Carbon Emission Tax and Investment Strategy

Not much was made of the significant announcement made in the National Budget Speech on 27 February 2013 of the implementation of Carbon Emission Taxes ‘CET’ with effect from 1 January 2015.

CET must be considered in the context of other realities affecting energy prices in South Africa and the impact on businesses, large and small.

Reality 1

Some South Africans remember George Harrison. No, not the Beatle! Another George Harrison found the gold strike in Langlaagte, south of Johannesburg in 1886.

George Harrison’s gold strike would probably have had little significance had it not been for the discovery of substantial coal deposits just 100km to the east of Johannesburg near Witbank. Without coal to power South Africa’s mines, they would probably never have prospered. They are amongst the richest by volume but the poorest in ore quality in the world.

For more than a century South Africa has been a world leader in the practice of turning low calorific value coal into power for mining. Arguably even the new mega power stations, Medupi and Kusile, are merely an extension of the practice; their emissions will not be more than 25% below the existing major power stations.

The current electricity crisis is not the first in South Africa’s history. There was a crisis in the 1970s that was solved with the rebuilding of the current electricity grid between 1970 and 1990. The 1970s electricity crisis was recognised to be of such national significance to South Africa and the cost of the rebuild was paid primarily by the taxpayer. Carbon emissions were hardly considered relevant at the time.

By the 1990s electricity production was far in excess of demand. Excess capacity was sold off to the mining and business sectors at a substantially reduced price. The result was that many South African businesses have been built on an electricity price far below sustainable levels.

Today South Africa’s total carbon emissions are in the region of 450 million tons per annum, the 11th highest in the world. By its own admission ESKOM is responsible for 235 million tons of the total.

The National Development Plan (NDP) concentrates more than 50% of the R3,6 billion infrastructure target towards expanding the coal fired electricity grid.

Reality 2

South Africa consumes approximately 600 000 barrels of oil a day but only produces around 191 000 barrels. The rest is imported, primarily through the oil terminal in Durban.

Our oil refineries are old. This means they are designed to refine the ‘sweeter’ crude oils that are obviously more expensive. There are no plans afoot to build new refineries within the NDP.

Thus South Africa’s businesses are hugely exposed to higher oil prices. This is aggravated even further by the vulnerability of the rand against other currencies.

At present the balance of payments current account is reflecting a record deficit and the Reserve Bank’s stated strategy is not to interfere or protect the rand by increasing interest rates. It is surprising that the rand has recovered to below R9 to $1 in recent weeks.

56% of the Basic Fuel Price (BFP) comprises the rand price of imported oil. To this is added the costs of refinement, delivery and distribution and then the fuel levy. Believe it or not, South Africa’s fuel taxes are substantially below most of the first world.

Click here for a useful illustration of the components of the current BFP.

Reality 3

Some say that ‘fracking’ the natural gas reserves of the Karoo will solve casino online South Africa’s problems. This debate can be dismissed for purposes of this article. Even if a settlement of the fracking debate could be concluded in the short term and the resources did actually exist, it will be at least 15 years before the infrastructure can be created to exploit the resource to any substantial extent. South Africa has to face the problems now!

Reality 4

Pravin Gordhan took over as Minister of Finance from Trevor Manuel at the height of the financial crisis in May 2009. For three years Pravin Gordhan and National Treasury made the call that South Africa’s growth rates would recover to above 4% per annum by 2014/15. Thus, it was not considered necessary to change the overall strategy underpinning South Africa’s tax collections: Collect over 80% of taxes from Corporate Tax (CIT), VAT and Personal Income Tax (PIT).

Since 2009 the burden on PIT has increased to 35% of the total tax collection while VAT has declined to 28% and CIT has faded to 19%. Clearly a change in strategy at National Treasury is imminent. Prior to the 2013/14 National Budget Speech there was much speculation as to whether it would come in the form of increased PIT, VAT or CIT.

But the problem is that there are insufficient wealthy taxpayers in South Africa to make a substantial difference by increasing PIT. COSATU has flatly rejected any prospect of increasing the VAT rate. And the international implications of increasing CIT are such that it cannot be considered.

The net result is that National Treasury will have to implement a new form of taxation within the medium term.

The obvious result: Carbon Emissions Tax Implementation (CET)

The principal problem with CET is that it becomes a business cost and will thus inevitably have an inflationary consequence that will impact all South Africans. CET has featured in National Treasury proposals before. But it was hoped that the economic recovery would be sufficiently swift to avoid the measure.

Despite the above, CET remains the only politically acceptable and feasible form of taxation alternative available to National Treasury.

The principle advantage to SARS in CET is that it is collected at source from a mere handful of taxpayers. This solves many issues relating to cost of collection and tax leakage.

Thus it was announced in the National Budget Speech that CET would be implemented in South Africa on 1 January 2015 with a base level proposed of R120 per Carbon Emission Ton.

Based on South Africa’s current carbon emissions this creates a potential tax base of R54 billion per annum. Potentially CET could become RSA’s fourth largest tax, yielding revenue streams in excess of customs duties, sin tax and fuel levies.


Is business already facing an energy crisis?

It is submitted that local businesses are already facing an energy crisis that started as far back as 2008.

The above graphic reflects:

1. The consumer price index (CPI)
2. The rand price of platinum (PLAT ZARS)
3. The rand price of oil (OIL ZARS)
4. The rand price of electricity (ESKOM ZARS)
5. The rand price of Gold (GOLD ZARS).

Only gold on a bull run has kept ahead of electricity price increases.

Disturbing questions for business are immediately apparent:

  1. Will the above trend continue?
  2. How will the implementation of CET aggravate the already substantial increasing trend in electricity prices?
  3. Is there a future in mining industry in South Africa?
  4. What other local businesses are caught up in the energy crisis?

This article originally appeared in Carbon Emission Tax and Investment Strategy in glacier by Sanlam, The {Inside} Story

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