No-one likes paying taxes, and in that sense Treasury acting director-general Ismail Momoniat is right to say that for business to support the carbon tax is like turkeys voting for Christmas.
He also said that organised business lacked leadership and vision in opposing the proposed hike in the tax, which will be increased progressively by at least $1 a year to reach $20 per ton of CO² equivalent by 2026. In the second phase, from 2026, the carbon tax rate will have larger annual increases to reach at least $30 by 2030.
But perhaps Momoniat overlooked the support business organisations have expressed for the national effort to reduce greenhouse gas emissions and that they are not opposed to the carbon tax as such. They pointed this out at a meeting of parliament’s finance committee last week. What they are opposed to is the rate of the increase proposed, which they say is too onerous and will be imposed too soon.
It is questionable whether the proposed tax increase will be as harmful and crippling to business as it suggests, or whether it is exaggerating this to bolster its arguments against it. Tax increases generally elicit a howl of protest. Treasury says its own studies show that it will not be as onerous as claimed by business, but companies such as Sasol and ArcelorMittal SA say that it will be. Sasol says its business will be unviable in 2029 if the tax increase without allowances is imposed. Other sectors such as the cement and chemical industries have also raised their voices in opposition.
Treasury and business, however, are talking past each other, the main reason being that Treasury has not yet clarified the future path of the tax allowances, which means the effective carbon tax rate is low. Business has formulated its view on the devastating effect of the proposed tax increase on the basis that there will be no allowances. The February 2022 Budget Review said that the basic tax-free allowance would be reduced gradually from 2026 to 2030 and the Tax Laws Amendment Bill, which provides for carbon tax increases but makes no provision for allowances.
Current exemptions and tax-free allowances range from 60% to 95%, which translates into an effective tax rate of R6 to R50 per ton, giving an effective average rate of R34 per ton. This is low by international standards, the Treasury says.
The Treasury indicated at the meeting that a policy paper on allowances was planned for 2023 and that it was unlikely that there would be no allowances until 2030, but this does not help businesses with their planning and future projections. They rightfully complain that proposed carbon tax increases should be accompanied upfront by a plan for allowances. There is no way that business can comment on the fairness of the proposed increase without knowing what it will mean in practice.
The Treasury has had ample time to work out an allowance regime.
Business Unity SA says that the Treasury’s assurances on the continuation of the allowances alleviates some of its concern about the rate of the increase. The assurances make the proposed increases palatable, it says, because of the allowances that protect vulnerable and trade-exposed sectors.
That said, it is also true that business has to get to grips with the reduction in carbon emissions, failing which it will be slapped with onerous taxes on its exports by countries with a carbon border adjustment mechanism, such as that adopted by the EU and planned for the UK. This will mean that exporters will have to pay the difference between SA’s carbon price and that of the importing country. Rather the tax be paid in SA than abroad.
International bodies including the IMF have recommended a minimum effective carbon price of at least $25 by 2025 and $40 by 2030, which are higher than the Treasury’s proposals.
The climate crisis is already on us, with floods, fires and other disasters around the world. SA and business especially have to play their part in limiting its effects.
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