting administrative systems Visibility of tax Design tax base, collection

point, price level

Emissions trading

Price uncertainty volatility Emissions are capped

quantity certain Complexity negotiations,

high transaction costs, newinstitutions. Some costs (and benefits) are

hidden Coverage, point of obligation,

cap level

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Tax Design Considerations

Actual measuredemissions

Can be precisely targeted as emissions rise, polluterstax liability rises.

Administrativelychallenging: a largenumber of emission

sources need to bemonitored and measured.

Requires technologicalcapacity, systems andhuman resources tomeasure and monitor

Upstream Taxes

Close correlation betweenenergy source carbon contentand eventual levels of emissions.

Upstream involves fewertaxpayers. Lower administrativecosts if carbon tax is leviedupstream on producers rather

than downstream on fuel users.

Piggyback on existing taxsystems.

Upstream tax systems should becombined with a crediting systemto encourage development andadoption of carbon capture andstorage technologies.


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Border tax adjustments (BTAs)

BTAs forms part of policy proposals by developed countries targeted atcountries not participating in global emissions reduction agreements.

What are BTAs? 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 / carbonprice.

BTAs seek to achieve two objectives: Provide competitiveness offsets for domestic producers.

Address possible carbon leakage concerns reduction of emissions in ataxing country results in increases in emissions in other countries.

BTAs Will impact negatively on countries that dont take appropriate action to price

carbon.

Might also impact negatively on global trade.


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Revenue Revenue recycling

Budget neutrality

Revenue neutrality

Earmarking of revenue

Environmental Funds

--------------------------- For many stakeholders, there is a link between revenues from

environmentally-related taxes and spending on the environment.

In general, full earmarking is not in line with sound fiscal

management practices. Need to consider different incentive / revenue use options {revenue

recycling such as soft earmarking (on budget allocations) orreducing (or not increasing) payroll taxes}.


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GHG Inventory, 2000 (DEA)

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1 2 2 .%

. 1 3

. 3 . 1 0

. & 1

2

(,

) 1 1 1.%

3 2 232 .2%

. 3 11

, 1 03 .%

32 0 32 0 .0% 33 2.0%

() 20 0


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GHG emissions - PPD


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Carbon Tax: Design Considerations

1. Carbon Emissions Tax

Actual measured emissions; or

2. Proxy tax bases:

A. Fossil Fuel Input (Upstream):

where fuels enter the economy based on the carbon content of the fuel.

B. Output Tax (Downstream):

(i) At point where fuel is combusted.

(ii) May be based on average emissions of production processes.


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Budget 2012: Proposed carbon tax designfeatures: (1)

Percentage-based rather than absolute emissions thresholds, belowwhich the tax will not be payable.

A higher tax-free threshold for process emission, with considerationgiven to the limitations of the cement, iron and steel, aluminium and glasssectors to mitigate emissions over the near term.

Additional relief for trade-exposed sectors.

The use of offsets by companies to reduce their carbon tax liability.

The tax will apply to carbon dioxide equivalent (CO2e) emissionscalculated using agreed methods.

A basic tax-free threshold of 60 per cent (with additional concession forprocess emissions and for trade-exposed sectors) and maximum offset

percentages of 5 or 10 per cent until 2019/20 is proposed.

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Additional relief will be considered for firms that reduce their carbonintensity during this first phase. The reduction in carbon intensity will bemeasured with reference to a base year or industry benchmark. Tax-free

thresholds will be reduced during the second phase (2020 to 2025) andmay be replaced with absolute emission thresholds thereafter. Alignmentwith the proposed carbon budgets as per the national climate changeresponse white paper (2011) will be important.

A carbon tax at R120 per ton of CO2e above the suggested thresholds isproposed to take effect during 2013/14, with annual increases of10 per cent until 2019/20.

Revenues from the tax will not be earmarked, but consideration will be

given to spending to address environmental concerns. Incentives suchas the proposed energy-efficiency tax incentive and measures to assistlow-income households will be supported.

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Budget 2012: Proposed carbon taxdesign features: (3)

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Table C.13 Proposed emissions thresholds for sectors

Basic tax free threshold (%)

below w hich no carbon tax

Maximum

Additional

Additional

allowance

Total Maximum

offset

w ill be payable during the

first phase (2013 to 2019)

allowance trade

exposure

for

process

percentage

emissions

Sector

Electricity 60% - - 60% 10%

Petroleum (coal to liquid) 60% 10% 10% 80% 5%

Petroleum oil ref inery 60% 10% 10% 80% 5%

Iron and steel 60% 10% 10% 80% 5%

Aluminium 60% 10% 10% 80% 5%Cement 60% 10% 10% 80% 5%

Glass & ceramics 60% 10% 10% 80% 5%

Chemicals 60% 10% 10% 80% 5%

Pulp & paper 60% 10% 0% 70% 10%

Sugar 60% 10% 0% 70% 10%

Agriculture, forestry andland use

60% - 40% 100% 0%

Waste 60% - 40% 100% 0%

Fugitive emissions: coal 60% 10% 10% 80% 5%

Other 60% 10% - 70% 10%


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In addition to the proposed percentage thresholds in

Table C.13, firms will be encouraged to reduce the

carbon intensity of their products during the firstphase of the scheme.

This could be accommodated by adjusting the

basic percentage tax-free threshold (60%) byincreasing or decreasing it by a factor (Z).

The overall tax-free allowance for an entity will be

capped at 90 per cent of actual verified emissions.

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Adjustments to the (60%) basic percentagetax-free threshold

Percentage thresholds will be used to quantify the carbon tax liability of an entity

or firm based on the absolute emissions for that year.

A formula is proposed to adjust the basic percentage tax-free threshold to take

into account efforts already made by firms to reduce their emissions and toencourage firms to invest in low-carbon alternatives. The basic percentagethreshold below which the tax will not be payable may be adjusted using acarbon emissions intensity factor for output compared to an agreed sectorbenchmark. A formula is proposed to calculate a factor Z, which will then be used

to adjust (increase or decrease) the basic percentage tax-free threshold asdescribed below:

Z = Y / X

X is the average measured and verified carbon intensity of the output

of a firm. Y is the agreed benchmark carbon intensity for the sector.

The adjustment to the tax-free threshold is then determined bymultiplying the original percentage threshold by Z.

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Energy Sector

Pricing energy appropriately is important to ensure that the external costsof climate change and other environmental damages are reflected in theprice of energy and that the relative prices between carbon intensive and

low carbon technologies are correctly reflected. Energy sectors environmental externalities include GHG emissions and

local air pollution damages (emissions of SOx, NOx)

Electricity sector high emission intensive power stations to be phased-

out over time, support transition efforts to low carbon electricity sector(e.g. renewables).

Given the regulatory environment of the electricity and liquid fuelssectors, and therefore electricity and fuel prices, some consideration

must be given to the pass through mechanism as a results of the carbontax so as to ensure that appropriate incentives are maintained forchanges in both production and consumption patterns.

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3 South Africa EFR Carbon Tax UNEP IMF GIS Oct 2012 C Morden

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