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Wednesday, 26 October 2016 12:22

What Does the 2016 Budget Mean for Implementation of the Carbon Tax?

Andrew Gilder, Mansoor Parker and Olivia Rumble

Although the carbon tax did not feature in the Budget Speech
delivered on February 24, 2016, it remains in the mainstream of
the fiscal agenda for 2016 in South Africa.

I. Budget 2016
The South African Finance Minister Pravin
Gordhan did not mention the proposed
carbon tax in his Budget Speech delivered on
February 24, 2016. Curiously, given the emotion that
has surrounded the idea of the tax since 2010, when it
was first formalized in a Treasury discussion paper,
commentary on the implications of the Minister’s apparent
omission has been muted or nonexistent.

This article seeks to remedy the silence and argue
that: far from being an indication that the carbon tax is
off the table, the Minister’s failure to mention the
tax in the 2016 Budget Speech is reflective of the
fact that the tax has now moved into the mainstream
of Treasury’s legislative work agenda; and
s there are very compelling reasons why the carbon
tax will be introduced on schedule, in January 2017,
while acknowledging that a lot of legwork still
needs to be done if this timing is to be achieved.
While the Budget Speech is a public statement of
the Minister’s intentions for the year, given the range
and complexity of economic issues that must be addressed,
the speech is really only an index to the much
more substantial Budget Review—the detailed set of
documentation underpinning the speech. Mention
has been made of the carbon tax in virtually all of the
Budget Speeches and Budget Reviews since 2011.
Given that these years were characterized by an evolution
of the form and content of the tax design and
tax took the form of a set of policy discussion papers
dated 2010, 2013 and 2014, the Budget Speeches and
Reviews became an important means for Treasury to
formally communicate its most recent thinking on the
issues. Carbon tax observers kept a close eye on these
key moments as the tax design slowly took more specific

By February 2016, however, there was no need for
Treasury to hint at its current thinking on carbon tax
form and content. This is because the draft Carbon
Tax Bill (‘‘the Bill’’) was published for comment in November
2015, along with an explanatory memorandum,
a press release and promises of pending
publication of draft carbon offsets and emissions intensity
regulations and a round of Treasury-hosted
carbon tax workshops.

Consequently, Treasury’s detailed ideas on the
carbon tax are in the public domain and are in the
process of being debated and refined; i.e., the carbon
tax is now mainstreamed into the fiscal agenda for

In support of this notion is the fact that the 2016
Budget Review makes specific mention of the carbon
tax. The reference is cryptic, which is to be expected
given that it simply confirms the status quo ante.
Under the heading ‘‘Update on implementation of
carbon tax’’, the review states:
The main aim of the carbon tax is to put a price on the
environmental and economic damages caused by excessive
emissions of greenhouse gases. A secondary
the economic outlook, the carbon tax has been designed
to ensure that its overall impact will be revenue
neutral up to 2020. The [Bill] was published in November
2015, with 90 comments received to date. The
Bill will be revised, taking into account public comments
and further consultation.

Two features of this statement, namely, references
to the ‘‘economic outlook’’ and revenue neutrality, are
examined below, in conjunction with a set of three
compelling imperatives for implementation of the
carbon tax in January 2017, which derive from the dynamics
of the international and national climate
change policy arenas.

II. Reasons for Implementing the Carbon Tax on
A. Reason 1: Future Integrity of the System
To date, implementation of the carbon tax has been
delayed three times—the original date for implementation
was 2015, but this was pushed to 2016 and,
later, to 2017. Without interrogating the reasons for
the delays, their consequences have been detrimental
to the tax’s ultimately coming into operation, as they
have given emitting industries the impression that
Treasury and the Department of Environmental Affairs
(‘‘DEA’’) are not serious about bringing the tax
into operation. When consulting with industry leaders
on the tax, regularly repeated mantras are ‘‘Treasury is
not serious about the carbon tax!’’ and ‘‘The carbon
tax will never happen.’’

Industry buy-in is essential for an operational
carbon tax system with the integrity to deliver on the
aims as set out in the 2016 Budget Review. In recent
years, Treasury has been working with industry to
hear and deal with concerns regarding the tax’s implementation
and to overcome a trust deficit that has
crept into the conversation between government and
business around the need for mitigation of industrial
greenhouse gas emissions. If Treasury postpones
implementation for a fourth time, industry’s view that
it is not serious about the tax will be justified and Treasury
will have a monumental task to claw back the
current position on the tax.

