To date there has been a big outcry against South Africa’s proposed carbon tax because there is no ring fencing of the funds generated, effectively making the tax all stick and no carrot. All revenues collected from carbon emissions were going to effectively be put into the general fiscus and be ‘un- ring fenced’ so to speak, and could be spent on anything at the discretion of government. This has been a big problem as it is an environmental tax, and effectively any funds and revenue collected, as a result of this tax, should be spent on projects and programmes that are stimulating the growth of the green economy, or the low carbon economy as they call it.
The carbon offset proposal tabled by the National Treasury on Tuesday is a positive step to making the carbon tax work, as it gives big corporates the opportunity to actually invest a good portion of their carbon tax liability into carbon offsets, or better known as carbon credits. One tonne of CO2 reduced in a project or a programme could be used by companies to effectively reduce their carbon emissions and as a result their carbon tax liability.
I think corporates are going to take this up in a big way. I think it is going to stimulate a local carbon trading scheme so there could be a lot of activity in terms of carbon project development and taking projects through the whole development lifecycle of generating carbon credits. I think corporates are going to take them up and buy them for a couple of reasons; The carbon tax, the initial price is R120 a tonne of CO2 , carbon offsets will have to come in at under R120 a tonne, so there will be an opportunity for a discount or an arbitrage opportunity where companies can actually reduce their carbon tax liability.
Companies will also be able to see exactly where their funds go, so for that portion of their carbon tax liability they can invest it in carbon offset and choose a qualifying project like waste to energy, municipal landfill to energy or reforestation. It could be anything that is in line with what we would expect from the green economy. This is a really good thing because companies will be able to align their investments and offsets with their corporate social responsibility strategy and that is a great opportunity.
Internationally, carbon trading from a regional level has actually been the big success story, in terms of putting the price on carbon and open carbon trading schemes. We are seeing it in the United States and Canada, there are two such schemes that actually extend across the US and Canada, which have become a robust and buoyant carbon trading schemes. The prices are good and there is a lot of liquidity, which is what you want to see out of a carbon trading scheme.
Similarly, in China they are introducing their own scheme. There are a lot of bilateral agreements between countries in terms of carbon trading. If we talk about this as being the bottom up strategy for regions and countries where they understand that putting a price on carbon is actually critical to effecting change in the economy because without internalising the price of carbon into the price of activities and products, you are not actually going to see that change. They are seeing that at a regional and national level and we are seeing that in South Africa and that it is working really well.
What has been really challenging, however, is the top down carbon trading or the multi stakeholder agreements like the Kyoto Protocol, where governments are having trouble, over the last 20 years, agreeing on a single approach to regulate carbon emissions. The European Trading Scheme has been around for the longest period as a regional trading scheme and has been the flagship and has been fraught with many problems. It began around the same time as the global economic crisis, so obviously if economic productivity is suppressed so will emissions. It created an issue in terms of supply and demand and the current price of carbon credits on that scheme is very low. If it goes below a certain point it does not stimulate and incentivise the transformation to lower the carbon activity which is a massive issue.
I do believe this is the right thing for South Africa, I believe the hybrid between a carbon tax and a carbon offset scheme is quite smart as it allows companies the flexibility to choose where they want to invest. It will have some positive impacts, the carbon tax without the carbon offset scheme could become quite perverse, and at the end of the day you could have a situation where funds being collected as a result of the carbon tax could effectively be invested in Coal 3 or Medupi or Kusile. Eskom, our local utility which is a monopoly as we know, is very challenged at the moment for raising funds to cover the cost of this infrastructure and the cost of just keeping the lights on in South Africa. The worst case scenario for a carbon tax would be a situation where they collect this money and it gets spent and invested in coal fired power stations, which would be absolutely against the whole objective of this scheme in the first place.
By Kevin James
Head of Strategy at GCX Africa