A presentation by Mr Cecil Morden (Chief Director: Economic Tax Analysis: National Treasury), at the Transport Forum SIG: "Sustainable Transport" on 6 August 2015 hosted by University of Johannesburg's Institute of Transport and Logistics Studies (Africa), or ITLS (Africa). The theme of the presentation was: "Environmental Fiscal Reform and the proposed Carbon Tax".

1. Environmental Fiscal Reform and the proposed
Carbon Tax
Sustainable Transport
University of Johannesburg
Institute of Transport and Logistic Studies (Africa)
Cecil Morden - 06 August 2015

2. 1. Costs associated with road transport
2. CO2 emissions in the transport sector
3. Environmental Fiscal Reform
4. National Climate Change Response – White Paper (NCCR – WP)
5. Quantifying Green House Gas Emissions
6. The National Development Plan
7. Options to intervene and the rationale for a carbon price / tax
8. Carbon tax design, carbon offsets & revenue recycling
9. Alignment with carbon budgets / DEROs
10. Carbon tax modelling
11. Competitiveness / carbon leakage / BCA
12. Impact on energy prices & incentive for energy efficiency savings
13. Summary
Outline

3. Costs associated with Road Transport
• Private costs
– Construction
– Maintenance
• Social costs / externalities
– Congestion
– Accidents (road safety)
– Air pollution
– GHG emissions
– Noise pollution
3

4. 4
Externalities
• “Externalities refers to situations when the effect of
production (and) or consumption of goods and services
imposes costs or benefits on others which are not reflected
in the prices charged for the goods and services being
provided”.
• Positive externalities (“spillovers”) : Research &
Development, Health, e.g. immunization, basic education,
road safety, street lighting, energy efficiency savings, etc.
• Negative externalities (“spillovers”) : Local air pollution,
noise, congestion, water pollution, GHG emissions – climate
change, etc.

5. Economic Instruments,
source: Economic Instruments, Module 1d, Sustainable Transport, GTZ, 2004 , http://www.sutp.org
• Internalisation of costs which are currently imposed externally upon
persons other than the individual transport user is an indispensable
element of a sustainable transport system, but it must be achieved
step-wise, not shock-wise. Only then will full cost pricing have a chance
of being accepted by market participants and gaining sufficient political
support. (p.2)
• Economic instruments can set dynamic incentives for substitution,
technical change and the research and development of pollution
abatement technologies. (p.4)
5

6. GHG emissions in the Transport Sector,
source: Transport and Energy, Research Findings, International Transport
Forum, Leipzig, May 2008
• Transport is responsible for 13% of all anthropogenic emissions of greenhouse
gases and 23% of world CO2 emissions from fossil fuel combustion.
• In most countries, transport CO2 emissions are growing faster than total CO2
emissions.
• Road transport accounts for, by far, the largest part of CO2 emissions from the
(transport) sector and this will remain the case in the coming decades despite
more rapid growth in shipping and aviation.
• Light duty vehicles is the largest source of CO2 emissions from transport.
• Rapid improvement of the fuel economy of light-duty vehicles and freight trucks
by about 30% would reduce emissions and may even stabilize emissions from
such vehicles over the next two decades.
• In the longer run the expected growth in vehicle fleets and usage outstrips these
fuel economy improvements, leading to rapid growth of emissions. Stabilizing
emissions from light-duty vehicles over this horizon would require fuel economy
levels of around 3.5 l/100 km (80 g CO2 / km)
6

7. Reducing CO2emissions in the Goods Transport
Sector, source: Transport and Energy, Research Findings, International Transport
Forum, Leipzig, May 2008
World-wide freight transport accounts fro roughly a third of transport sector
CO2 emissions. Freight activity is expected to continue to expand strongly
but there are opportunities to mitigate CO2 emissions:
• Technological innovation
– two thirds of fuel efficiency gains in trucks are expected to come from improvements in
engine and exhaust systems.
• Eco-driving
• Logistic organisation, vehicle loading and truck km charges
– Logistical improvements have also been driven by the introduction of electronic truck
kilometre charges in Switzerland, Germany and Austria.
• Model efficiency considerations
– More generally governments can influence freight modal split through a coherent policy
of charging for the use of infrastructure across the modes. In the majority of countries,
trucks are charged at levels below the marginal cost of using the roads, …. Pricing
road use at marginal cost (including congestion and environmental costs) would create
the conditions for a more efficient modal split. (p. 15)
7

8. Fuel efficiency standards and carbon taxes:
source: Transport and Energy, Research Findings, International Transport Forum, Leipzig, May 2008
• Intervention to internalize the costs of CO2 emissions from transport
serves to both mitigate climate change and reduce oil consumption at the
same time. Carbon taxes are the preferred instrument of many
economists to achieve this because they provide incentives for
attainment of the environmental target at least cost. However, vehicle
fuel efficiency of CO2 emissions standards have some advantages, not
least in terms of political acceptability.
• … if a standard is the primary tool adopted for reducing transport sector
CO2 emissions (and the rebound effect is a problem – i.e. the cost savings
resulting from increased fuel efficiency may be taken up by additional driving or upgrading
of the power or weight of the vehicle purchase) a secondary tax element is
required – ideally in the form of a carbon tax or alternatively through fuel
taxes or differentiation of taxes on vehicle purchase or ownership. It also
increases the urgency of introducing tools to manage congestion. p.22
8

