Carbon Tax Bill workshop

Meeting report

Opening remarks

Co-Chairperson Carrim said that nowhere in any Parliament was this workshop a common practice, and within limits stakeholders would be allowed to have a say, but the Committee would not look at issues that were being presented for the first time. Nothing was going to change, and the Secretary would summarise what people were saying in the submissions that had been received last week. The Committee would not entertain any new issues.

Co-Chairperson Mapulane reiterated that this was the final day for Environmental Affairs, and the workshop session would cover only the areas that remained outstanding from the stakeholders. The Committee needed to satisfy itself that everything had been done.

Mr Ismail Momoniat, Deputy Director General (DDG): Tax and Financial Sector Policy, National Treasury, said that hard copies of the presentation were not available, but given that this was a workshop, it had difficulty figuring out how much detail it needed to present. All the stakeholders would make the necessary submissions.

Mr Mapulane suggested that the session would be interactive.

Briefing by National Treasury on Carbon Tax Bill response

Mr Momoniat then took the Committee through the presentation, and commenced with the background, indicating that it was long process and many changes had been made on the way. All the issues had been responded to.

In terms of greenhouse gas (GHG) emission trends of South Africa compared to the rest of the world, the annual emissions for SA (fuel consumption only) had been increasing in absolute terms between 1990 and 2015. World annual GHG emissions had similarly increased during this period. South Africa’s most recent slowdown in the absolute levels of GHG emissions was expected to reverse as soon as economic growth recovered. It would therefore be shortsighted to say one must do nothing and wait until growth recovered before action was taken. Given the inaction to date – and the relatively high growth in South Africa’s GHG emissions -- the need for pre-emptive action was now more urgent than ever before.

To provide policy certainty between 2013 and 2017, section 5 of the bill had been amended to include the headline, marginal tax rate of R120/tCO2e; and specified the annual increase in the nominal carbon tax rate by a maximum of inflation plus 2%. With regards to the alignment of the carbon tax policy with the carbon budgeting system of the DEA, the phase 1 introduction of the 5% carbon budget allowance came in 2014. For phase 2, the DEA and Treasury were working on alignment and integration of the carbon tax and carbon budget instruments, and there would be no double penalty. 

The carbon tax modeling study – modeling of the current design undertaken through the World Bank in 2016 and the socio-economic impact of the carbon tax -- showed a significant impact in reducing the country’s emissions without a significant impact on growth.

The biggest concern from business was the alignment of the carbon tax and the carbon budget. Some stakeholders were of the view that there would be duplicate and contradictory policy requirements for business should the first phase of the carbon tax overlap with the imposition of mandatory carbon budgets by the DEA. There was support for the basic tax-free allowance equal to the carbon budget (with no further allowances for trade exposure or performance) which would be applied so that the company would only have a carbon tax liability on those emissions in excess of the budget. Some stakeholders suggested that the carbon tax, as a carbon pricing instrument, could be implemented in parallel without the need to specify the means of alignment of the two mechanisms or systems i.e., both the carbon tax and the carbon budgets should be implemented independently. It was recommended that the carbon tax be applied on all emissions, with a lower rate for those emissions within company carbon budgets, and a significantly higher penalty rate for emissions exceeding the budget, to incentivise real mitigation action, especially at the low prices of the carbon tax.

In response, Treasury and the DEA had discussed the options for the alignment of the carbon tax and carbon budgets during several meetings held in June and July 2018. Both departments agreed in principle that emissions within the carbon budget would be taxed at a lower rate, with all tax free allowances applicable. The current carbon tax design features would apply and any adjustments to the level of the tax-free thresholds and the rate of the tax would be based on a review after at least three years of implementation of the carbon tax. A higher tax rate would be applied on emissions above the carbon budget (no tax-free allowances to apply) where the carbon budget would serve as the maximum level of emissions allowed.

Since the Climate Change Bill, including the mandatory carbon budgets system of the DEA, had not been promulgated, the carbon tax bill could not be amended to reflect this alignment at this stage. Once the Climate Change Bill was assented to as an act of Parliament, the “Carbon Tax Act” could be then amended accordingly.

The features of alignment were that where the carbon budget allocated to an entity was below the level of total emissions reported by that entity, the tax would apply as follows:

• For emissions up to the level of the budget, the current tax design would apply -- the tax rate of R120, adjusted in line with Section 5 in the Bill, and all the tax free allowances would apply;
• For emissions exceeding the carbon budget, a higher tax rate of R600/tCO2e would apply; and
• Due to the alignment of the mandatory carbon budget and the tax, the carbon budget allowance of 5% would fall away, and the limit on the tax free allowances would be adjusted from 95% to 90%.

