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Modelling the impact on
South Africa’s Economy of
introducing a carbon tax
Report prepared for National
Treasury Carbon Tax Modelling
Workshop
10th November 2016
Modelling the impact on South Africa’s Economy of introducing a carbon tax
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The modelling considers a range of scenarios
We identify one combination as the ‘focus’ scenario, but all sensitivities are explored
Tax scenarios
—
—
—
—
Revenue recycling scenarios (all revenues
recycled)
T1: tax rate increasing by 10 percent per annum
over the period 2016–21, and thereafter by the
—
assumed inflation rate (5.5 percent); tax-free
thresholds are held constant for the duration of
the modeling period 2016–35. Ag and waste
—
exempt
R1: Recycling of tax revenues is applied
through an output-based rebate on all
production across all sectors
T2: as T1, but the tax-free allowances are
gradually removed at a rate of 10 percentage
points per annum from 2021. Ag and waste
exempt
—
R3: a combination of R1 and R2 (split 50:50)
—
R4: subsidy on the production of renewable
electricity generators (for modeling purposes,
directed towards solar PV)
—
R5: The tax revenue is used to decrease the
VAT rate on agricultural goods, food, transport
services, and beverages and tobacco
T3: as T1, except for the agricultural sector where
the exemption is removed at a rate of 10
percentage points per annum from 2026
T4: T2+T3, ie tax-free allowances are gradually
removed at a rate of 10 percentage points per
annum, starting in 2021, for all industries except
agriculture, for which phasing out begins in 2026
R2: tax revenue is recycled through a decrease
in the VAT rate on all the goods that make up
household spending
Modelling the impact on South Africa’s Economy of introducing a carbon tax
Contents
1. Focus scenario results
2. Sensitivity analysis
― tax
― revenue
― baseline GDP forecasts
3. International comparisons
3
Modelling the impact on South Africa’s Economy of introducing a carbon tax
In the focus scenario, emissions in 2035 are expected to be 33
per cent lower than in the baseline
The carbon tax can make an important contribution to meeting South Africa’s NDC but would
not be sufficient by itself, under these settings
250
200
CO2 Index 2014 = 100
- 33%
150
100
50
0
Baseline CO2 emissions rebased to 2014 = 100
T2R1 CO2 emissions rebased to 2014 = 100
4
Modelling the impact on South Africa’s Economy of introducing a carbon tax
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In the context of the expected growth of the economy, the
impact of the tax on GDP is small
The average annual growth rate of the economy is expected to be 0.15 percentage points
lower, leading to GDP in 2035 being 3 per cent lower than in the baseline
250
-3%
GDP Index 2014 = 100
200
150
100
50
0
Baseline GDP rebased to 2014 = 100
T2R1 GDP rebased to 2014 = 100
Modelling the impact on South Africa’s Economy of introducing a carbon tax
6
Other macroeconomic aggregates are also only modestly
affected
Employment and household consumption index,
2014 = 100
250
Household
consumption
200
-4.6%
150
-1.4%
100
Employment
50
0
Baseline employment
T2R1 employment
Baseline household consumption
T2R1 household consumption
Modelling the impact on South Africa’s Economy of introducing a carbon tax
There are some sectoral winners and losers…but many sectors
are largely unaffected
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The winners and losers reflect the efforts to restructure the South African economy in line
with its international commitments
500%
% deviation from baseline in output at 2035
NucGen
400%
WindGen
300%
HydroGen
SolarPVGen
OtherGen
GasGen
This means output in 2035
is lower than it would have
been w/out the carbon tax
for these sectors
BUT, all sectors see
absolute growth in output
between 2015 and 2035
200%
100%
62% of the sectors included are only marginally
affected by the introduction of the carbon tax
OtherManuf
0%
-100%
PetroRef CoalGen
Modelling the impact on South Africa’s Economy of introducing a carbon tax
Competitiveness effects are relatively muted with overall
exports expected to be 3.5% higher in 2035 than in baseline
There are important differences across sectors
60%
Deviation from baseline exports at 2035
40%
20%
0%
-20%
-40%
-60%
-80%
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Modelling the impact on South Africa’s Economy of introducing a carbon tax
Contents
1. Focus scenario results
2. Sensitivity analysis
― tax
― revenue
― baseline GDP forecasts
3. International comparisons
9
Modelling the impact on South Africa’s Economy of introducing a carbon tax
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The different tax scenarios make very little difference to the
expected impact on GDP
This is because greater tax revenues are offset by greater revenue recycling
250
-1%
-3%
GDP Index 2014 = 100
200
150
100
50
0
Baseline GDP rebased to 2014 = 100
T1R1 GDP rebased to 2014 = 100
T2R1 GDP rebased to 2014 = 100
T3R1 GDP rebased to 2014 = 100
T4R1 GDP rebased to 2014 = 100
Note:
T1R1 and T3R1 overlap, as do T2R1 and T4R1.
