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Carbon tax works if it is drafted well

Read the original article here

Levies have reduced emissions and, with a few tweaks, their economic effects will be manageable.

In his article “Carbon tax shoots itself in the foot” (Business, September 13 to 20), Professor Philip Lloyd asserts that a carbon tax will not be effective in reducing greenhouse gas emissions.

We disagree with Lloyd on several points.

It is too simplistic and sloppy to say that carbon taxes have had no effect.

Our investigations paint a more nuanced picture than Lloyd’s stark assessment.

Different countries have used the term in a number of ways — varying from a charge on emissions to being focused partially or completely on energy.

In terms of their design, none of the schemes covers all energy uses in a homogenous manner.

Tax exemption
A number of countries exempt the generation of electricity or fuels that go into the generation of electricity from tax.

As a result, it is seldom a clear case of comparing apples with apples and Lloyd’s obfuscation of international examples by bundling them all together as if they are the same is disingenuous.

For example, a tax on energy may not have the same outcome as a tax on emissions — one may reduce energy consumption but not emissions.

It really depends on what the target outcome of the tax is. And, yes, the results are not always evident.

When we related the carbon tax to emissions in some of the countries we have studied the results have been mixed.

In absolute terms, emissions have reduced in Sweden (marginally), Denmark, the United Kingdom and Ireland.

Reduction in emissions
In the case of Ireland, a 4% reduction in emissions has been registered within just a year of implementation of the tax.

Emissions have increased marginally in Finland and substantially in the Netherlands and Norway.

However, there is recognition in these countries that emissions would have been far higher in the absence of the tax.

Therefore, it can be concluded that carbon taxes have proven to be largely effective in reducing emissions when compared with the business-as-usual scenario.

Lloyd mentions the European Union Emissions Trading Scheme as a failure. There is some truth in what he says.

However, there is also evidence that the trading scheme was responsible for reductions of 2% to 5% below business as usual in 2005 to 2007.

Even after 2008, it’s likely the trading scheme continued to reduce emissions independently of the global economic downturn.

That said, analytically the exact amount of reductions attributable to the trading scheme is difficult to quantify.

In the same breath, we agree that the current trading scheme carbon price signal is too weak to avoid investments in high-emitting infrastructure.

The economic downturn combined with the record use of international offset credits has led to an accumulation of more than two billion surplus emission allowances on the market.

There are discussions to cancel these allowances to bring the trading scheme back on track.

Lloyd asserts that Australia’s carbon pricing regime resulted in billions in damages and thousands of lost jobs.

Australia’s emissions
On the contrary, there is evidence that the adverse impact of Australia’s emissions trading scheme on the economy has actually been marginal.

In the first 12 months of its operation, gross domestic product grew by around 2.5% (which is in line with long-term trends), industrial production increased by 5.1%, retail trade increased by 3.1%, household consumption increased by 1.7% and more than 160 000 new jobs were added to the economy.

These are hardly the consequences predicted by doomsday prophets.

Lloyd goes on to say that the tax will have a serious impact on the poor. But one cannot deny the principle of a carbon tax on that basis.

The impact on the poor can always be mitigated through appropriate measures that include recycling of revenue from the tax, measures targeted to protect low-income groups and even broader fiscal reforms.

Lloyd’s study of international experience should have revealed, as ours did, that the judicious use of revenue from carbon tax or putting in place supporting packages and measures can address the twin objectives of environmental improvement and economic growth while mitigating the impact on the poor.

Reminder to Lloyd
We would have liked to see Lloyd use this information to advise the government on how to improve the design and implementation of the tax to make it pro-poor.

We would like to remind Lloyd that various safeguards are under discussion to ensure that the poor do not suffer as a result of this tax.

Yes, a lot more work needs to be done in this area, but there is no denying that the treasury’s paper on the economic impact of the tax, from which Lloyd chooses selectively, makes it clear that, if revenue recycling is included in the economic model, the impacts of the carbon tax are manageable.

We are also aware that the treasury is doing work in this area. We would advise Lloyd to use his years of experience to help on this front, since he is so concerned about the impact on the poor, rather than to imply that the government’s intent is malicious.

Like many others, we have concerns about unintended consequences. We have not used these concerns as a tool to shoot down the tax.

We have urged the treasury to look at the features of the tax more closely from this aspect and have made some concrete suggestions.

There are two ways the tax could play out.

Impact on the poor
At its initial threshold, with rebates and exemptions, the tax will have a minimal impact on the poor.