9. Sustainable transport instruments
source: Urban Transport and Climate Change – Module 5e; giz http://www.sutp.org
9
Sustainable transport instruments – overview
Planning Land use planning
Public transport
Non-Motorised Modes
Regulatory Physical restraint measures
Traffic management measures
Regulation of parking supply
Low emission zone
Speed restrictions
Economic Instruments Road pricing
Fuel taxes
Vehicle taxation
Parking pricing
Information Public awareness campaigns
Driver behaviour training and education / eco-
driving
Technology Cleaner production
Cleaner technology

10. Economic instruments
source: Urban Transport and Climate Change – Module 5e; giz http://www.sutp.org
• Road pricing
– The motivation for road pricing include (i) raising revenue to pay for
infrastructure, (ii) reducing congestion and (iii) reducing emissions.
– Where congestion management is a key objective of road pricing
schemes, reduction in GHG emissions are more likely to be achieved.
– Equity and public acceptability are always issues when implementing
charge-based measures, and this is particular so for road pricing
schemes.
• Fuel taxation
– Implementing fuel tax measures will not address the issue of
congestion, which is often a localised problem.
– http://www.GIZ.de/fuelprices for information of fuel taxation and an
international comparison of fuel prices in more that 170 countries.
10

11. Environmental Fiscal Reform (1)
• Environmental fiscal reform refers to the interface
between environmental and fiscal policy measures.
• It focuses more specifically on tax and expenditure
policies that yield both environmental benefits and
fiscal revenues.

12. Environmental Fiscal Reform (2)
• The Environmental Fiscal Reform Policy Paper (published in
April 2006 ) provides a foundation to build on and support
environmentally related initiatives in South Africa.
• Maintenance of a coherent tax policy framework;
• Development of a coherent process and framework to
consider and evaluate environmental taxes; and
• Consider both environmental and revenue outcomes and the
“double-dividend” hypothesis.
12

13. Criteria / Design considerations for
environmentally related taxes, 2006 paper
• Environmental effectiveness – linked to the environmental externality and aim
for best design possible;
• Tax rate & revenue – tax rate to be phased-in, revenue use in terms of
government priorities;
• Support for the tax – public support and acceptance is important (e.g. tax payer
morality);
• Legal, technical & administrative feasibility:
– Define taxable commodity - tax base; or nature of incentive;
– Setting the tax rate;
– Tax avoidance and evasion;
– Collection costs; and
– Compliance costs.
• Competitiveness impacts – may require phase in approach to allow adequate
time for adjustments;
• Distributional impacts – compensating measures may need to be considered;
and
• Adjoining policy areas – is the instrument capable of contributing to other social
and economic objectives?
13

14. Environmentally related taxes in South Africa
14
R million 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
1 General fuel levy 19 190 20 507 21 845 23 741 24 884 28 833 34 417 36 589 40 320 43 685 48 467
2 Air passenger departure tax 412 440 485 541 549 580 649 762 873 879 907
3 Plastic bag levy 41 61 75 86 79 111 150 161 152 169 174
4 Electricity levy 3 342 5 103 6 323 7 984 8 819 8 648
5 Incandescent light bulb levy 64 151 144 132 72 91
6 CO2 Vehicle emissions tax 626 1 617 1 568 1 711 1 483
Sub Total 19 644 21 008 22 405 24 368 25 512 32 929 41 097 45 596 51 029 55 335 59 770
TOTAL Tax Revenue 354 981 417 334 495 515 572 870 625 179 598 705 674 202 742 651 813 834 900 015 986 283
Sub Total / TOTAL 5.5% 5.0% 4.5% 4.3% 4.1% 5.5% 6.1% 6.1% 6.3% 6.1% 6.1%

15. Environmentally related taxes in South Africa
15
Y-on-Y % Change 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
1 General fuel levy 6.9% 6.5% 8.7% 4.8% 15.9% 19.4% 6.3% 10.2% 8.3% 10.9%
2 Air passenger departure tax 6.8% 10.2% 11.6% 1.5% 5.6% 11.8% 17.5% 14.5% 0.6% 3.2%
3 Plastic bag levy 48.9% 22.4% 14.5% -8.1% 39.9% 36.0% 6.9% -5.1% 11.1% 3.0%
4 Electricity levy 52.7% 23.9% 26.3% 10.5% -1.9%
5 Incandescent light bulb levy 136.5% -4.8% -8.5% -45.5% 26.6%
6 CO2 Vehicle emissions tax 158.4% -3.1% 9.2% -13.3%
Sub Total 6.9% 6.6% 8.8% 4.7% 29.1% 24.8% 10.9% 11.9% 8.4% 8.0%
TOTAL Tax Revenue 17.6% 18.7% 15.6% 9.1% -4.2% 12.6% 10.2% 9.6% 10.6% 9.6%

