Treasury publishes carbon tax modelling report

Publication of the carbon tax modelling report

The National Treasury today publishes a carbon tax modelling report entitled: “Modelling the Impact on South Africa’s Economy of Introducing a Carbon Tax”. This report provides an assessment of the impacts of the proposed carbon tax policy on reducing greenhouse gases (GHG) emissions, economic growth, employment, and industry competitiveness.

The study was conducted on behalf of the National Treasury under the Partnership for Market Readiness initiative administered by the World Bank, which is aimed at supporting countries in strengthening their policy analysis and technical capacity to implement carbon pricing measures.

This study closely models the design features of the tax as outlined in the 2013 Carbon Tax Policy Paper. The design of the carbon tax aims to contribute to a meaningful and permanent reduction in greenhouse emissions whilst, at the same time, to minimise any potential adverse impacts on low income households and industrial competitiveness.

The provision of tax-free emissions thresholds and allowances ranging from 60 per cent to 95 per cent will result in a relatively modest carbon tax rate ranging from R6 to R48/tonCO2eq during the first phase of the carbon tax up to the end of 2020.

The modelling results suggests that the carbon tax will have a significant impact on reducing South Africa’s GHG emissions and would lead to an estimated decrease in emissions of 13 to 14.5 per cent by 2025 and 26 to 33 per cent by 2035 compared with business-as-usual.

The carbon tax would make an important contribution towards reaching South Africa’s Nationally Determined Contribution (NDC) commitments under the recently ratified Paris Agreement for emissions to peak in 2020 to 2025, plateau for a ten year period from 2025 to 2035 and decline thereafter.

The carbon tax will also ensure that emissions reductions are delivered while sustained economic growth is realised. The carbon tax is expected to lead to a reduction in the annual average growth rate of the economy of just 0.05 to 0.15 percentage points compared to business-as-usual. Sensitivity analysis shows that the carbon tax would have a similar modest impact even if the economy grows less quickly than expected.

Model overview and assumptions

The study uses the University of Pretoria’s General Equilibrium Model (UPGEM) which is a dynamic general equilibrium model of the South African economy. The model provides a quantitative description of the South African economy, and accounts for linkages and interactions between the various sectors and agents within the economy.

The model was modified to allow for detailed analysis of the impacts of the carbon tax on the electricity generation mix and GHG emissions.

The analysis relies on a comparison between a baseline scenario and different policy scenarios informed by the tax design. The baseline scenario specifies how the economy is expected to evolve over time without the introduction of the tax or any other regulatory interventions.

This is then compared to the expected change in the economy when a specific carbon tax design and revenue recycling measure is introduced. The difference between the baseline and various policy scenarios provides an assessment of the impact of the policy intervention on the economy.

Source: Government of South Africa

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