SA’s carbon tax is a step in the right direction
Since 2010 the debate concerning the net effect of pricing carbon in the SA economy has been fractious, with concerns ranging from international competitiveness to the financial impact on local industry and labour concerns.
The reality is that SA is a significant global emitter of greenhouse gases (GHG), with a heavy reliance on fossil fuel-based energy. So, in a bid to contribute to tackling climate change, the country has a dual responsibility to honour its international emission reduction commitments and reduce its GHG emissions, in line with the National Development Plan (NDP).
The government’s announcement of a market-based carbon pricing mechanism is an important step towards shifting the economy to a low-carbon growth path by initially targeting the most carbon- and energy-intensive companies.
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SA is not alone in its climate and carbon tax endeavours: since November 2018, 46 national and 24 sub-national jurisdictions are putting a price on carbon. On February 19 2019, the SA Carbon Tax Bill was passed in parliament and the following day it was formally announced during the national budget speech.
The bill includes a R120 per tonne carbon tax for primary GHG emitters; a carbon tax on liquid fuels; economic incentives for energy efficiency; and the use of carbon offsets as a means of reducing tax burden. What is envisaged is a phased approach, with the first phase extending from June 2019 to December 2021, escalating at 2% above consumer price index annually.
From an investments perspective the market impact is anticipated to be mostly muted for phase 1, owing to carbon allowances and offsets, which will result in an effective tax rate of between R6 and R48 a tonne. Phase 2, from 2022 onwards, envisages a higher tax to begin aligning with global rates. Pending the revised rates, the impacts in phase 2 could materially impact high-intensity carbon emitters.
On the upside, the transition to a low-carbon economy presents long-term investors with a range of new market opportunities. Renewable energy, energy efficiency, energy storage/charging, green property and green bonds are some examples of nascent growth areas. Specialist infrastructure, private equity and impact funds provide institutional investors with vehicles to access these markets.
A carbon tax of 9c/*l* for petrol and 10c/*l* for on diesel will apply, which will be carried by the consumer. These impacts will likely remain, becoming part of the fuel levy adjustments, which for 2019/2020 are 29c/*l* for petrol and 30c/*l* for diesel. Continued fuel-cost increases and expanding electric-vehicle market will drive cost parity in time. Already, luxury car brands are positioning themselves in SA, with five new additions to the local market with average battery ranges varying between 400km to 480km.
From a national budget perspective the tax is intentionally planned to be revenue neutral. The first phase will be characterised by a combination of tax incentives and revenue-recycling measures as a means of managing the economic impact.
Symbolically, the carbon tax is an important step for the SA economy in decoupling economic growth from carbon intensity. The ultimate aim of a carbon tax is to disincentivise future carbon-intensive investments and improve energy efficiency by utilising alternative and cleaner technologies.
*• Duncan is head of responsible investment at Old Mutual Investment Group.*