Integration of the Carbon Tax and Carbon Budgets in South Africa

World Bank, March 2017

Executive Summary I n 2009, at the UNFCCC Conference of the Parties (COP) in Copenhagen, South Africa made a voluntary commitment to reduce its greenhouse gas (GHG) emissions by 34 percent in 2020 and 42 percent in 2025 relative to business-as-usual (BAU). This was part of a wider commitment by South Africa to contribute to the global effort in mitigating anthropogenic climate change and to transition to a lower-carbon economy. This was reaffirmed in its Intended Nationally Determined Contribution (INDC) submission to the UNFCCC, in advance of COP 21 in Paris in 2015, which identifies the intention that South African emissions should follow a ‘Peak Plateau and Decline’ (PPD) trajectory: peaking in 2025 within a range of 398 to 614 MtCO2e; plateauing for approximately a decade; before beginning to decline in absolute terms, falling to between 212 to 428 MtCO2e by 2050.

Among a suite of different policies, two, in particular, have been designed with the intention of delivering a significant proportion of these emission reductions:

• A carbon tax designed by the National Treasury (NT) to provide a price signal to producers and consumers of carbon-intensive products and to create an incentive to invest in cleaner technology. The carbon tax is expected to come into operation in 2017 at a headline rate of R120/tCO2e, although the effective tax rate will initially be lower as a result of a series of tax free allowances.

• A series of carbon budgets designed by the Department of Environmental Affairs (DEA) envisaged to provide a GHG emissions allowance (in other words, a cap), against which physical emissions arising from the operations of a company during a defined time period will be tracked. In the period to 2020, the carbon budgets will not be a compliance instrument but rather will be used to increase understanding of the emissions profile of participating companies, and to establish monitoring, reporting, and verification (MRV) processes. Beyond 2020, they are intended to become compulsory.

This paper provides recommendations for combining the carbon budget with the carbon tax to support delivery of South Africa’s emissions reduction targets beyond 2020. While both the carbon tax and carbon budget approach have merits, economic theory would suggest that there could be risks associated with applying both instruments to the same emissions at the same time. Stakeholder consultation also revealed significant concerns with this option….

The analysis involves comparing four categories of policy alignment options across eight core principles. The four categories of alignment options, developed by the consultancy team and agreed in consultation with DEA and NT, and following discussion with other stakeholders are:

• layering—where both instruments continue to apply to all entities;

• ‘tax enforces budget’—where the tax rate applies in the event that emissions exceed an entity’s budget;

• hybrid options with trading—where entities are allowed to trade budget allocations between themselves, and the tax determines the maximum and/or minimum price of these trades; and

• differential instruments—where different instruments are applied to different entities.

Within each category, there are a range of variants, as explained in the main report. The eight core principles were also agreed through the same process and following a review of a wider selection of principles evident in existing South African policy documents. The eight core principles are:

1. Emissions reduction effectiveness: the interface option should be effective at reducing emissions.

2. Emissions certainty: the interface option should give policymakers and other stakeholders confidence that it is possible to meet a particular emission level. This could apply both to the flow of emissions at a particular point in time and—from a climate change perspective, more importantly—the cumulative emissions over a period of time.

3. Cost-effectiveness: the interface option should minimise the additional costs that society as a whole faces in order to reduce emissions, typically expressed on a cost per tonne of CO2e reduced basis.

4. Polluter pays principle: the interface option should ensure that environmental costs are internalised and that increases or higher net levels of emissions lead to higher financial costs.

5. Equitable treatment: the interface option should treat firms and individuals that are in a similar situation—in terms, for example, of the emissions they are responsible for—in a similar way. This is both a principle that has its own merits and also one that helps to reduce the risk of competitive distortion.

6. Distributional issues: the interface option should not impose a disproportionate burden on the poorest and most disadvantaged in society.

7. Feasibility and simplicity: the interface option should be feasible for the responsible government agencies to design and implement, and feasible and simple for those regulated by the option to comply with. It should be noted that there is a link between this principle and the principle that the interface option should build on existing processes: options that build closely on existing processes are likely to be easier to design and implement. the interface option should not unduly disadvantage South African firms competing with firms based overseas not subject to the same intensity of emissions reduction regulatory effort.

Here is the full article:

Alignment Study CBCT World Bank Website March 2017 (1)

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