Carbon tax: SA can't afford it, says economist

Cape Town – A carbon tax will be damaging to South Africa’s existing industrial economy, which in turn will have severe consequences for economic growth and employment, said Rob Jeffrey, managing director and senior economist of Econometrix. 

Jeffrey, who in the past authored a report on the potentially negative economic impact a carbon tax and the overuse of alternative energy sources could have on developing countries, is of the view that such a tax will lead to the de-industrialisation of South Africa’s economy. 

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His comments were in reaction to National Treasury’s publication of research done by the Partnership for Market Readiness – a World Bank unit – on the impact a carbon tax will have on reducing greenhouse emissions, economic growth, employment and industry competitiveness.

Scenarios modelled 

In a media statement, National Treasury said the research showed that carbon tax will result in a substantial reduction in greenhouse gas emissions, while it will have a modestly negative effect on economic growth and employment. 

In the study, two baseline scenarios were considered: 

- a main baseline scenario which assumed an average annual GDP growth of 3.5% from 2016 to 2035, constant inflation of 5.5% and population growth of 1%. 

- an alternative baseline scenario which assumes an annual GDP growth of 2.4% from 2018 to 2035. 

Revenue recycling scenarios were also taken into account, which consist of production-based recycling, reductions in the VAT rate and support for the renewable energy sector. 

Revenue recycling means that the revenues from carbon tax are recycled or re-channelled into the economy. 

National Treasury said a carbon tax with persistent tax-free allowances to certain industries will lead to substantially lower reductions in emissions, but will have a smaller negative impact on GDP growth. 

On the other hand, production-based recycling (a scenario in which Treasury gives revenue back to companies in proportion to their output) may have a smaller impact on GDP, but less significant reductions on emissions. 

Findings

National Treasury favours the so-called focus scenario in which carbon tax is applied at R120/tonCO2e, but tax-free allowances are removed at 10 percentage points per year from 2021 onwards. In addition, there is an output-based rebate on all production across all economic sectors. 

The economy will continue to grow under this scenario, while emissions are reduced. “The modelling results estimate that a carbon tax will reduce the economy’s average annual growth rate by only 0.15 percentage points,” National Treasury said. 

Modest impact? 

The impact on other macroeconomic aggregates will also be modest: the annual growth rate in household consumption will fall by 0.23%, employment decreases by 0.07% and real wages fall by 0.2%, National Treasury argues. 

Jeffrey, however, says that the cumulative impact of the slowdown in GDP growth on the size of the economy could be a reduction in the size of the economy of between 4.4% and 6.2% by 2035. 

READ: Carbon tax will have a negative economic impact - Outa 

National Treasury hopes that the implementation of a carbon tax will bring about structural change in the economy whereby the “green economy” grows more rapidly. 

“This will be extremely damaging to the existing industrial economy,” says Jeffrey, “as South Africa is still in its industrialising phase of economic development.” 

According to Jeffrey, a carbon tax policy will de-industrialise South Africa’s economy in favour of renewable energy – something South Africa cannot afford currently.