Summary
A carbon tax appears to be the most appropriate mechanism to reduce GHG emissions in South Africa, creating incentives for emissions reduction at least cost to the economy. While it would not guarantee a fixed quantitative reduction in such emissions over the short term, a carbon tax set at an appropriate level and phased in over time would provide a strong price signal and certainty to both producers and consumers, acting as an incentive for more environmentally friendly behaviour over the long term.
Taxes on carbon afford firms the flexibility to undertake emissions reductions according to their specific processes and provide the long-term price certainty necessary for investment decisions. Ideally, a carbon tax should apply directly to emissions of CO2 but for administrative reasons this is not feasible. The next best option is a proxy carbon tax on fossil fuel inputs.
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The main body of this discussion document is structured as a technical paper. The remainder of the paper is structured as follows:
- Background
- Climate change and its effects
- Economics of climate change
- Policy instruments to address climate change
- Environmentally related Pigouvian taxes
- Tax policy design considerations
- International practice
- Revenue use – revenue recycling, tax shifting and/or earmarking
- Potential impacts of carbon taxation for South Africa.
The next phase of government’s investigation into a carbon pricing regime will elaborate on the economics, design and practicality of an emissions trading scheme. This will involve an analysis of implemented and proposed emissions trading schemes internationally. The policy discussion document is expected to be published for comment next year.