16. Fuel taxes – summary table, 2015 Budget Review
16

17. Estimated CO2e – Mt: Fuel Combustion only –
(IEA, 2014) (1998 to 2001 = -8%) (2008 to 2012 = - 2%)
17
1998, 306
2001, 282
2008, 384
2012, 376
-
50
100
150
200
250
300
350
400
450
-
5 000
10 000
15 000
20 000
25 000
30 000
35 000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
CO2 - Mt: Fuel Combustion only
World (lhs)
South Africa (rhs)
1.00%
1.05%
1.10%
1.15%
1.20%
1.25%
1.30%
1.35%
1.40%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
CO2 - Mt: Fuel Combustion only
South Africa / World (%)

18. IEA: Estimated GHG { CO2e } emissions:
Sectoral Approach – Fuel combustion only
18
Mt of CO2: CO2 Sectoral Approach
Country 2010 2008
B People's Republic of China 23.84% 1 22.07% 1
United States 17.73% 2 18.95% 2
B India 5.37% 3 4.88% 4
B Russian Federation 5.22% 4 5.40% 3
Japan 3.78% 5 3.91% 5
Germany 2.52% 6 2.71% 6
South Korea 1.86% 7 1.70% 9
Canada 1.77% 8 1.87% 7
Islamic Republic of Iran 1.68% 9 1.69% 10
United Kingdom 1.60% 10 1.74% 8
Saudi Arabia 1.47% 11 1.31% 13
Mexico 1.38% 12 1.37% 12
Indonesia 1.36% 13 1.24% 17
Italy 1.32% 14 1.48% 11
B Brazil 1.28% 15 1.23% 18
Australia 1.27% 16 1.31% 14
France 1.18% 17 1.26% 16
B South Africa 1.15% 18 1.31% 15
Poland 1.01% 19 1.01% 21
Chinese Taipei 0.89% 20 0.89% 22
Spain 0.89% 21 1.08% 19
Ukraine 0.88% 22 1.05% 20
Turkey 0.88% 23 0.89% 23

19. CO2 emissions (metric tons per capita) in 2010
(WB, 2014)
19
0
2
4
6
8
10
12
14
16
18
20

20. GHG Inventory, 2010 – Estimates, DEA
20
2010: GHG Inventory (Estimates) -- Categories
Emissions -
CO2 Eq (Gg)
Emissions -
CO2 Eq (Gg)
Total Emissions -
CO2 Eq (Gg)
Percentage
Contribution
1 - Energy 428 368 82.66%
A - Fuel Combustion Activities 402 817 77.73%
1.A.1.A - Electricity 236 798 45.69%
1.A.1.B - Petroleum Refining 2 284 0.44%
1.A.1.C - Manufacture of Liquid Fuels (Synfuel ) 28 611 5.52%
1.A.2 - Manufacturing Industries and Construction 41 117 7.93%
1.A.3 - Transport 47 607
Civil Aviation 3 670
Road Transport 43 440 8.38%
Rail Transport 497
1.A.4 - Other Sectors 44 684 8.62%
B - Fugitive emissions 25 551 4.93%
2 - Industrial Processes and Product Use 44 351 8.56%
2.A - Mineral Industry 4 793
Cement production 4 187
Lime production 502
Glass Production 104
2.B - Chemical Industry 1 011
2.C - Metal Industry 37 513
Iron and Steel Production 24 147
Ferroalloys Production 11 809
Aluminium production 1 468
3 - Agriculture, Forestry, and Other Land Use (25 714) (4.96%)
4 - Waste 19 806 3.82%
Total National Emissions and Removals 518 239 100.00%
International Bunkers 2 572

21. South Africa’s National Climate Change
Response White Paper, 2011
• South Africa‟s response to climate change has two objectives:
– Effectively manage inevitable climate change impacts through interventions
that build and sustain South Africa‟s social, economic and environmental
resilience and emergency response capacity.
– Make a fair contribution to the global effort to stabilise greenhouse gas
(GHG) concentrations in the atmosphere at the level that avoids dangerous
anthropogenic interference with the climate system within a timeframe that
enables economic, social and environmental development to proceed in a
sustainable manner.
• One of the elements in the overall approach to mitigation is: The deployment of a
range of economic instruments to support the system of desired emissions
reduction outcomes, including the appropriate pricing of carbon and economic
incentives, as well as the possible use of emissions offset or emission reduction
trading mechanisms …
21

22. The Poverty Impacts of Climate Change, Economic
Premise, The World Bank, March 2011. Number 51
• Over the last century, the world has seen a sustained decline in the
proportion of people living in poverty. However, there is a growing
concern that climate change could slow or possibly even reverse
progress on poverty reduction.
• This concern is rooted in the fact than most developing countries are
more dependent on agriculture and other climate-sensitive natural
resources for income and wellbeing, and that they also lack sufficient
financial and technical capacities to manage increasing climate risk
(adaptation).
• Climate change is likely to lead not only to changes in the mean levels of
temperatures and rainfall, but also to a significant increase in the
variability of climate and in the frequency of extreme weather-related
shocks.
• ...much of the poverty impact is expected to be concentrated in Africa
and South Asia, both of which would see more substantial increases in
poverty relative to a baseline without climate change.
22