However, if the tax results in no shift in behaviour over time, then the pass-through costs to the consumer (and, crucially, the poor) would increase as the tax does.

This is the worst-case scenario. But if the desired effects, including increased energy efficiency and growth in new energy technologies, materialise then the increased tax over time should have little effect as emissions are decreased and, in this case, pass-through costs need not affect consumers.

This is the precise goal of the tax: over the long term, the economy would see a net benefit.

The tax should also be seen as pre-emptive. Some studies show that the world’s 14 largest economies will impose some form of tax on carbon-intense imports.

Australia’s linking of its emissions trading scheme with that of Europe is some indication of where the world is going.

The future
It is possible to envisage a future of an inter-locked global carbon pricing system that could affect our own exports.

This possibility is already on our doorstep. The EU is in the process of revising the blanket emissions tax on the aviation industry.

There is a good possibility that a “made in South Africa” product, namely South African Airways, will have no option but to comply unless it can reduce emissions or demonstrate equivalent measures within South Africa.

Though we can cite many such possible outcomes, the bottom line is that there should be less emotion and gut reaction to the carbon tax.

It is easy to criticise the tax, but it is harder work to suggest concrete ways to improve it.

After all, it is hard to believe that Lloyd or other critics believe that it would be a good option for our economy to rely totally on high carbon-intense fossil fuels.

Saliem Fakir is head of the World Wide Fund for Nature South Africa’s living planet unit and Manisha Gulati is its energy economist

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Carbon Tax opponents inaccurate, writes Saliem Fakir

read the original here: Business Day
DAVID Gleason urges us to “look to Australia’s Abbott for carbon tax lead,” cautioning that a hastily applied carbon tax in South Africa will have a damaging effect on key business sectors, and implying that Australia is a case in point (Torque, September 11).

While I wholeheartedly agree that the carbon tax must indeed be subject to thorough consultation (not least of all with impoverished communities so that we can ensure that it is structured in such a way as to serve them rather than further adding to their cost burden), Mr Gleason’s assertions about Australia’s carbon tax are inaccurate on several fronts.

First, in Australia it is not, nor was it ever, a “carbon tax” as some media have claimed.

Australia has an emissions trading scheme which began with a fixed price for three years. The outgoing government promised to end the fixed price period a year early and move to a floating price.

Second, and again in contrast to some media reports, the carbon price was not a major issue affecting the way people voted.

Exit polling found that it was only a top issue for a meagre 3% of Australia’s voters.

There’s good reason for this — the effect of Australia’s emissions trading scheme on the economy has been marginal. In the first 12 months of its operation, gross domestic product grew about 2.5% (which is in line with long-term trends), industrial production increased 5.1%, retail trade increased 3.1%, household consumption increased 1.7% and more than 160,000 new jobs were added to the economy. Hardly the consequences predicted by doomsday prophets.

Now, compare this with the affect that making large businesses pay for their pollution had on emissions in the first 12 months. Emissions from electricity decreased 7%, the emissions intensity of electricity generation fell 4.5% and renewable energy generation is up 25%.

The propensity of South Africa’s carbon tax opponents to sight Australia’s “carbon tax failure” as an argument for why the proposed South Africa carbon tax should not be passed are, when one looks at the facts, completely unfounded and smacks more of fear-mongering than being factually accurate.

Saliem Fakir

Head of Living Planet Unit, WWF-SA

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Seize your power to save the planet

South Africa is facing a serious energy crisis. We have too many people and not enough electricity to go around. It’s a frustrating situation for the general public. With a shortage of power stations (and those under construction going hopelessly past deadline and over budget)and the looming threat of fracking, something must be done.

The tax payers of South Africa are the ones who lose in the current energy crisis, not only because electricity cuts out at the most inopportune moments, but because they foot the bill for poor service at the end of the day. In addition, the vast majority of our fuel is “dirty” – polluting our world and contributing to climate change.

WWF has recently launched the Seize your Power campaign globally, seeking to use the voices of ordinary citizens to lobby governments on the issue of renewable energy. South Africa has an abundance of wind and sun with which to generate energy without turning to dirty fossil fuels. Renewable energy is an economically viable option for tax payers and governments, especially in a country in need of a solution to the energy crisis.

Before resorting to fracking in the Karoo – an endeavor reputable environmental organisations have cautioned against – citizens should encourage government to investigate wind and solar energy. Wind power has become cheaper than coal in Australia, and in India solar power has begun to compete with fossil fuels. As cities turn greener, let’s make our voices heard.