Modelling the impact on South Africa’s Economy of introducing a carbon tax
But different tax schedules do have important impacts on the
abatement delivered
If the tax exemptions are not withdrawn, the tax might only deliver emission reductions of
26% relative to the baseline in 2035; leaving more work to be done by other policies
CO2 emissions level 2014 = 100
250
200
- 26%
150
100
50
0
Baseline CO2 emissions rebased to 2014 = 100
T1R1 CO2 emissions rebased to 2014 = 100
T2R1 CO2 emissions rebased to 2014 = 100
T3R1 CO2 emissions rebased to 2014 = 100
T4R1 CO2 emissions rebased to 2014 = 100
- 33%
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Modelling the impact on South Africa’s Economy of introducing a carbon tax
Contents
1. Focus scenario results
2. Sensitivity analysis
― tax
― revenue
― baseline GDP forecasts
3. International comparisons
12
Modelling the impact on South Africa’s Economy of introducing a carbon tax
Broader revenue recycling schemes result in smaller deviations
to GDP growth
This is because targeting significant additional resources at a small number of sectors leads
to diminishing returns
250
- 3%
200
GDP Index 2014 = 100
- 15%
150
100
50
0
Baseline GDP rebased to 2014 = 100
T2R1 GDP rebased to 2014 = 100
T2R4 GDP rebased to 2014 = 100
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Modelling the impact on South Africa’s Economy of introducing a carbon tax
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Although, targeting recycling to renewable electricity generators
does increase the emission reduction potential of the tax
250
200
CO2 Index 2014 = 100
- 33%
150
- 46%
100
50
0
Baseline CO2 emissions rebased to 2014 = 100
T2R4 CO2 emissions rebased to 2014 = 100
T2R1 CO2 emissions rebased to 2014 = 100
Modelling the impact on South Africa’s Economy of introducing a carbon tax
Contents
1. Focus scenario results
2. Sensitivity analysis
― tax
― revenue
― baseline GDP forecasts
3. International comparisons
15
Modelling the impact on South Africa’s Economy of introducing a carbon tax
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A more conservative baseline makes very little difference to the
expected change in GDP from the carbon tax
250
-3%
GDP Index 2014 = 100
200
-15%
Baseline
-4%
Alternative
baseline
150
-12%
100
50
0
Alt baseline GDP rebased to 2014 = 100
Alt T2R1 GDP rebased to 2014 = 100
T2R1 GDP rebased to 2014 = 100
Alt T2R4 GDP rebased to 2014 = 100
Baseline GDP rebased to 2014 = 100
T2R4 GDP rebased to 2014 = 100
Modelling the impact on South Africa’s Economy of introducing a carbon tax
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A more conservative baseline implies that the carbon tax might
give more abatement
250
GDP Index 2014 = 100
200
Baseline
-33%
150
-40%
100
-46%
-50%
50
0
Alt Baseline CO2 emissions rebased to 2014 = 100
Baseline CO2 emissions rebased to 2014 = 100
Alt T2R1 CO2 emissions rebased to 2014 = 100
T2R1 CO2 emissions rebased 2014 = 100
Alt T2R4 CO2 emissions rebased to 2014 = 100
T2R4 CO2 emissions rebased to 2014 = 100
Alternative
baseline
Modelling the impact on South Africa’s Economy of introducing a carbon tax
Contents
1. Focus scenario results
2. Sensitivity analysis
― tax
― revenue
― baseline GDP forecasts
3. International comparisons
18
Modelling the impact on South Africa’s Economy of introducing a carbon tax
International modelling and experience confirm that carbon
taxes and revenue recycling have small macroeconomic impacts
British Columbia
― introduced carbon tax in 2008; current tax rate is CAN$30/ton
― government must present an annual plan to the legislature demonstrating how all of
the carbon tax revenue will be returned to taxpayers through tax reductions
― econometric analysis suggests no difference in the GDP growth rate in British
Columbia, compared with other provinces in Canada, as a result of the carbon tax
― for employment, small but statistically significant 2 percent increase in employment
over 2007–2013
― carbon-intensive and trade-sensitive sectors seeing declines in employment but
clean service industries benefiting from employment increases
Modelling studies
— a meta-study of European studies show a GDP impact in the range of -0.5 to +0.5
per cent compared with baseline in two-thirds of the studies reviewed
— fewer studies of impact of carbon taxes on emerging market economies; but most
suggest broadly similar results (Brazil, Mexico, Indonesia)
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Modelling the impact on South Africa’s Economy of introducing a carbon tax
Summary
1. The modelling analysis suggests that the carbon tax can make a meaningful
contribution to South Africa’s emission reduction targets but, under the settings
modelled, would need to be complemented by other policies
2. Revenue recycling means that delivers these emission reductions while having a
very modest impact on the overall economic performance of the South African
economy
3. There are sectoral winners and losers – both in terms of overall output and export
performance – but these patterns reflect the objective of the tax in inducing
structural change
4. One of the most important determinants of the economic impact of the carbon tax is
the way in which the revenues are recycled: broader recycling has a more benign
economic impact than narrow recycling
5. The results from the study are consistent with both international experience and
other modelling studies of carbon taxation with revenue recycling
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Modelling the impact on South Africa’s Economy of introducing a carbon tax
Contact us:
26-28 Ely Place
London EC1N 6TD
21
Author contact details: John Ward
T: +44 7790 613951
E: [email protected]
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