23. Options for Intervention
• Command-and-control measures (Regulations):
– Use of legislative or administrative regulations that prescribe certain
outcomes;
– Usually target outputs or quantity, e.g. minimum ambient air quality
standards, within which business must operate.
• Market-based instruments:
– Policy instruments that attempt to internalise environmental
externalities through the market by altering relative prices that
consumers and firms face;
– Utilise the price mechanism and complement command-and-control
measures. Under certain circumstances MBIs are considered more
efficient than command-and-control measures
23

24. Fiscal policy to mitigate climate change:
A guide to policymakers.
Michael Keen, Ian Parry and Ruud de Mooij (editors) IMF, 2012
• “.. carbon pricing should ideally form the centerpiece of mitigation efforts…”
• “Carbon pricing also strikes the cost-effective balance between different emission
reduction opportunities because all behavioral responses are encouraged up to
where the cost of the last tonne reduced equals the emissions price.
• Moreover, the carbon price provides a strong signal for innovations to improve
energy efficiency and reduce the costs of zero- or low-carbon technologies.
• By definition, regulatory policies on their own, like mandates for renewable fuel
generation and energy efficiency standards, are far less effective as they focus
on a much narrower range of emission reduction opportunities.
• A reasonable minimum price to aim for seems to be around $20 per tonne, under
either least-cost climate stabilization or damage valuation approaches.
• Establishing a credible time path for progressively rising carbon prices is also
important to create stable incentives for long-term, clean energy investments”.
24

25. Rationale for a carbon tax / price
• A carbon tax is a means by which government can intervene by way of a market
based instrument to appropriately take into account the social costs resulting
from carbon emissions.
• A carbon tax seeks to level the playing field between carbon intensive (fossil fuel
based firms) and low carbon emitting sectors (renewable energy and energy
efficient technologies).
• Although this option does not set a fixed quantitative limit to carbon emission
over the short term, a carbon tax at an appropriate level and phased in over time
to the “correct level” will provide a strong price signal to both producers and
consumers to change their behaviour over the medium to long term.
• “The introduction of a carbon price will change the relative prices of goods and
services, making emission-intensive goods more expensive relative to those that
are less emissions intensive. This provides a powerful incentive for consumers
and businesses to adjust their behaviour, resulting in a reduction of emissions”.
25

26. The Core Policy Mix – a carbon price, energy
efficiency and technology policies (IEA 2011)
26

27. National Development Plan 2011:
on Climate Change
• “Emissions of carbon dioxide and other greenhouse gases are changing the
earth‟s climate, potentially imposing a significant global cost that will fall
disproportionately on the poor (p.35)”.
• “…. South Africa can manage the transition to a low-carbon economy at a pace
consistent with government‟s public pledges, without harming jobs or
competitiveness (p.51)”.
• “By 2015 … carbon-pricing mechanisms have been put in place (with appropriate
exemptions). These are supported by a wider suite of mitigation policy
instruments that target specific mitigation opportunities (p.214)”.
• “…. reduce carbon emissions from the electricity industry from 0.9kg per kilowatt-
hour to 0.6kg per kilowatt-hour”.
• “… it is possible to both reduce greenhouse gas emissions from electricity
production and still grow the minerals and mineral processing sectors”.
27

28. Carbon Tax Policy Proposal - timeline
28
Environmen
tal Fiscal
Reform
Policy
Paper
(2006)
LTMS
(2007)
Carbon Tax
Discussion
Paper
(Dec 2010)
NCCR- WP
(2011)
Carbon
Tax Policy
Paper
(May 2013)
Carbon
Offsets
Paper
(April 2014)
Legislative
Process &
Alignment
with
Carbon
Budgets
(2015)
Carbon Tax
Implement
ation
(mid 2016)

29. Proposed carbon tax design features (1)
• A carbon tax at R120 per ton of CO2e above the suggested thresholds
with annual increases of 10 per cent until 2019/20 is proposed as from
middle 2016 (1 July ?) .
• A basic tax-free threshold / allowance of 60 per cent is proposed.
• Additional tax-free allowance for process emission (10%)
• Additional relief for trade-exposed sectors (maximum 10%)
• A maximum 5% allowance for above average Performance – Z-factor
• Carbon budget allowance of 5%
• Carbon offsetting allowed to reduce carbon tax liability (5% or 10%)
• Tax-free thresholds will be reduced during the second phase (2020 to
2025) and may be replaced with absolute emission thresholds thereafter.
29

30. 30
Carbon Tax Design:
Tax Base Considerations (1)
• The carbon tax will cover all direct GHG emissions from
sources that are owned or controlled by the relevant entity
(Scope 1) emissions.
• These emissions relate to (i) energy use (i.e. fuel
combustion and gasification) and (ii) non-energy industrial
processes.
• For all stationary direct and process emission sources -
based on fuel inputs with approved emissions factors, or an
approved transparent and verified monitoring procedure.
• For non stationary ghg emissions (i.e. liquid / transport
fuels) the carbon tax to be incorporated into the current fuel
tax regime – an add on.

