Economic Implications of Carbon Taxes in South Africa James Thurlow, - - PowerPoint PPT Presentation

Economic Implications of Carbon Taxes in South Africa

James Thurlow, UNU-WIDER Coauthors: Theresa Alton, Channing Arndt, Rob Davies, Faaiqa Hartley, Konstantin Makrelov, Dumebi Ubogu

Carbon Emissions

• South Africa must produce more energy but also reduce emissions

– Pledged to lower emissions by 42% by 2025 (relative to business-as-usual)

Emissions per unit of energy use Energy use per person

Low income Lower middle income Upper middle income High income Low carbon growth path Current growth path

China Iceland Finland South Africa Mozambique DR Congo Norway Denmark Sweden

Source: WDI Notes: Log scale, Energy use in oil equiv.

Zambia Tanzania USA UAE UK

Energy-Economy Model

• South African General Equilibrium (SAGE) model
• 2005 social accounting matrix (SAM)

– 54 industries, 7 factors of production, 14 household groups

• Resource constraints

– Upward sloping labor supply curves for less-educated workers – “Putty clay” capital and endogenous capital accumulation

• Macroeconomic closures

– Fixed current account with flexible real exchange rate – Savings-driven investment

Energy Production

Natural gas Coal Electricity Nuclear Hydropower Gas-fired Renewables Waste Coal-fired Gas-to-liquid Oil refining Biofuels Coal-to-liquid Petroleum Feedstock Crude oil Final users Industries Households Government Investment Imported Partly exported

Energy Use

• Energy efficiency determined by…

– Existing technologies – Energy prices (provided there is new investment) – New investment (provided the price rises)

Energy efficiency = Energy input Industry output

Simulations

• 1. Domestic carbon tax

– Applied to all fossil fuels burned in South Africa – Starts at US$3 per ton CO2 in 2012 and rises gradually to US$30 in 2022 – Uniform reduction in indirect sales tax rates (distribution neutral)

• 2. Domestic border tax adjustment on embodied carbon

– As above, but rebate exporters and tax imports at same carbon tax rate

• 3. Foreign border tax adjustment

– South African exports are taxed at foreign border – Starts at US$1.5 per ton CO2 in 2012 and rises gradually to US$15 in 2022

• 4. Recycling revenues

– Instead of sales taxes, reduce corporate taxes or increase social transfers

Electricity Investments

10 20 30 40 50 60 70 80 90 100 2005 10 15 20 25 30 System capacity (GW) Gas Renewables Hydro Nuclear Coal 10 20 30 40 50 60 70 80 90 100 2005 10 15 20 25 30 10 20 30 40 50 60 70 80 90 100 2005 10 15 20 25 30

Base Case (BAU)

Cost: US$108 bil.

Policy-Adjusted

Cost: ??? Emissions: -19% of BAU by 2025

Emissions 3

Cost: US$171 bil. Emissions: -42% of BAU by 2030

Results: Emissions Reductions

• A US$30 per ton CO2 carbon tax achieves emissions targets
• Ring-fencing of electricity means large reduction in other sectors

Business- as-usual, 2010 Deviation from “business-as-usual” scenario, 2025 (%) Policy- Adjusted Production carbon tax Consumption carbon tax Foreign carbon tax CO2 emissions (mil.mt) using the reference approach 447.5

• 8.6
• 36.6
• 36.2
• 19.6

Electricity generation 237.0

• 19.0
• 19.0
• 19.0
• 19.0

Other sectors/households 210.5 0.0

• 51.3
• 50.5
• 20.1

CO2 emissions (mil.mt) using the sectoral approach 397.4

n.a.

• 40.4
• 41.4
• 21.0

Changes in GHG emissions, 2010-2025

Results: GDP and Employment Losses

$2.5 $5 $10 $15 $20 $25 $30 $35 $40 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 10 20 30 40 Decline in GDP or employment , 2025 (%) Decline in GHG emissions, 2025 (%) Carbon tax (US$/mt) GDP Employment 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 5 10 15 20 25 30 35 40 Decline in GDP, 2025 (%) Carbon tax (US$/mt) Services Construction Manufacturing Mining Agriculture

Economywide abatement costs Sectoral sources of losses

Results: Income Distribution

• 4
• 3
• 2
• 1

1 2 3 4 5 6 1-10 11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-96 97 98 99 100 Deviation in consumption, 2025 (%) Ranked population per capita expenditure percentiles Corporate tax Retaliatory tax Social transfers Sales tax

Consumption growth incidence curves

Conclusions

• Carbon taxes reduce national welfare and employment

– Absorption and employment fall by 1.2 and 0.6 percent, respectively, by 2025 – These effects are small in annual growth rate terms (less than 0.1 %-points)

• Welfare and employment losses are larger if RSA’s trading partners

unilaterally impose BTAs on South African exports

• Domestic BTAs reduce welfare and employment losses while

maintaining the same emissions reductions

• Mode of revenue recycling strongly influences growth and

distributional outcomes (i.e., trade-offs)