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The introduction of the carbon tax has been postponed several times since it was first discussed in 2010. The Davis Tax Committee first reviewed it in 2015, while the 2018 National Treasury Budget Review anticipates it will be implemented from January 1, 2019.
Many objections and reservations have been raised regarding the tax. Its primary purpose is to lower greenhouse gas emissions, help reduce the potential long-term negative effects of global climate warming, raise revenue and protect the natural environment.
South Africa is a developing country that remains poor and inequitable. However, it has a treasure trove of natural mineral and human resources. It should be attracting vast amounts of foreign and domestic investment. The National Development Plan (NDP) sets a realistic goal of over 5% GDP growth per annum. Still, South Africa's GDP growth has been less than 2.5% per annum over the past decade, lagging behind key African economies.
Investment impact
South Africa is deindustrialising, and has been slipping down international rankings in terms of productivity and as a destination for investment – particularly mining investment. Mining and manufacturing are the most electricity-intensive of all economic sectors. These industries are reliant on uninterrupted base-load, secure, competitively priced electricity. Government's Integrated Resource Plan (IRP) for electricity, and its continued focus on renewables, as well as its failure to develop its nuclear and High Efficiency Low Emissions (HELE) or 'clean coal' potential, will ensure that South Africa continues to fall behind its global and African economic peers. These energy sources should be supported by gas and domestic solar.
In South Africa's case, the future of hydropower is limited. Significant gas finds are still required. Solar and wind, due to their variability, unpredictability and low load factors that require massive back-up, are – at this stage of technological development – too expensive and not reliable enough.
Carbon tax and its impact would be the final nail in the coffin to ensure slow economic growth. Economic policy in South Africa has three key objectives: alleviating poverty, reducing unemployment and improving equity. This can only be achieved by increasing the sustainable economic growth rate. It needs, therefore, to focus on developing goods-producing industries: agriculture, agricultural processing, manufacturing, mining, mineral beneficiation and effectively reindustrialising the country. Furthermore, it must ensure the country becomes globally competitive.
All input costs, including electricity, are therefore critical. There must be security of supply of electricity at the lowest economic cost. Recent electricity price increases have already meant that the price, as applied to many major industrial users, has moved to damagingly high levels. Together with some other structural deficiencies, such as inadequate labour productivity levels and infrastructure support, this is pointing the country in the direction of becoming less globally competitive.
The carbon tax will have several negative economic outcomes which far outweigh the purported advantages. The increased cost of electricity would have inflationary consequences and a severe impact on the competitiveness of the mining and manufacturing industries, with a knock-on effect on primary producers and the value-added chain of other industries.
It would have a serious impact on exports – particularly the mining, beneficiation and industrial sectors, which represent more than 70% of South African exports by value.
Growth path
South Africa is heavily reliant on coal for energy, relative to other countries, hence a carbon tax will have a far greater detrimental economic impact in South Africa than in other countries. This statement is even more applicable today, with South Africa’s low economic GDP growth rate and the country being reduced to junk status by most major international ratings agencies.
Unfortunately, these unintended consequences are long-term. The country’s policies are misaligned with its economic priorities. South Africa, as an emerging economy, is going to pay a considerably higher price than many of the advanced (and other emerging) economies.
Most people are unaware that the impact of the negative carbon tax and renewables due to inflation, and poor growth in the mining industry and fixed investment, will reduce GDP growth by 0.9% per annum – or approximately R1trn in lost GDP by 2035. (Expressed another way, this would be R75 000 per annum per working individual in South Africa, or 5 million fewer people employed.) These are not trivial figures.
It is noteworthy that coal exports are increasing to other countries and are contributing to their economic growth, while South Africa is planning not to use abundant coal or uranium reserves worth some R10trn each. This defies any economic, financial, environmental or rational human logic. The additional costs will simply have to be passed on to consumers in the form of higher tariffs. No wonder in many countries renewables and the carbon tax are known as a tax on the poor. It is hoped that sense will prevail, and the carbon tax will be postponed indefinitely, or hopefully scrapped.
*Rob Jeffrey is an independent economic risk consultant and the former MD of Econometrix.