31. 31
Carbon Tax Design:
Tax Base Considerations (2)
• Entities that engage in activities that produce direct GHG
emissions will be liable for the tax and will need to submit
their tax returns based on their own / self assessment of
emissions.
• Department for the Environment (DEA) is working on the
development of mandatory reporting requirements of
emissions in South Africa for economic sectors through the
National Atmospheric Emissions Inventory System (NAEIS),
which shall begin in January 2016.
• The NAEIS / DEA will help the verification process of the self
reported GHG emissions for the purpose of the carbon tax
liability. (for SARS‟ auditing purposes)

32. 32
Revenue Recycling
• In general, “full” earmarking of specific tax revenue streams
are not in line with sound fiscal management practices.
However, the efficient recycling of revenue is important.
• Revenue recycling mechanisms for structural adjustment:
– tax shifting: reducing OR not increasing other taxes
(potential phasing-down of the electricity levy)
– a range of environmental tax incentives, including Energy
efficiency savings tax allowance
– “soft” earmarking (on budget allocations): enhanced free
basic energy / electricity programme, improved public
transport, Carbon Capture and Storage rebate

33. The carbon offset component of the carbon tax has a dual purpose:
• To serve as a flexibility mechanism that will enable industry to deliver least
cost mitigation, i.e. mitigation at a lower cost to what would be achieved in
their own operations, and thereby lower their tax liability; and
Policy intent of carbon offsets scheme
33
• To incentivise mitigation in
sectors or activities that are
not directly covered by the
tax and/or benefiting from
other government
incentives, especially,
transport, AFOLU, waste.

34. Carbon offsetting under the carbon tax
• It is proposed that initially carbon credits developed under certain
internationally recognised carbon offset standards be permitted.
• A potential domestic standard would primarily cover the types of projects
that are not well catered for under international standards.
• A specific set of eligibility criteria for carbon offset projects has been
devised to ensure effective implementation of the offset mechanism:
– Projects that generate carbon offset credits must occur outside the
scope of activities subject to the carbon tax.
– Only South African based credits will be eligible for use within the
carbon offset scheme.
– Carbon offset projects registered and / or implemented before the
introduction of the carbon tax regime will be accepted subject to certain
conditions and within a specific timeframe.
– Lists of both eligible and ineligible projects should be introduced.
34

35. Alignment between DEROs / Carbon Budgets and the
Carbon Tax Design
• It is envisaged that during the first phase of the carbon tax (2016-2020)
the carbon budgets will be indicative.
• During this period, the total emissions minus all the relative tax free
thresholds will be the reference point.
• During the period 2016to 2020 companies participating in the carbon
budget process will qualify for an additional 5 per cent tax free allowance
in terms of the carbon tax.
• During the subsequent tax phases (from 2021 onwards), the alignment
could be designed around carbon budgets as absolute thresholds
(absolute units of MtCO2-eq.), with the carbon tax applying to the
emissions above that level.
• Benchmarking
35

36. Carbon / energy tax – modelling references
• Van Heerden, J., Gerlagh, R., Blignaut, J., Horridge, M., Hess, S., Mabugu, R. &
Mabugu, M. (2006). Searching for triple dividends in South Africa: Fighting CO2
pollution and poverty while promoting growth. The Energy Journal 27 (2): 113-
141.
• Pauw, K. (2007). Economy-wide modeling: An input into the Long Term
Mitigation Scenarios process, LTMS Input Report 4. Cape Town, Energy
Research Centre. http://www.erc.uct.ac.za/Research/LTMS/LTMS-intro.htm
• Kearny, M. (2008). Modelling the impact of CO2 taxes in combination with the
Long Term Mitigation Scenarios on emissions in South Africa using a dynamic
CGE model.
• Devarajan, S., Go, D.S., Robinson, S. & Thierfelder, K. (2009). Tax Policy to
Reduce Carbon Emissions In South Africa. Policy Research Working Paper
4933. World Bank
• Alton, T., Arndt, C., Davies, R., Hartley, F., Makrelov, K., Thurlow, J., & Ubogu,
M. (2012). The Economic Implications of Introducing Carbon Taxes in South
Africa. Working Paper No. 2012/46. UNU-WIDER
36

37. Carbon Price Modelling Studies in SA
37
University of
Pretoria,
2006
University of
Cape Town for
Long Term
Mitigation
Scenarios, 2007
World Bank,
2009
University of
Cape Town,
2008
National
Treasury, 2010
Type &
scope of
modelling
Static CGE
model based
on 2000 SAM
Static CGE
Model based on
2000 SAM
Static CGE
Model based on
2003 SAM
DCGE
model based
on 2000 SAM
Dynamic CGE
model based on
2005 SAM
Carbon
pricing
modelled
Tax rate of
R35 ($3.8) per
tCO₂
emissions as:
 Carbon
tax
 Fuel tax
 Electricity
tax
 Energy
tax
Tax rate
simulations of
R25 ($2.73) to
R1000 ($109)
per tCO₂.
Energy input tax
imposed on coal,
crude oil and gas
Tax rate of R96
($10) to R165
($18) per tCO₂:
- Pure carbon
tax (based on
carbon content)
- Excise tax on
energy inputs
(coal, gas and
crude oil)
- Sales tax on
energy-intensive
sectors
Tax
simulations
as of 2007
study, but
imposed as a
sales tax on
used of
commodities
producing
high levels of
emissions to
impact
economic
behaviour
Tax rate of
R100 ($11),
R150 ($16.5) &
R200 ($22) per
tCO₂:
- Tax imposed
upstream on
fossil fuel inputs
- Tax is
introduced
gradually over a
10-year period
(from 2012).