Where the carbon budget allocated to an entity was equal to the total emissions reported by an entity, the current carbon tax design applied, and the carbon budget allowance falls away.

Discussion

Ms G Ngwenya (DA) said that there was a bit of uncertainty -- or rather confusion -- about whether the 60% allowance would apply to the volume or the tax emissions. It was with reference to the fact that the 60% applied to the emissions – could one get more clarity on this?

Mr Momoniat said that they would be imposing the tax on the emissions per year; and the previous year’s emissions were not a base to which the allowance would apply. The incentive at the broad level was that the less one emitted, the less one paid for the tax. Treasury also tried to encourage companies through the allowance to reduce their emissions every year.

Ms Sharlin Hemraj, Director and Senior Economist: National Treasury, said that the allowance did not refer to a base year, but was based on an annual emission reported by an entity. The allowance was relative and was percentage based, to ensure that some flexibility was provided to companies and built in a dynamic incentive for companies year in and year out. It was annual, and it was not linked to a particular base year.

A speaker from the University of the University of Cape Town (UCT) said that what was not clear in reading the response was that it seemed that the alignment was based on principle, but not operationally. The explanatory memorandum highlighted that the high tax rate would apply above the budget, but when one looked at the formula, each variable reduced the amount of tax. The explanation therefore helped, but the process was not clear. He asked whether the carbon tax would be amended at a later stage, and if so, when it could be amended and whether it would be at a higher tax rate.

A speaker from Business Unity South Africa (BUSA) said that the organisation had raised a number of issues regarding the alignment, and the new proposal had not been consulted on. They had not heard about it having a cap below and above the budget, with allowances and without allowances. This was not operational in the Bill. Therefore, BUSA had no idea about the long term trajectory of the Bill. Secondly, they had not been consulted on the third option – it was a new alignment that had not been reported. This contradicted statements regarding double penalties. It was also different from what had been mentioned by the Minister during the Medium Term Budget Policy Statement (MTBPS). It was deeply concerning that this issue had not been consulted on. Thirdly, the National Economic Development and Labour Council (NEDLAC) process had been working on a particular design at R120, but they had not looked at the job losses in terms of what R600 per ton would look like, plus a tax below the budget, and this would exacerbate the current economic conditions.  

Ms Yanga Mputa, Chief Director: Tax Policy, said that Treasury had had extensive consultations for eight years. People had known about the coming tax and in the meantime, the rest of the world had moved on to higher carbon taxes. A R120 a ton, minus the allowances, equated to R6/ton, which was laughable. So what Treasury had been subjected to all these years was special interest groups pleading for something that was in their interest, but which was not in the interest of the country. These lobbyists came here and represented companies. The World Wildlife Fund (WWF) represents a whole range of companies who do not come to carbon tax hearings because they were not worried about it, because their businesses would benefit. Treasury wanted to welcome the alignment design, because a carbon tax could not re-orientate the economy if it did not tax for emissions, and Treasury had the job of listening to everybody and applying itself to come up with the best possible solution, in the interest of the country. What had been tabled here today was the result of having listened to everybody, and how a carbon tax was seen that would work.

A speaker from SASOL agreed that the alignment was not what most people expected, but she wanted to understand the rationale behind having a carbon tax below the carbon budget, when the World Bank recommendations clearly stated that there should be no tax below the carbon budget. Their concern with the alignment proposal was that it actually generated the worst of both worlds by taking away the flexibility that Treasury intended to introduce and retaining the tax from every emission below the budget, and not aiding emission reductions.

Mr Carrim said that some of the Members that were present had not been present when the process started, so some of the issues had already been covered. These matters had already been discussed and looking at the Bill, Advocate Frank Jenkins, Senior Parliamentary Legal Adviser, had looked at what Treasury had introduced that was new, so one could not have a situation where things that had been discussed extensively being discussed again. Parliament belonged to the people, and the big problem here was that politicians were not experts, whether big businesses liked it or not. The ANC was clear that it would approve the Bill, but what was at issue was what it was going to approve -- the phasing in, etc -- and to what extent it could carry the big businesses with it. The Bill was going to happen and it was unfair that the system disproportionately benefited a certain group of the public. The new Members were getting a skewed presentation, because this came from one group of the population and it favoured those that had a significant interest on the Bill. Business’s input on the Bill was appreciated, but the Committee was now approaching a voting stage on the Bill.

Ms Ngwenya said that she was unclear and she would ask as much as she needed to get clarity. She felt that Mr Carrim’s comments were negative. It was true that the ANC had the numbers, but it could not dismiss the fact that other Members should have an input.

Mr Mapulane interjected, and indicated that the Committee would not engage on those comments because they were political.