B. Reason 2: National Credibility
South Africa prides itself on its role in the international
negotiations that occur under the auspices of
the United Nations Framework Convention on Climate
Change (‘‘UNFCCC’’). There was much selfcongratulatory
backslapping when the South African
Presidency of Conference of Parties (‘‘COP17’’)
(Durban, 2011) was able to claim that COP17 had put
the negotiations back on track after the perceived failure
of COP15 (Copenhagen, 2009). Among the innovations
that the South Africans introduced was the
‘‘Indaba method’’ of deadlock-breaking, an approach
that the French Presidency of COP21 (Paris, 2015) deliberately
used to progress the discussions, which resulted
in last December’s much-vaunted Paris
Agreement, intended as the primary determinant of
the global climate change response from 2020.
As a good international corporate citizen, South
Africa submitted its Intended Nationally Determined
Contribution (‘‘INDC’’) to the UNFCCC in advance of
COP21. The INDC is, essentially, a summary of national
intentions to contribute to the global response
to climate change; South Africa’s stated approach to
mitigation is to apply a four-prong strategy—the first,
most obvious and most well-developed of which is the
carbon tax. While it is true that the INDC is careful to
make South Africa’s implementation of climate
change response actions contingent upon the receipt
of appropriate international support, further prolongation
of the already lengthy period during which the
carbon tax has been bandied about on both the domestic
and international stages will become increasingly
embarrassing for Treasury, the DEA and the
Department of International Relations and Cooperation,
which takes the lead in the negotiations.

C. Reason 3: Economic Impact of the Tax
Business has been strident in its opposition to the
carbon tax on the basis that it will wreak destructive
economic consequences across emitting industries.
This concern was noted by the Davis Tax Committee
(‘‘DTC’’), which, during the course of its review of the
national taxation system, also considered the carbon
tax. Contrary to what has been represented in the
‘‘Twittersphere’’, which implied that the DTC was opposed
to the carbon tax, the DTC’s ‘‘First Interim
Report on the Proposed Carbon Tax for South Africa’’
(November 13, 2015) indicates that the carbon tax
policy proposal and the Bill represent commendable
schemes to drive a shift to a low-carbon intensity
economy, and that their various elements are designed
to protect industries against competition shocks,
trade exposure and sector-specific disadvantages in
the short term through allowances and the use of offsets.
The DTC did, however, express some concern about
design issues and made detailed recommendations for
improvement, suggesting that the tax be introduced
from 2017 with a 100% tax-free threshold for the first
year; i.e., an arrangement that would legally oblige
carbon tax liable entities to engage with the system
and to submit tax returns without incurring actual liability.
As mentioned above, the 2016 Budget Review also
addresses the issue of economic impact (‘‘Given the
economic outlook, the carbon tax has been designed
to ensure that its overall impact will be revenue neutral
up to 2020.’’). There is a difference between the
DTC’s suggestion of a 100% tax-free threshold and the
notion of ‘‘revenue neutrality’’, which is normally used
as a catch-all phrase to refer to either:
tax shifting; e.g., returning the money raised from
the carbon tax to the economy through a gradual
phase-out of the fossil fuel levy, with the carbon tax
revenue replacing the levy in the national budget; or
revenue recycling; i.e., using carbon tax revenues to
finance various green incentives.

Both approaches—a 100% tax-free threshold and
revenue neutrality—have the effect of reducing the financial
impact of the carbon tax on the economy/taxliable
entities; although, given revenue neutrality’s
focus on the wider economy, utilization of this
approach will not necessarily mean that large emitters
will escape unscathed.

The 2016 Budget Review notes that the period
during which the revenue neutral boon would apply is
up to 2020; i.e., the tax will be revenue neutral for four
years—2017, 2018, 2019 and 2020. While this extends
the DTC’s suggested single year’s grace, the clear implication
of the review’s stated timing is that the
carbon tax will be implemented prior to 2020, which
would be a pleasing congruency between the first
phase of the carbon tax, i.e., up to 2020, and the
coming into operation of the Paris Agreement and the
commencement (from 2020) of a truly global climate
change response. Among the Agreement’s innovations
is the extension of responsibility for the international
climate response to include efforts by both developed
and developing countries, whereas this responsibility
currently lies primarily with developed countries.
In order to comply with its international commitments,
South Africa needs all elements of mitigation
policy to be operational by the beginning of the third
decade of the century, which presupposes that the
various instruments, including the carbon tax, will
have gone through their respective teething processes
before then.