38. Carbon Price Modelling Studies in SA
38
University of
Pretoria, 2006
University of Cape
Town, 2007
World Bank, 2009 University of
Cape Town,
2008
National Treasury,
2010
Revenue
recycling
measures
modelled
- Direct tax break,
labour and capital
- Indirect tax breaks to
all households (VAT)
- Reduction in the price
of food
- Production subsidies
for nuclear or renew-
able energy and
biofuels
- Food subsidies
- General VAT & PIT
subsidies
- Household transfers
- Reductions in
distortionary indirect
taxes: production
taxes, sales taxes,
value-added taxes, and
import tariffs
- Lump sum transfers
to households
- Examines
scenarios
associated with
the Long Term
Mitigation
Scenarios
modelling
- Recycling: VAT, PIT,
CIT, transfers to
households and/or
government investments
Results - Model finds potential
for double or triple
dividends (GHG
reduction, GDP growth
& poverty reduction) if
revenue is recycled
through lowering
existing taxes
- All taxes yield an
emissions dividend, with
carbon tax being the
most effective
- The food tax hand-
back reduces poverty
more than other
recycling measures.
- A tax of R75 per tCO₂
and increased to
around R200 per ton
seems appropriate.
- It
- Food subsidy yields
the most positive
result, with marginal
increases in GDP at
low levels of taxation.
- Revenue recycling
schemes (biofuel, food
VAT) have a positive
effect on employment.
- Tax >R600 per ton:
Coal to liquid plants not
viable.
- All taxes drive a 15%
reduction in CO₂
emissions
- A direct carbon tax
imposes the lowest
distortion compared
with taxes on energy or
energy-intensive
sectors.
- If revenue is recycled
to reduce pre-existing
tax distortions, the net
welfare cost becomes
negligible;
- The impact on the
GDP or consumption is
generally less than 1
per cent
- If CO2 tax is
combined with
tax relief or re-
investment of
additional
revenue ,
economic impact
is positive
- CO2 tax is
effective in
reducing CO2
emissions
- Employment for
semi- and
unskilled labour
rise with increase
in investment
- With R200 tax
emissions decline by
34% by 2020 and over
42 per cent by 2025,
relative to the baseline.
- If carbon tax revenues
are recycled via VAT
rate, it leads to a smaller
negative impact on GDP
(–0.2) by 2035.
- Reductions in CIT or
PIT see the GDP
decrease by 0.4 per cent
by 2035.
- Recycling revenue by
increasing government
savings and investment
results in positive gains.

39. Policy responses to carbon leakage: how to
support sectors at risk – vivideconomics, 2015
• Policy makers have considered and/or adopted a range of policy
instruments to reduce the risk of leakage when designing a carbon
pricing regime. These instruments can be split into two main groups:
(i) measures that are integrated into design of a carbon pricing scheme,
or „integrated measures‟ such as free allowance allocation, and
(ii) measures that are external to and operate in parallel with the carbon
pricing scheme, typically known as „complementary measures‟. These
include cash transfers to offset some of the carbon cost firms face,
rebates on non-carbon taxes, direct support for emissions reduction
projects and energy efficiency measures.
• Three main forms of integrated measures are either operating in practice
and/or have been discussed heavily in the relevant literature:
– free allowance allocations;
– administrative exemptions; and
– border carbon adjustments (BCAs).
39

40. 40
Border Carbon Adjustments (BCAs) - 1
• BCAs form part of policy proposals by some countries targeted at countries not
participating in global emissions reduction agreements.
• What are BCAs?
– Taxing imports according to emissions associated with their production at the
same carbon price as domestically produced goods and services.
– Imports will be taxed at a rate equal to the “domestic” carbon tax / carbon
price.
– Exports (rebate ?)
• BCA‟s seek to achieve two objectives:
– Provide competitiveness offsets for domestic producers.
– Address possible carbon leakage concerns – reduction of emissions in a
taxing country results in increases in emissions in other countries.
• BCA‟s
– Will impact negatively on countries that don‟t take appropriate action to price
carbon.
– Might also impact negatively on global trade.
– Can be difficult to implement
– Will have to consider WTO provisions

41. Border Carbon Adjustments (BCAs) - 2
• …. the domestic industry may themselves be import intensive, so a
border tax (carbon adjustment) on the import side could have ambiguous
effects.
• …. Border carbon adjustments will be very information intensive.
• Border carbon adjustments should not be seen as a simple panacea to
competitiveness issues created by a carbon tax.
Source: ITTCC – Industry Task Team on Climate Change (2011), South Africa
• Provide a symmetric BCA based on the domestic carbon content of
goods produced in carbon-intensive, trade-exposed industries. The
carbon tax to be imposed on imports and rebates on exports (for
fabricated and manufactured goods, the South African input-output table
would be used to calculate the appropriate direct and indirect emission
factor. ) Source, NERA Economic Consulting, December 2011
• How practical would such calculations be?
• Yes for homogenous products such as fuel, but for others?
41