Mr Mactavish Makwarela, Director: Department of Environmental Affairs, responded to the question regarding the alignment between the carbon tax and the carbon budget, and how that aligned with the Climate Change Bill. The Department had met with Treasury in September and agreed on the alignment principles. One of those principles was the high tax rate above the carbon budget, and the key problem they were trying to resolve was that business was saying that they wanted an assurance that there would be no double taxation. Therefore, the proposal put forward ensured that there would not be double taxation. Secondly, for the tax rate below the budget, the issue of double incentivising was addressed. The carbon budget was not about the levels of emissions allowed for the company. Thirdly, they had agreed that when the Climate Change Bill became law, they would ensure that there was alignment. The legal advisors helping Treasury had agreed that there should be a clear transitional period and formulation. They had now been told by the legal advisors that the law was not yet in place and they could not create those mechanisms, so after the Climate Change Bill became law, they could then make those amendments to the Bill. The legislation should assist the DEA on how it should improve and ensure that the emissions in the country are reduced.

Mr Momoniat said that it was important that everyone understood the process and that the changes effected now were as a result of the previous engagements, and there were no other changes made. Treasury did not usually go and ask any player for permission for any changes that it had made -- it accepts the inputs, effects the changes and publish. It had different conversations when it met with the chief executive officers (CEOs) of these companies, but it was often seen that the officials that came to the briefings would say things that were in contrary to those said by their CEOs in their engagements with them. The change was not new.

Ms Hemraj said that the amendment could not be reflected in the current Carbon Tax bill, because it needed to make reference to the Climate Change Bill, which allowed for the imposition of the carbon budgeting system, still needed to be enacted. Secondly, this was a proposed alignment option for when the mandatory carbon budget came into play and was implemented. The intention behind coming up with the option was that emissions up to a certain level would be taxed, given the current allowances, and emissions above that level were subject to a higher rate. There was no double taxation. The carbon budget would be aligned to the Nationally Determined Contribution (NDC) commitments which were strict, and the budget would be annualised.

Mr Mapulane said that he may have heard that the Climate Change Bill was going to be approved by Cabinet and would afterwards come back to Parliament, but that it may be dealt with by the Sixth Parliament. When the Climate Change Bill came, those discussions would be had and then the alignment would take place. Therefore, there was really nothing new.

Mr Jongikhaya Witi, Chief Director: Department of Environmental Affairs, referred to monitoring and reporting, and said there was a legal instrument that compelled industries to report on their emissions in the form of the reporting regulations, which described how the reporting must be done, the methodologies to be applied when the industries quantified their emissions, who must report, and the alternatives of reporting. So far, the first reporting cycle had started in 2018, the second one in January 2019, and the third would be in March 2019. This would be happening annually. So far this process was happening manually, but they were in the process of developing an automated system so that the 2020 reporting cycle would be automated. 

Mr Makwarela stated that at the moment, the government had spent about R3 billion of the tax incentive for the carbon tax. With liquid fuel, there was an issue with domestic aviation. but it would be covered by the tax. For international aviation, all airlines were supposed to report on their emissions on the international mechanisms.

With regards to the emissions from the burning of waste, comments from the stakeholders had shown that these had been excluded, but that had now been corrected. The tax allowance would be reduced from 100% to 90%.

Ms Hemraj said that these changes were made in the Bill to clarify the changes in domestic and international aviation, and liquid fuel. They had engaged with BUSA about the right mechanisms to administer the tax, and their view was that shifting to a carbon tax administration was not necessary because the carbon tax was emissions-based, and it was classified as a good. In their view, this was the best instrument that should be used for the administration. Secondly, it prevented creating a new duplication of administration. There had been some issues raised regarding the requirements for the licensing of facilities, and it had been argued that it was cumbersome.

Another issue that was raised was the provisional payment of the tax, and the reconciliations to be done in the following year. The proposal was therefore that there should be one annual carbon tax payment which would be due in June of the following year, and this had been included in the Bill.

Lastly, on the NEDLAC process, Treasury had engaged government and labour on the job creation plan, and various departments had been part of the task team. There would be a report that would published by the team and it would cover sectors that would be affected by the tax. Mitigation plans were yet to be discussed. The labour initiative had been created with industries to identify the scarce requirements in terms of the transition that would be needed, and linked to the shift to using technology.

Feedback would be provided on the work that would be undertaken by the task team regarding jobs in relation to the carbon tax. As part of the work that was done under the task team, business had done a study on the impact of job losses, and business would present its plans that would be informed by the study.

Complementary to the Bill, a set of regulations had been developed in June 2016 and canvassed with stakeholders, and a revised regulation had then been published on 12 November 2018. The last day for comments would be 14 of December 2018.

