Carbon tax to hurt growth, socio-political stability and exacerbate unemployment

By Rob Jeffrey Time of article published Apr 16, 2015

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THE CARBON tax will have a serious negative impact on the goods-producing sectors of the economy, particularly mining, manufacturing and agri-processing by making the country less competitive in the global economy.

Econometrix submitted a report on the 2013 update to the Integrated Resource Plan (IRP) for Electricity, IRP 2010 to 2030.

We have updated the report and it spells out the damage the carbon tax would do to the local economy. Included in the report is comment on the futility of introducing a carbon tax or any other envisioned carbon tax-trading scheme.

The intervening period has only reinforced these views.

The facts to back this up include: the failure of such schemes in Europe and elsewhere, the false promises by most leading nations regarding the real steps they will take to mitigate carbon emissions and that there has been no real decline in carbon emissions during this period.

The exception to this has been the US, where greater use of gas has led to a slowdown in their growth in carbon emissions.

Environmental concerns

The annual growth increase of China’s carbon emissions has been 520 million tons a year over a ten-year period compared to South Africa’s total annual carbon emissions of 440 million tons in 2013.

A saving of 20 percent in South Africa would amount to 88 million tons but India’s annual growth in carbon emissions over ten years exceeds 90 million tons a year.

Any decline in the growth of carbon emissions in China and India is unlikely in the period up to 2030 as they continue to pursue economic growth.

Furthermore, the argument regarding global warming has changed considerably over the pastfew years. The global temperature has not increased materially for more than 18 years.

Econometrix is not an expert in this field but it would appear that there are extremely strong arguments and indications that the impact of man-made global warming has been vastly exaggerated. Certainly, South Africa should not be leading the pack in curbing its own carbon emissions at substantial economic and personal cost when the rest of the world is flagrantly disregarding the same set of rules. This is particularly true when South Africa’s likely contribution to any reduction in carbon emissions will be less than measurable.

Passing on costs

A carbon tax will increase the costs of electricity and the products of many important industries. These costs will be passed on through price increases to business and consumers. Downstream business and industry will be faced with these increased costs and will in turn pass these costs on to its consumers.

Certain industries will be faced with a carbon tax of their own and in turn their increased electricity costs and carbon tax costs will also be passed on to their consumers and users of their product.

Ultimately, demand will decline as the price increases faced by consumers will reduce their disposable income. In the case of export industries trading in the global competitive market they will either face a decline in demand and/or reduced prices with resulting lower returns. In turn, imports would become more competitive and import sensitive industries would suffer.

The complex impacts of unnecessary real price increases would result in a further deterioration in the current account of the balance of payments, already at an excessively high level.

Furthermore, there would be a decline in the return on investment of the affected business and real investment would decline. At present, it is already running at below required levels capable of sustaining an acceptable economic growth rate.

Each industry would need to be examined on its merits. An example of the damage it could cause would be the motor vehicle industry. Current exports total more than R100 billion an annum and total employment exceeds 100 000. The competitive damage to this industry alone could be significant.

Economic impact

Econometrix has calculated the economic impacts of these effects. The carbon tax would slow gross domestic product (GDP) growth by 0.4 percent a year, resulting in a 6.5 percent reduction in the size of GDP by 2030, or R350bn, and a reduction of almost 1.4 million in the number of jobs available.

The number of dependents affected is therefore estimated at almost 5 million. This is a sizeable effect on an economy with a population estimated to be approaching 70 million by 2030.

Significantly, it will reduce the cumulative taxes collected by 2030 by R750bn due to the slower growth. It will require a large and costly bureaucracy to run this complex, cumbersome and highly inefficient tax. The reduction in taxes is likely to be greater than the net taxes that will be collected.

Overseas experience

The argument that the tax will be neutral because this money will be funnelled back to develop the green economy must be treated with great suspicion.

There are a number of economic arguments that strongly suggest that this will not be the case.

It amounts to a tax on existing industries and effectively a subsidy for new ventures many of which are less efficient with higher cost structures.

It consequently will foster higher costs and inflation. Bureaucracy is not the best means of fostering economic efficiency.

This is the task of market forces in order to develop a more efficient and effective economy. The experience overseas supports this argument. For example, there are substantial question marks regarding the policy and Germany’s “Energiewende” is a well-documented case in point.

Electricity prices there are the highest in Europe because of the move to renewables and that the development of the new transmission grid has fallen well behind schedule resulting in localised rolling power cuts and has required substantial unforeseen investment.

As a result, certain key electricity-intensive industries are considering moving to the US.

It is worth noting that Germany is in the process of building a number of coal-fired power stations to correct the imbalance that renewables have caused for electricity supply.

Finally, carbon tax and higher prices of the large input cost increases from electricity price increases runs contrary to the country’s own beneficiation policies, where some companies are now expanding elsewhere because of the non-competitive electricity costs in this country. It is noteworthy that one of South Africa’s key global competitors, Australia, has scrapped plans to introduce such a scheme.

Damage to potential

Econometrix has recently estimated that South Africa should, with the correct policies and adequate and secure electricity growth, have a potential sustainable growth rate of GDP of 4.1 percent a year.

As a result of a number of policy issues, insufficient security of supply and non-competitive prices of electricity, the carbon tax and the switch to more costly renewables and other investment adverse policies, the sustainable GDP growth of South Africa is unlikely to exceed 2.5 percent a year .

This will have a detrimental impact on the country’s goods producing industries, particularly mining, mining beneficiation, manufacturing and its agri-processing sectors.

By 2030, this would result in GDP being R1.4 trillion less than what should be achieved, while employment levels could be roughly 5 million lower than the levels actually possible and required.

Carbon tax will play a substantial role in this poor economic performance, which will have a detrimental effect on the standard of living, unemployment and the social and political structure of South Africa.

More particularly it would make the country’s important goods-producing sector less competitive.

This will cause further structural problems for the current account of the balance of payment, which already has a substantial deficit.

In the latest global competitiveness report, out of 144 countries, South Africa has fallen to 113th in terms of its labour market efficiency, 89th on its macroeconomic environment and has fallen 11 places to 56th in the overall competitiveness index.

The carbon tax will only exacerbate these trends. Most importantly it will more than likely result in a further deterioration in South Africa’s sovereign rating with serious consequences to South Africa’s cost of capital, ability to raise capital and its ability to attract foreign investment.

Rob Jeffrey, is the managing director and senior economist of Econometrix

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