42. Energy sector & carbon pricing
• Pricing energy appropriately is important to ensure that the external costs
of climate change and other environmental damages are reflected in the
price of energy and that the relative prices between carbon intensive and
low carbon technologies are correctly reflected.
• The current regulatory framework for determining the prices of liquid fuels
(petrol, diesel, paraffin and gas) does not allow for a pass-through –
either in full or in part – of the carbon tax imposed at refinery level. The
electricity sector is however able to pass on the carbon tax to final
consumers.
• Consideration could be given for a pass through mechanism of the
carbon tax within the liquid fuel sector. However such an intervention
must still ensure that appropriate incentives are maintained for changes
in both production and consumption patterns.
• A carbon price / tax will influence future investment decisions and reduce
the price-cost differentials between fossil fuel-based electricity and
renewable energy.
42

43. Electricity generation levy
• The levy implemented on 1 July 2009 on the production / generation of
electricity from non-renewables including coal, petroleum-based fuels,
natural gas and nuclear. The objectives were:
– Complement demand side management efforts
– As a first step towards developing a carbon tax to achieve long term climate
change objectives
• Electricity generated from renewables and qualifying cogeneration are
excluded from the levy
• This levy now also incorporate provision for the funding of energy savings
measures such as the SWH, previously included in the electricity tariff and
funding to rehabilitate some of the roads that were damaged due to the
large volumes of coal trucks in some of the Provinces.
• To ensure the effective pricing of carbon and facilitate the structural change
currently taking place in the energy sector, a gradual phasing-down and
restructuring of the current electricity levy will be considered
43

44. Impact on fuel prices
44
CO2
emissions
kg / litre
CO2
emissions
tons/litre
Cents / per
Litre - for
R10 per ton
of CO2
40% Taxed =
60% Tax Free :
cents / l
100% Taxed = 0%
Tax Free :
cents / l
petrol 2.343659 0.002344 2.30 11.20 28.10
diesel 2.681548 0.002682 2.70 12.90 32.20
Fuel taxes in
2015/16
Cents / litre
Assumed carbon tax
(at 60% tax free
threshold)
cents/litre
% of fuel taxes
in 2015/16
Assumed carbon
tax (at 0% tax
free threshold
cents/litre
% of fuel taxes
in 2015/16
petrol 413.00 11.20 2.71% 28.10 6.80%
diesel 398.01 12.90 3.24% 32.20 8.09%

45. Average % household consumption expenditure by expenditure
deciles (2010/11 IES) - (1)
45
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Food and non-alcoholic beverages
0.0%
10.0%
20.0%
30.0%
40.0%
Lower 2 3 4 5 6 7 8 9 Upper
Housing, water, electricity, gas and other fuels
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Lower 2 3 4 5 6 7 8 9 Upper
Transport
0.0%
5.0%
10.0%
15.0%
20.0%
Lower 2 3 4 5 6 7 8 9 Upper
Miscellaneous goods and services

46. Electricity, Fuel & Transport Services: Average % household
consumption expenditure by deciles (2010/11 IES) - (4)
46
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Lower 2 3 4 5 6 7 8 9 Upper
Electricity as a % of TOTAL Expenditure
- by expenditure decile
Fuels and lubircants as a % of TOTAL
Expenditure - by income decile
5, 9.2%
7, 7.0%
8, 4.6%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Lower 2 3 4 5 6 7 8 9 Upper
Transport services as a % of TOTAL
Expenditure - by expenditure decile
Passenger transport by road as a % of
TOTAL Expenditure - by income decile

47. Energy Efficiency Savings Tax Incentive
• The energy-efficiency savings tax incentive (EESTI) was introduced in
November 2013 to complement the proposed carbon tax. The EESTI will run
until January 2020. Some of the carbon tax revenue will be recycled through the
EESTI.
• The EESTI allows businesses to claim deductions against there taxable income
for energy-efficiency saving measures – measures in kWh equivalent.
• The rate at which the deductions is calculated will been increased from
45c/ kWh to 95 c/kWh.
• As at end of April 2015 (slightly over a year in operation) about 3 826 MWh of
potential energy savings was lodged from about 74 registered projects and more
than 100 users are registered in the system. Some of the projects come from the
most energy intensive users are large in the size of potential energy savings.
47

48. Summary and next steps
• Policy development & public consultation with regard to a carbon price /
carbon tax in South Africa commenced in 2010
• The Climate Change Response White Paper in 2011 provided the
broader policy context for a carbon price / tax as one a suite of measures
to address the challenge of clime change and the transition to a low-
carbon economy
• The proposed design of the carbon tax tries to address concerns about
the impact of higher energy prices on low income households and on the
international competiveness of South Africa firms (especially the mining
& manufacturing sectors ).
• The emission trading schemes in China and the carbon tax initiatives in
Mexico, Chile and other developed and emerging economies should be
noted.
• The Carbon Tax Bill will be submitted to Cabinet for approval for
publication for public comment.
48

49. Thank you
Questions?

50. PIT, VAT & CIT as a % of total tax revenues
50
42.7%
37.1%
27.5%
10.4%
2008/09, 27.2%
19.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
TaxtoGDPratio
Fiscal year
Tax as a proportion of National Budget Revenue for top three taxes
Personal income tax
Value added tax
Corporate income tax