There is another date that informs the operation of
the carbon tax; namely, the INDC’s idea of South Africa’s
greenhouse gas emissions beginning to plateau
from 2025 onwards. Treasury has suggested that the
impact of the carbon tax will be gradually ramped up
so that industry has time to take account of, and adapt
to, the tax. If the carbon tax is revenue neutral up to
2020 and its real economic impact is ramped up thereafter,
by 2025 it will be well-placed to achieve the aim
of curbing greenhouse gas emissions, just as the plateau
period commences.

III. Should the Carbon Tax be Implemented from
Despite the issues discussed in this article, cogent arguments
can be made that the Byzantine complexity
of the proposed carbon tax design—which would require
collaboration and coordination between Treasury,
the DEA, the South African Revenue Service and
the Department of Energy—and the limited time to
January 2017 mean that the tax should either be
scrapped or delayed indefinitely and/or until the
design issues have been addressed. There is certainly
merit in such arguments, but there are other, more
fundamental, considerations that will be factored into
the carbon tax equation, including:
While its legal strength has been questioned, the
Paris Agreement represents a sea change in political
attitudes to dealing with climate change. COP21
also featured significant participation and support
from large-scale private sector business, including
the fossil fuel industry. One of the Agreement’s observed
strengths is its considerable moral weight,
which civil society groupings have already indicated
will provide the ammunition they will use to
ensure that country parties stay within the limits of
the commitments that have been made and to hold
the private sector accountable for its actions. Civil
society court action in South Africa is already being
directed against industry’s perceived negative environmental
impacts and it is not inconceivable that
these actions will be extended to addressing climate
change issues directly, in both the public and private

Some of the criticism leveled against the carbon tax
includes the notion that South Africa should not
seek to lead the pack of developing countries in
implementing fiscal and other measures to reduce
greenhouse gas emissions. The reality is that decarbonization
of the world economy, including all of
the advanced developing countries (which includes
South Africa) is an inexorable political and social
movement of which this country is simply a part.
South Africa is not unique as a developing country
seeking to introduce mitigation measures. The
broader issue, however, is that dirty economies that
fail to take steps towards cleaner practices will, by
the middle of the next decade, start feeling a coldness
from the international shoulder. One example
of such coldness is increasing discussion on the imposition
of border tax adjustments on manufactured
goods imported into European countries that
originate in countries with fossil fuel heavy economies.
As is clear from the debate around the carbon
tax, economies do not easily take steps towards
cleaner practices and when they do, some time is
needed before the practices take effect, thus supporting
the notion of a 2017 start date for the
carbon tax. An important feature of the Agreement
is the balance between binding and non-binding
provisions. One observer has described this approach
as establishing obligations of conduct but
not of result (Prof. Dan Bodansky). Effectively,
country parties to the Agreement are obliged to
devise and implement climate change response
measures within their economies, subject to international
oversight, but they are not obliged to
achieve the specific objectives which they may have
set out for themselves, e.g., a reduction of a specified
volume of greenhouse gas emissions. If South
Africa accedes to the Paris Agreement, this means
that by implementation of the carbon tax it would
be well on the way to complying with its international
legal obligation to devise and implement a
climate change measure without the need for the
measure to achieve particular results, certainly in
the short to medium term. This is another motivation
for a 2017 introduction of the carbon tax, in a
learning-by-doing configuration.

Finally, the idea that the carbon tax should be delayed
because it is imperfectly formed is less powerful
than the combined strength of the various
drivers towards implementation that are considered
in this article. A limited entry into operation of
the carbon tax in 2017, either as revenue neutral or
with a 100% threshold, will permit the players time
to ‘‘learn by doing’’ in advance of 2020 and the proposed
ramp up will help create a leaner, less
emission-intensive South Africa in light of increasing
global carbon constraints.

Andrew Gilder and Olivia Rumble are climate change and
carbon markets specialists and Mansoor Parker is a tax
executive at ENSafrica. They may be contacted at:
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GIL Africa 2017