On the second of November 2015 the National Treasury released the Draft Carbon Tax Bill for public comment. Comment is due by the 15^th of December. This is the first in a series of blogs to be published by DNA Economics related to the proposed carbon tax, and focuses on the level of the carbon tax in relation to existing carbon pricing schemes internationally.

Since the Draft Carbon Tax Bill was released for comment two weeks ago, a number of commenters have questioned the timing of the introduction of the carbon tax given the current tough local economic conditions (see, for example, comments by the Chamber of Mines of South Africa and the head of the Davis Tax Commission). It is therefore useful to consider how the international carbon pricing context has changed since 2010 when the National Treasury released the Carbon Tax Discussion Paper for comment, and how this has impacted the level of the proposed local carbon tax in comparison to existing carbon pricing schemes.

When the Carbon Tax Discussion Paper was released in 2010, there were only 18 carbon pricing schemes (carbon taxes or emissions trading schemes (ETS)) operating at the national or sub-national level internationally.[i] All these schemes were in high income countries, and three of the schemes were only implemented in 2010. The World Bank’s State and Trends of Carbon Pricing (September 2015) report shows that by 2017, the year the proposed South African carbon tax is set to be implemented, there is likely to be 37 other carbon pricing schemes in operation. In total, 62 carbon pricing schemes are currently implemented or under consideration internationally (see Figure 1). And carbon pricing has also now spread to developing countries, with a carbon tax already in operation in Mexico, and emissions trading schemes already in place in Kazakhstan and China. In fact, China has recently announced that it will launch a national scheme to replace its seven local pilot emissions trading schemes by 2017. This will create the world’s largest ETS, twice the size of the EU-ETS.

Figure 1: Overview of existing, emerging, and potential regional, national, and subnational carbon pricing instruments (ETS and tax)

Source: Kossoy et al (2015)

The proposed South African carbon tax is set at a rate of R120/tCO2e, but due to a number of tax free allowances to firms, the effective tax rate will be between R6/tCO2e and R48/tCO2e. In 2013, when the detailed tax design was first announced, this equated to a US Dollar rate of $0.7/tCO2e to $5.4/tCO2e at the average monthly exchange rate for February 2013 (R/$ = 8.87, the tax design was first announced in the 2013 Budget Review). Using the average exchange rate for the first week in November 2015 (R/$ = 13.95), the effective carbon tax rate in US Dollar is currently $0.4/tCO2e to $3.4/tCO2e. So while economic conditions may have deteriorated since 2013, the weakening exchange rate has reduced the effective USD carbon tax rate – thereby reducing the risk that local firms may be at a disadvantage to foreign competitors in locations without a carbon price (a phenomenon known as ‘carbon leakage’; the topic of a future blog). Given that most firms will be able to claim free allowances up to at least 75% of their carbon tax liability, the average local carbon price is likely to be somewhere between R6/tCO2e and R30/tCO2e ($0.4/tCO2e to $2.2/tCO2e).

Figure 2: Proposed SA carbon tax compared to selected international experience

Source: DNA Economics adapted from Kossy et al (2015)

The figure above shows that the proposed carbon tax, in US Dollar terms, is in-line with the carbon prices in other developing countries like Mexico and China. This is largely due to the depreciation of the Rand since 2013. Had the carbon tax been implemented in 2013, all other things being equal, with a theoretical upper rate of $5.4/tCO2e, only the Beijing ETS would have had a higher price amongst carbon pricing schemes in developing countries.

So while local economic conditions may have deteriorated since 2013, the delay in the implementation of the South African carbon tax has meant that the effective rate of the tax is now more closely aligned with carbon prices in other developing countries. The prevalence of carbon pricing schemes has also increased significantly since 2013, with carbon pricing now also taking root in developing countries.