51. The tax to GDP ratio
51
Tax revenue by instrument as a % of Gross Domestic Product
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Individuals 7.77% 8.10% 8.04% 8.03% 8.13% 8.29% 8.58% 9.12%
VAT 6.93% 6.41% 5.80% 6.50% 6.20% 6.46% 6.58% 6.74%
Companies 6.45% 6.87% 5.29% 4.70% 4.92% 4.79% 4.91% 4.79%
Fuel levy 1.09% 1.03% 1.13% 1.22% 1.19% 1.21% 1.21% 1.25%
Specific excise 0.84% 0.84% 0.83% 0.81% 0.82% 0.85% 0.80% 0.84%
Customs duties 1.22% 0.94% 0.77% 0.94% 1.11% 1.17% 1.22% 1.05%
STC / Dividends 0.95% 0.83% 0.61% 0.61% 0.71% 0.59% 0.48% 0.55%
Sub Total 25.26% 25.02% 22.46% 22.81% 23.09% 23.37% 23.80% 24.33%
Three (PIT, VAT, CIT) 21.16% 21.37% 19.13% 19.23% 19.25% 19.54% 20.08% 20.65%
Tax / GDP 26.38% 25.95% 23.47% 23.86% 24.11% 24.46% 24.93% 25.47%
Budget Revenue / GDP 25.78% 25.28% 22.72% 23.80% 24.02% 23.68% 24.25% 24.54%

52. Allocations - Department of Transport
52
R'000 2012/13 2013/14 2014/15
1 Departmental baseline 23,021,852 28,418,447 29,725,696
SANRAL: NationalRoad Agency: Capital 6,394,541 7,515,300 7,849,560
SANRAL: NationalRoad Agency: Coalhaulage 648,910 665,498 696,111
PRASA: Passenger RailAgency of SA 7,481,110 10,710,959 13,865,547
Compensation of employees 381,322 405,748 430,101
Other 8,115,969 9,120,942 6,884,377
2 Conditional Grant to Local Government 5,589,135 5,912,264 6,184,228
Public Transport: Infrastrcuture & Network
Operations
3 Conditional Grant to Provincial Government 13,093,000 13,735,539 14,367,374
ProvincialRoad Maintenance 8,540,479 8,952,830 9,364,661
Public Transport Operation 4,552,521 4,782,709 5,002,713
4 Net additions (e.g. PRASA) 571,313 156,960 3,100,381
5 TOTAL 42,275,300 48,223,210 53,377,679
Transport - National - Budget Allocations

53. Fuel levy was flat in real terms up to 2008, then increased
thereafter
53
0
50
100
150
200
250
300
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Fuellevy(centsperlitre)
Fiscal year
Fuel levy in c/litre for petrol (real and nominal terms)
Fuel levy - petrol (Nominal)
Fuel levy - petrol (Real: 2008 as base year)

54. Fuel levy revenues have been decreasing as a share of tax and GDP
54
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
Fuellevyrevenues(Rmillion)
Fiscal year
Fuel levy revenue as percentage of tax revenues (LHS) and GDP (RHS)
Fuel levy as % of total revenues (LHS)
Fuel levy as % of GDP (RHS)

55. Fuel (Petrol & Diesel) usage – fuel efficiency
55
3.77
4.38
8.15
2
3
4
5
6
7
8
9
10
Litres of Fuel / R' 000 GVA
Litres P / R'000 GVA
Litres D / R'000 GVA
Litres Total / R'000 GVA

56. Petrol & Diesel Sales
56
Petrol Diesel Total Petrol Diesel Total
Million Litres % % %
2014 11 344 13 168 24 512 46% 54% 100%
2013 11 153 11 890 23 043 48% 52% 100%
2012 11 714 11 262 22 976 51% 49% 100%
2011 11 963 11 225 23 188 52% 48% 100%
2010 11 455 10 170 21 625 53% 47% 100%
2009 11 313 9 116 20 429 55% 45% 100%
2008 11 077 10 071 21 148 52% 48% 100%
2007 11 558 9 757 21 315 54% 46% 100%
2006 11 279 8 708 19 987 56% 44% 100%
2005 11 165 8 115 19 280 58% 42% 100%
2000 10 396 6 254 16 650 62% 38% 100%
1995 10 153 5 432 15 585 65% 35% 100%
1994 9 629 5 110 14 739 65% 35% 100%
1990 8 633 5 280 13 913 62% 38% 100%
1985 6 561 5 062 11 623 56% 44% 100%
1980 3 945 3 391 7 336 54% 46% 100%

57. Taxes on Petrol : Q3 2014, Source: IEA
57
44.9% 43.0%
39.8%
25.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Taxes on Petrol as % of Pirce: Q3 2014
Fuel tax GST / VAT

58. Petrol pump prices – Dec 2014: US$
58
Retail pump price - Petrol December 2014:
US$ Unleaded*
Country Price incl. Taxes
Indonesia 0.95
Nigeria 0.60
UK 1.94
Norway 2.45
Turkey 2.23
Australia 1.35
South Africa 1.23
China 1.24
Brazil 1.45
India 1.14
Argentina 1.55
Zambia 1.60
Malawi 1.88
Source: Bloomberg / Associates for International
Research Inc. (AIRINC) /Europes Energy Portal
(1 December 2014)