You can join the movement towards a cleaner planet by signing the Seize Your Power pledge here

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Carbon tax: Don’t throw the baby out with the bathwater

Killing the carbon tax will destroy a great idea, writes the WWF’s Saliem Fakir and Manisha Gulati.

Today, the idiom is used to suggest an avoidable error in which something good or essential is eliminated when trying to get rid of something bad or inessential. The numerous heavy-weights who are weighing in against the carbon tax run the risk of suggesting precisely that: rejecting the essential along with the inessential.

At this stage, both champions and critics of the tax have a point.

From the champion’s perspective; it’s no longer just about high greenhouse-gas emissions or where South Africa stands globally on the list of emitters that matters. It is about the basic inflation-related costs associated with an ongoing over-dependence on fossil fuels and the country’s balance sheet. Sound arguments for the carbon tax are those which call for a long-term view of our economy.

The recent fuel price hikes (and the whopper planned for next month) are a good reminder that the price volatility of oil affects us all, particularly when 95% of our crude oil requirement is met through imports. South Africa’s cheapest and easiest-to-mine coal deposits are said to have reached peak production.

Availability of coal from new deposits will require extensive and expensive new infrastructure, and there are questions about the quality of this new coal. Clearly fossil fuels are a business and investment risk. But this gets little attention in the debate on carbon tax because the focus is almost always on emissions and costs.

The tax can be used to encourage reduced emissions by shifting our economy towards less energy consumption and less carbon intensive sectors, it can generate economic wealth and create jobs by diversifying the country’s export base and competitiveness through new technologies. And in doing so, it can free up the valuable resources currently going into managing the inflationary effects of coal and oil dependency, and so increase investments in the development objectives of the economy.

These are some of the positives, but in its current form, critics of the tax have a point as well. Without some significant shifts in design, the net effect of this tool intended for good threatens to become a cost burden to consumers and the economy.

Electricity tariffs are one such element of the tax which requires shifting. The reality of the electricity sector is that Eskom holds a monopoly on electricity supply. Consumers have no choice when it comes to either energy supplier or technology. As it stands, there will be pass-through costs arising out of the tax in electricity in addition to an existing environmental levy in the tariff if the structure of the sector is not changed. At best, end users may reduce electricity consumption, but this can not be the end goal of a growing economy – we have to enable users to choose more efficient technologies.

The tax will not suddenly change the fuel mix for electricity production unless the tax itself is used to support a new profile for the sector through a revenue recycling model. Despite the tax, we will still be stuck with an electricity system that is dependent on the pace of government procurement through Eskom or the Independent Power Producer process to bring down the overall carbon intensity of the grid.

For the tax to show positive effects and for emitters to reduce emissions there must be workable alternatives. While some emitters and energy intensive users may be able to self-finance their low carbon options, others will not, especially in industries that are already uncompetitive.

The tax will also need to be supported by policies, which remove non-price barriers to provide long-term price certainty and reduce risks to green investment and low carbon technologies. But in order for government to action such a shift, and to ensure that our energy, fiscal and industrial policies continue to speak to each other, improved understanding of alternative technologies is required.

Elements of the tax design also need improvement to enable a modal shift in the transport sector from road to rail in the case of freight, and from private to public transport in the case of passengers. In a country where public transport is limited and often unreliable, the number of vehicles on our roads continues to grow. Road congestion harms our economy in other ways too: reducing productivity, increasing our imports of oil and increasing spend on roads which could and should be used for better social ends.

The carbon tax is a useful and necessary instrument. While we don’t believe that the perverse impacts of the tax are government’s intention, there is a clear need for design improvements to ensure a stronger link between the tax and the strategic objectives of a low carbon economy.

While the tax in its current form includes a number of problematic elements which should indeed be redesigned, the carbon tax itself is essential. The alternative of evading the tax will make the country more reliant on fossil fuels, resulting in adverse consequences for economic, social and human development in the country.

In order to keep the baby and toss the bath water, we cannot only think of the short term, but must consider what is most necessary for the long-term sustained growth of our economy.

Saliem Fakir is head of WWF South Africa’s Living Planet Unit. Manisha Gulati is an energy economist with WWF South Africa’s Living Planet Unit. The unit’s work is focused on identifying ways to manage a transition to a low-carbon economy.

Read the original article here: Mail & Guardian

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