The Treasury has rejected the plea by organised business to reduce the carbon tax rate proposed for 2026 and 2030 on the grounds that it is too onerous, with Treasury acting deputy director-general Ismail Momoniat saying he was concerned and “rather surprised” by the lack of vision of business and “disappointed” about its lack of leadership.
Momoniat said in parliament on Wednesday that the objection of business to the carbon tax was not something it would say to foreign investors. He asked whether business was trying to understand the challenges faced by SA with regard to climate change and their own commitments to reducing carbon emissions over the next 10-15 years.
Business Unity SA (Busa) and Minerals Council SA responded to Momoniat’s comments, saying that raising concern over a high carbon tax and affordability did not mean a lack of commitment to climate change and SA’s mitigation commitments.
The Treasury gave its draft response to public submissions on the budget’s carbon tax proposals contained in the Tax Laws Amendment Bill in a presentation to parliament’s finance committee.
The Treasury has accepted arguments that the carbon tax should not be dollar denominated on the grounds this will result in uncertainty and instability due to fluctuations in the exchange rate.
It said it would be converted into the rand equivalent using average exchange rates published by the Reserve Bank.
The Treasury provided a table of the carbon tax in rand terms based on an average rate of R15.40/$ for the 12 months to end-July 2022, which it said would translate into a carbon tax of R159/tonne of CO2 emissions in 2023. This would rise to R190 in 2024, R236 in 2025, R308 in 2026 and R462 in 2030.
Business objected to the Treasury’s proposed carbon tax rate increases to $20/tonne of CO2 emissions in 2026 and $30 in 2030, saying this is too steep and too soon and would inhibit investment in decarbonisation technologies and growth of new low-carbon sectors. It proposed that higher carbon tax increases should be made after 2035 and that the annual carbon tax rate should be increased by inflation plus two percentage points until at least 2030, but the Treasury did not accept this.
“SA has made ambitious commitments in the nationally determined contribution (NDC) commitments under the Paris Agreement for a peaking of emissions in 2025 and a rapid decline in emissions in 2030. Emissions will decline in the range of 350-million to 420-million tonnes and for the first time the climate targets are compatible with the 1.5°C temperature goal,” Treasury senior economist Sharlin Hemraj said.
“A credible price on greenhouse gas emissions is crucial and can go a long way towards building up a cost-effective climate policy framework.
“The 2022 carbon tax rate proposals aim to provide policy certainty on the rate trajectory and a credible price signal to help achieve the NDC commitments approved by cabinet.
“The proposed rate increases of inflation plus two percentage points until 2030 with higher prices implemented after 2035 do not sufficiently reflect the polluter-pays principle and the anticipated growing climate risks. It is also not in line with the carbon prices required to meet the 2°C temperature goal under the Paris Agreement in a cost-effective manner.”
Momoniat said there were many exemptions and tax-free allowances of between 60% and 95%, which translated into an effective carbon tax rate of between R6/tonne and R50/tonne, giving an effective average rate of R34/tonne.
For the headline carbon tax rates proposed by the Treasury, the effective carbon tax rates assuming average tax-free allowances of 80%-85% would be about R46-R62/tonne of CO2 emissions in 2026 and R69- R99/tonne in 2030.
The effective tax rate will be much lower if the other deductions are taken into account. Treasury chief director for economic tax analysis Chris Axelson noted that the effective carbon tax rate in SA was very low. Momoniat noted that the regime was criticised because the rate was too low and there were too many exemptions.
Hemraj said future periodic adjustments of the carbon tax rates every three years, for example, may be necessary to take into account global carbon pricing developments and to ensure equivalence with any carbon border taxes.
Uncertainty
Business was concerned about uncertainty over the future of the allowances, but Hemraj said it was not correct that all allowances would be removed. She said it was highly unlikely there would be no allowances in 2030, adding the Treasury would publish a paper in 2023 on possible design options for tax-free allowances to provide policy certainty.
“Certainty ... will be dependent on progress we will make in reducing emissions and minimising impacts of climate change,” Hemraj said,
But PwC tax policy leader Kyle Mandy said the trajectory of allowances was critical for the effective tax rate. The piecemeal approach adopted by the Treasury was “entirely unhelpful”.
Sasol and ArcelorMittal SA representatives also stressed the need for clarity around allowances before the carbon tax hikes were enacted.
The Treasury did not accept the business recommendation that a socioeconomic modelling be undertaken, saying this had been done and had shown that a carbon tax would have a significant effect on reducing SA’s greenhouse gas emissions and would lead to a decrease in emissions of about 13%-14.5% by 2025 and 26%-33% by 2035 compared with business as usual, with a marginal effect on the economy’s average growth rate.
Treasury economist Kuhle Mxakaza said that in light of the extension of the electricity price neutrality commitment by three years until 2025, further work will be undertaken to assess the effect on different sectors of removing this concession.
She said further consideration will be given to extending this deduction for another three to five years and refining the design of the incentive to remove any double benefits. Business is of the view that the neutrality of electricity producers remains in place in perpetuity, or at least until the electricity production industry has been decarbonised.
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