Introducing Carbon Taxes in South Africa

James Thurlow

South Africa is one of the largest greenhouse gas (GHG) emitters. In 2007 it ranked 13th amongst all countries in terms of its overall emissions from burning fossil fuels, and its per capita emissions were twice the global average. Not surprisingly, there is pressure for South Africa to lower emissions, and so the government has committed to a two-fifths reduction by 2025 (from a baseline 'business as usual' projection). This will pose a serious challenge. South Africa's economic development has long been founded on mining and heavy industry, supported by cheap electricity from coal-fired power stations. Reducing the country's carbon intensity will therefore require a substantial economic transformation, with clear winners and losers, especially during the transition period.

Various interest groups are expressing concerns about the effects of introducing carbon taxes. Businesses are worried about losing competitiveness, especially in export markets for minerals and metals. Labour unions worry about job losses and already high unemployment. Civil society is concerned about rising energy prices, especially given persistent and widespread poverty. The challenge then for the South African government is not only to design and implement an effective carbon tax, but to also strike a careful balance between development and environmental goals.

A recent study by UNU-WIDER and the South African National Treasury provides new evidence to the ongoing public debate. The study measures the direct and indirect carbon content of a very detailed array of South African products. As the figure shows, exports are dominated by carbon-intensive products, such as mining and metals. These products rely on foreign markets and may face declining export competitiveness if a carbon tax is introduced. Conversely, the main employing sectors, such as agriculture and services, are typically less carbon intensive and so are not at great risk. However, metals and mining are amongst the most unionized sectors, and so union resistance is understandable.

The study also finds that the consumption patterns of the poorest and richest households are less carbon intensive than those of middle-income households. This is because middle-income households spend less of their income on foods (relative to the poor) and services (relative to the rich). However, South Africa's notoriously high-income inequality means that the richest households are by far the largest contributors to overall emissions. While the per capita emissions of the poorest quintile are similar to the national average for Benin (one of the lowest emitters in per capita terms), the emissions of the top earners are closer to that of Kuwait (the world's second highest emitter). This extreme 'emissions inequality' means that richer households will have to greatly reduce their carbon use (in absolute terms) if national emission reduction targets are going to be met.

Overall, the study concludes that carbon taxes will lower South Africa's export earnings. This may justify contentious border tax adjustments that rebate South African exporters and impose tariffs on the carbon content of imports. Secondly, a carbon tax is unlikely to cause substantial job losses, although short-term adjustment costs are inevitable as workers migrate towards new and less carbon-intensive industries. Finally, a carbon tax may reduce welfare for poorer households through higher consumer prices. However, upward pressure on unemployment and poverty might be avoided if carbon tax revenues are recycled via reduced consumption taxes, job retraining programs, and investments in cleaner and more labour-intensive technologies. These compensating measures may address some of the concerns about carbon taxes and help South Africa transition to low-carbon development.

James Thurlow is a Research Fellow at UNU-WIDER

Source: Arndt, C., R. Davies, K. Makrelov and J. Thurlow (2011). ’Measuring the Carbon Content of the South African Economy’,UNU-WIDER Working Paper No. 45, United Nations University, World Institute for Development Economics Research, Helsinki.

WIDER Angle newsletter
August 2011
ISSN 1238-9544