Research uptake
Carbon Taxes and Low Carbon Development in South Africa

Introduction

South Africa is one of the world’s most carbon-intensive developing countries. Recognizing this, the South African government committed to substantially reducing greenhouse gas (GHG) emissions by 2025, in part through the introduction of a carbon tax. UNU-WIDER partnered with the National Treasury’s Economic Policy Analysis Unit (EPAU) to develop new analytical tools to assess the socioeconomic and environmental impacts of carbon taxes. The research not only led to peer-reviewed publications, but has influenced internal policy documents and has been noted in national and international press. The project has strengthened government’s capacity to conduct similar assessments for other development policies, and has built partnerships between government and researchers at national universities.

Objectives and research questions

The overall objective was to raise the standard of the carbon tax debate by providing research that could be used in public–private forums to structure discussions between interest groups and help guide policy decisions by the National Treasury and other ministries. Research questions:

• What level of carbon tax is needed to achieve national emissions reduction targets?
• How will different levels of carbon taxes affect long-term national income growth?
• Which industries are the winners and losers from introducing carbon taxes?
• What is the relationship between carbon taxes and import/export competitiveness?
• To what extent can border tax adjustments offset losses?
• Given high unemployment levels, what is the impact of carbon taxes on jobs and wages?
• How will carbon taxes and higher energy prices affect poorer households?
• What social and economic tradeoffs exist between tax revenue recycling options?

Project approach

Together with the EPAU, UNU-WIDER developed a new economy-wide model for South Africa that contains a detailed treatment of energy generation and use. This model is called the ‘Energy-Extended South African General Equilibrium’ model (E-SAGE). The model allows for a detailed assessment of carbon taxes at the national, sector and household levels. The model is dynamic and so can compare alternative growth and emissions trajectories. The database underlying the model allows for a life-cycle measurement of carbon use for detailed industries and products. The model can therefore assist in designing and evaluating carbon taxes, revenue recycling options and border tax adjustments.

The E-SAGE model has become the standard tool used by EPAU. It has been used to evaluate not only carbon tax policy, but also energy policy (i.e., the Integrated Resource Plan), health policy (i.e., the National Health Insurance Scheme), and the national development strategy (i.e., the New Growth Path). It is now used on a daily basis by government analysts within the EPAU. The project also developed data systems that the EPAU will continue to use to improve the database underlying the model. UNU-WIDER has conducted a regular series of capacity-building seminars with EPAU, some of which were attended by analysts from other government ministries or departments.

The model has been documented and distributed to researchers at universities, government analysts across ministries, and private sector analysts whose industries are concerned about carbon taxes. UNU-WIDER’s contribution in developing the model is cited in government discussion documents. More generally, EPAU has referred to the collaborative nature of its partnership with UNU-WIDER as the most successful example of technical assistance that it has received from international development agencies.

Given that UNU-WIDER cannot provide indefinite technical assistance to EPAU, UNUWIDER has partnered with the Energy Research Center (ERC) at the University of Cape Town. UNU-WIDER is working with the ERC to further extend the energy component of the E-SAGE model and to transfer the economic model to ERC researchers through week-long workshops and researcher exchanges. Some evidence of sustainability is that the ERC and EPAU will work together during 2012 to evaluate South Africa’s Integrated Energy Plan using the E-SAGE model (i.e., with minimal technical support from UNU-WIDER). Moreover, ERC used the E-SAGE model in its contribution to the second Long-term Mitigation Strategy being developed by South Africa’s Department of Environmental Affairs.

During 2012 and at the request of EPAU, UNU-WIDER and ERC will extend the E-SAGE model to cover the broader southern African region in order to evaluate a regional renewable energy strategy. The model will also be used in a joint study with the National Planning Commission (Office of the President) to conduct South Africa’s first national climate change vulnerability and adaptation assessment.

