Carbon Tax

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Behavioural economics and the South African carbon tax

The Draft Carbon Tax Bill released towards the end of last year outlined the design of a carbon tax to be implemented in 2017. Rather than a low and escalating carbon tax, as is often recommended in carbon tax literature, the Treasury proposed a complicated carbon tax structure with a headline carbon tax rate of R120/tCO2e and a number of discounts that significantly reduce the effective tax rate. Insights from the field of behavioural economics, however, suggest that there may be method to the Treasury’s seeming administrative madness.

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Public awareness of carbon taxes – the blindside remains

Somewhat against expectations, the National Treasury announced the implementation date for the proposed South African carbon tax in the recent budget. In my last blog post (Nov 2012), I mentioned that public awareness of carbon taxes (crudely approximated by the frequency of Google searches) has been declining steadily since the run-up to the implementation of the CO2 vehicle emissions tax in September 2010. This blog explores whether anything has changed since November last year, especially in reaction to this new announcement.

Over the same period, the contribution of the tertiary sector (which is typically less energy-intensive than the primary and secondary sectors) to GDP increased by 8 percent (to 69.6 percent), while the contribution of the primary sector fell by almost a third (to 7.9 percent). It is clear that the energy intensity picture in South Africa is changing over time. What is not clear yet, however, is whether this is predominantly due to increased energy efficiency and decoupling between economic growth and energy use, or whether this is being driven by structural changes to the South African economy.

A cost-benefit analysis is only as good as the assumptions that underlie it. If a rigorous assessment of the relative merits of exploiting Karoo Basin shale gas is to be undertaken, it is important that these two factors (amongst other critical assumptions – on both the cost and benefit side of the analysis) are considered in detail.

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