A speaker from BUSA asked for clarity on the NEDLAC process in relation to the terms of reference, which said that they should consider the Socio-Economic Impact Assessment System (SEIAS) report. However, as business they felt and they had put on record that the SEIAS did not model correctly the impact of the carbon tax. It was in that context that business had requested to undertake a study on the socio-economic Impact. Government had stated that the study was noted. BUSA had also presented preliminary presentations which had been shared with the Chairperson of the Committee. However, it could not look at what mitigation plans needed to be put in place without assessing the impact. Treasury’s presentation had misrepresented this slightly, and business wanted to develop a national jobs resilience and creation plan as part of the work that was done by the jobs summit.

Ms Ngwenya said there was a good normative point whether they had not missed something, as the more one reduced one’s emissions, the less incentives one received as a business.

In Treasury’s response, it seemed to say that it recognised that South Africa’s emissions were below the national benchmark trajectory. Be as it may, it seemed that in relation to gross domestic product (GDP) growth, South Africa was likely to reach that by 2050, but there remained some doubt whether that would be achieved, considering the country’s declining growth path.

Another concern was about revenue recycling. If it was being said that revenue recycling was important, why was it not a good idea to ring-fence those funds? What were the intentions of the funds to be used? Lastly, on the global context in which the Bill was introduced, the large economies were not coming to the table, so the lack of serious commitment did limit the space for developing countries to come on board.

Mr Mapulane said that he hoped Ms Ngwenya was not suggesting that just because China and the United States were not coming on board, that this legislation would therefore be frivolous.

A speaker from the WWF said that the organisation worked with both business and society, and it did not have a material interest in the outcome. On the growth projections and emissions linked to such growth, they were still below the goals they had set for themselves, but one example where emitters had pushed this debate towards their interest was that their domestic policy commitment was below the range. They were below the top end of the range, and it had long been contested whether that range was an adequate level of ambition.

On the job issue, one would be doing the mine workers a disservice if one continued to allow the way the economy operated to continue doing so by extracting the resources domestically and shipping them overseas for value added services. These new laws were creating space for localisation and a whole new area of businesses which were not being allowed to flourish because of continuously sticking to the same way of doing business.

In a recent press statement, SASOL had reported that if they paid tax at a R120 per ton rate, that would cost them R1 billion of their profits. However, we pay R6 per ton, considering all the rebates. That R1 billion was about 2% of SASOL’s profits before tax. The nation hands subsidies to the liquid fuel sector. In the fossil fuel subsidy, they receive about R7 per ton and R29 billion in direct subsidy a year, and are exempted from paying over money to the tune of R35 million to R5 billion through indirect subsidy measures. If heavy emitters argued that R1 billion was a big piece of their profits, then they should forego the subsidies.

The jobs argument had been used mischievously, and Treasury had reported on the kind of plans that would be put in place to create and retain jobs.

Mr Mapulane said it was becoming very clear that the other issues were not as contentious as the alignment of the carbon tax and carbon budget. However, at the end of the day, they could agree to disagree.

Ms Hemraj said that Tresury was seeking to put a price on the emissions, because those emissions were not currently priced. It was aiming to correct the market failure and it was starting at a very low rate. It was important to remind people about the objective of the Bill. Once they corrected that market failure, they needed to start somewhere in addressing these emissions to ensure that producers’ behaviours were changed, as well as consumers’ in terms of consumption. They had done a modeling study -- there had been several modeling studies -- and a study regarding the shock to the economy as the result of the tax. The World Bank study had reported that there would be a decrease in emissions, but there were various assumptions that were built into that model that did not take into account all of the allowances. At the minimum, it was likely to over-estimate the impact on the GDP, as it did not take into account the benefits of reducing local air pollution and the benefits of the shifts that would be made. The cost of local air pollution directly affected people who lived in those vicinities in which they were susceptible to diseases, where the medical treatment thereof was borne by the State. This was one of the examples that were not accounted for in the modeling studies. The carbon tax would contribute towards a decrease in emissions and minimise the impact on the GDP.

With regard to the ring-fencing of the revenue, when one looks at all the allowances from 60% to 95%, one would be looking at a tax on the margin of 5% and not at the entire revenue. If one had to earmark the money, one of the challenges was that it may not be sufficient to address the objective one was trying to address. It might provide the revenue, but it would not provide enough revenue for the goals that had been set.

Ms Mputa said that with regard to sequestration, there was a national reporting regulation that stipulated the provisions for reporting on sequestration. However, what had been missing so far were the modalities of how to manage that. These rules were being developed, and they should be concluded soon.

The meeting was adjourned.