Key findings

The project has produced two peer-reviewed working papers for external publication, and one internal discussion paper for the National Treasury. The evidence from these papers suggests a number of key findings:

• A carbon tax of US$30 per ton, if gradually introduced, will have only a small negative impact on national income over the next two decades and is enough for South Africa to achieve its emissions reduction targets.
• New jobs will be created in ‘greener’ sectors, the carbon tax will reduce national employment and wages, albeit only slightly. Most job losses will occur in mining and heavy industries. These are, however, industries that tend to be more export-intensive and have more organized labour, thus highlighting the political challenges of introducing carbon taxes.
• The analysis suggests that national income and job losses can be reduced through border tax adjustments, without preventing South Africa achieving its emissions targets. Moreover, the socioeconomic effects of higher energy prices can be offset through revenue recycling, although trade-offs between mitigating growth and poverty effects do exist.

Overall, the study supports a reassessment of the electricity sector investment plan and the current policy of supplying 85 percent of electricity demand from domestic sources. Adopting a regional renewable energy strategy could reduce the necessary carbon tax level and so lower the economic and social costs of achieving low carbon development in South Africa.

Research uptake

In February 2012 the South African government’s annual budget speech announced that a carbon tax will be introduced (probably in early 2013). During the interim period, the design of the carbon tax will be debated. The evidence produced by UNU-WIDER and EPAU has been used directly in the drafting of policy discussion documents within the National Treasury. The findings were presented and discussed at closed forums organized by the National Planning Commission and the National Treasury’s tax policy unit. These forums were attended by representatives from labour unions and major energy-intensive industries. The meetings facilitated an open debate between key stakeholders over the merits and costs of carbon taxes. In most forums, UNU-WIDER has been the only non-South African institution invited to attend. This is directly a result of our collaboration with the National Treasury and our contribution to the discussion documents. The E-SAGE model has been distributed to private sector representatives, in order to provide opportunities for private industries to respond to the analysis.

Key areas where the evidence has influenced the debate has been (1) on the potential role of border tax adjustments, which the evidence supports; (2) the lower-than-expected effects of the carbon tax on low-income households and low-skilled labour; and (3) how revenues can be used to offset losses at the national, sector and household levels. In response to the debate on border tax adjustments, UNU-WIDER and EPAU conducted additional detailed analysis, which was circulated amongst major industries and government departments.

A paper outlining the carbon tax analysis has been submitted to a journal for peer review and publication. The border tax analysis will be published in the South African Journal of Economics. As mentioned, the E-SAGE model continues to be used by national researchers and government analysts for both energy and non-energy policies. The model will be jointly published by UNU-WIDER and ERC and will be made a public good available on the internet. An article reviewing ‘green growth’ options in South African will be published in an academic journal and presented at Rio+20 in June 2012.

Mail & Guardian online, March 2012: ’The treasury's carbon tax model, done by the United Nations University World Institute for Development Economics Research, showed that if the revenues were recycled in the form of tax breaks on income, for example, there was a small negative impact on gross domestic product (GDP)’. http://mg.co.za/article/2012-03-09-carbon-or-resource-rent-tax/

Seminar: James Thurlow and Channing Arndt gave a presentation titled 'The Economics (and Politics) Behind South Africa's Carbon Tax', at the United Nations Department of Economic and Social Affairs (UN DESA) on 3 April 2012. The seminar presented findings from two recent studies conducted by the South African National Treasury and UNU-WIDER.

Research output

Measuring the Carbon Content of the South African Economy WP/2011/45
Channing Arndt, Rob Davies, Konstantin Makrelov and James Thurlow
Forthcoming in the South African Journal of Economics (2012) 

The Political Economy of Green Growth: Cases from Southern Africa WP/2012/11
Danielle Resnick, Finn Tarp, and James Thurlow
Forthcoming in Public Administration and Development (2012) 

The Economic Implications of Introducing Carbon Taxes in South Africa
Forthcoming as a UNU-WIDER working paper

Energy Extension to the South Africa General Equilibrium (SAGE) Model
Forthcoming as UNU-WIDER working paper