Carbon Trading or Carbon Tax? Weighing up South Africa s Mitigation Options. Genna Robb, Emily Tyler and Brent Cloete

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Patrick Stephens
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1 Carbon Trading or Carbon Tax? Weighing up South Africa s Mitigation Options Genna Robb, Emily Tyler and Brent Cloete

2 Methodology Theoretical comparison of tax and ETS Draw lessons from international experience, in particular: Scandinavian carbon taxes European ETS Detailed consideration of South African context Conclusions drawn for instrument choice for SA Points to note: Pure form versus hybrids Approach of presentation vs. paper

Detailed consideration of South African context Conclusions drawn for

3 Conclusions A carbon tax would be better for South Africa in the short term Tax can better provide stable incentives required for investment in mitigation Current market structure precludes an effective ETS Tax is simpler and does not require new institutional framework Tax will generate revenue Low level tax requires less data to implement effectively But in the long term an ETS may become more attractive

effective ETS Tax is simpler and does not require new institutional framework Tax will generate

4 Advantages of a tax over an ETS (1) Price certainty Extremely important to provide stable incentives for investment Especially in SA where long term power generation investments need to be made in the coming years Experience has shown that price volatility under an ETS is high (EU ETS, US SO2 trading scheme) Volatile carbon price will mean more volatile energy prices Can get some stability from ETS with price caps and floors, but undermines benefit certainty and complicated to administer

that price volatility under an ETS is high (EU ETS, US SO2 trading scheme) Volatile carbon price will mean more volatile

5 Advantages of a tax over an ETS (2) Market structure precludes effective cap and trade: 56% (and likely more) of permits held by 2 institutions Market likely to be illiquid and manipulated by large players Excluding E&S significantly reduces coverage but not cost - environmental and economic efficiency reduced Tax much more transparent, less open to gaming South Africa s emissions profile, 2007 Other 44% Sasol 12% Eskom 44% Source: Data from Carbon Disclosure Project report (NBI, 2008) and LTMS modeling (ERC, 2008)

cost - environmental and economic efficiency reduced Tax much more transparent, less open to gaming South Africa s emissions

6 Advantages of a tax over an ETS (3) Simplicity Institutional infrastructure to levy a tax already exists ETS is a complex and sophisticated instrument requiring significant new infrastructure and skills Mismanagement of ETS can cause price spike/crash SA has a skills shortage and institutional capacity is an issue SA has no experience of a similar mechanism Internationally, financial crisis has prompted concern that ETS could destabilise economies

can cause price spike/crash SA has a skills shortage and institutional capacity is an issue SA has no experience

7 Advantages of a tax over an ETS (4) Revenue generation Tax has the capacity to generate substantial revenue SA is a developing country with fiscal constraints Revenue can be used to offset impact on consumers and business (potential double or triple dividend) and to give further incentives for investment in green technologies Auctioned trading scheme would also generate revenue but they are typically grandfathered at first

consumers and business (potential double or triple dividend) and to give further incentives for investment

8 Advantages of a tax over an ETS (5) Data requirements Less data is required to implement a low level carbon tax than a grandfathered ETS Level of data currently held in SA on emissions and mitigation potential and cost is very poor First few years of either instrument should be primarily a data gathering exercise

currently held in SA on emissions and mitigation potential and cost is very

9 Disadvantages of a tax Lack of benefit certainty Less important for SA right now Can be counteracted by design Historically more resistance to a tax Evidence of a re-think post-financial crisis, new carbon taxes in Ireland and France Can be reduced using targeted rebates (at a cost to environmental effectiveness) ETS can also be problematic due to windfall profits

post-financial crisis, new carbon taxes in Ireland and France Can be reduced using targeted

10 In the future ETS may become more attractive in the long term Better suited mechanism to international harmonisation If internationally linked, SA likely to be a seller of allowances, therefore forex inflow Concentration issues may be reduced in future Quantity certainty may become more important over time It is possible to use both instruments simultaneously several European countries are doing so

therefore forex inflow Concentration issues may be reduced in future Quantity certainty may become

11 General design considerations Concentrate on data and awareness initially Start at a low level low price/emissions cap Support instrument with regulation, incentives Consider impact on vulnerable sectors and the poor Consider if substitution options are available Consider existing policy environment and incentives Consider energy sector complexity

Consider impact on vulnerable sectors and the poor Consider if substitution options are

12 Thank you Genna Robb: Emily Tyler: Brent Cloete:

Economic & Administrative Considerations for the Initial Distribution of Emissions Allowances. Dallas Burtraw Resources for the Future

Economic & Administrative Considerations for the Initial Distribution of Emissions Allowances Dallas Burtraw Resources for the Future Initial Distribution of New Asset Value Rate approach implicitly assigns