Implementing a Carbon Tax in South Africa
Start & End Date: 2015-2020
Country/Countries: South Africa
Multilateral Institution(s) Involved: World Bank
Case Study: Available
An increasing number of middle income countries are in the process of introducing carbon pricing and other innovative instruments to reduce the cost of greenhouse gas emissions effectively. While there is a growing number of policy options and instruments that countries can draw from to shift toward a low carbon pathway, tailoring these to each country’s unique circumstances and development priorities is a challenge. Pricing carbon through instruments such as emissions trading and carbon taxes is a cost-effective means to achieving emissions reduction. For this reason, a number of governments are incorporating carbon pricing policies into their mitigation strategies. South Africa plans to introduce a carbon tax at R120 ($11.20) per tonne of carbon dioxide in 2016, with annual increases of 10% until 2019/20. The tax is envisioned to be a fuel input tax, based on the carbon content of the fuel used, and will cover all stationary direct greenhouse gas emissions from both fuel combustion and nonenergy industrial process emissions, amounting to approximately 80% of total emissions.
The development objective of the Partnership for Market Readiness Project for South Africa is to strengthen the readiness of the government of South Africa for the design, preparation, and implementation of a carbon pricing instrument. In the National Climate Change Response Policy, the government recognizes the need for flexibility in pursuing South Africa’s mitigation objectives and the important role of market-based instruments that allow companies and sectors to achieve emissions reduction in the most cost-efficient manner. For South Africa, a carbon tax seems to be most suitable. The tax is expected to stimulate emission reductions by increasing the uptake of energy efficiency and reducing the energy intensity of the economy. The project comprises of four components: 1) Supporting the refinement of the design of the carbon Tax through analytical work, 2) Strengthening the capacity of government to enhance the data management and reporting (GHSs) and measurement/ monitoring, reporting and verification (MRV) system, 3) Supporting the design of the carbon offset scheme, and 4) Communication, stakeholder engagement and project administration support.
The carbon tax and accompanying tax incentives, such as an energy efficiency tax incentive, are expected to provide appropriate price signals to help shift the economy towards a low-carbon and sustainable growth path. A complementary offset scheme is also proposed, with its parameters yet to be finalized. The development of the offset scheme, which is being supported by the Partnership for Market Readiness (PMR), aims to provide flexibility for tax payers and lower their tax liability, as well as incentivize mitigation in sectors not directly covered by the tax. The government is currently conducting technical analyses of the tax design and an assessment of its potential impact. The design of these interventions is not expected to compromise the competitiveness of the country’s economy, minimizing potential negative impacts on households.