Saturday, March 1, 2014

Rethink carbon taxes!

I'm glad the Minister of Finance gave us all some respite in this year’s budget.  For this was the year when he was supposed to be introducing a carbon tax.  However, he first made the proposal back in 2009.  Since then, the world has changed and his original rationale is now looking very suspect.

For instance, internationally the price of carbon has plunged.  The EU, which was particularly strongly committed, has been trying to support the price, and failed (at great cost). So we now have the prospect of taxing something at about twice its actual value.  That suggests that carbon is a very great sin indeed; only sin taxes are higher than the basic cost of what is being taxed.

Internationally, too, nations which have tried to set up carbon limits are abandoning them when faced by reality.  Germany, for instance, has had laudable carbon targets, but the political decision to phase out nuclear power has meant the death of the targets.  This year alone Germany will bring on line some ten new coal-fired power stations, with more to follow.  In Japan, too, the closure of nuclear plants following a re-assessment of the risks in an earthquake-prone land has meant discarding their target to reduce carbon emissions. Japan now faces increasing emissions for the foreseeable future. Carbon targets are far less important than keeping the lights on.

The great efforts of the UN have come to naught.  At Copenhagen in 2009, they reached an Accord, but it was merely noted.  Some elements of the Accord were accepted at Cancun in 2010.  In Durban in 2011, they developed a “Platform for Enhanced Action”. It was hoped to agree something by 2015 for implementation by 2020 – some enhancement! At Doha in 2012, there were grave reservations that few nations were committing aggressively enough to the 2oC target – an understatement, if ever there was one. The 2013 meeting in Warsaw broke up in disarray – those awful developing states were demanding that the developed nations pay for the damage they had caused. Ridiculous! Didn’t they understand it was a global problem?

It is now questionable if carbon is as severe a global problem as was thought five years ago. Emissions have soared, but the thermometer has remained stuck on “warm” – since 1997, according to some commentators. Yes, this decade is warmer than any since we got accurate instruments, but it is not getting warmer still. Meanwhile some of those naughty developing nations, like China and India, are emitting more and more carbon every year. The annual growth in China’s emissions is larger than South Africa’s total output.

Another global phenomenon is the realisation that carbon taxes are not the answer.  They are supposed to cut emissions.  Our official policy is to slow emissions until they reach a peak around 2025, after which they may decline.  But carbon taxes have not been able to stop emissions. Australia tried it, and didn’t like the taste. In eighteen other jurisdictions around the world, the best that can be said is that it has slowed the growth in emissions, not reversed them.  Only in the Canadian province of British Columbia has a carbon tax managed to cut emissions. Only there did the government reduce income tax in direct proportion to the carbon tax. In some countries, carbon emissions have more than doubled since the tax was put in place.  

Even here, some circles of Government are somewhat less enthusiastic than they were five years ago.  Treasury itself has been mulling over the problem which they first identified, that the impact of the tax falls heaviest on the poorest, and enriches the richest.  The Department of Energy, in its November 2013 review of its IRP2010, has found better ways of reducing carbon than a tax.  And it has found a carbon budget, beloved of the Department of Environment Affairs, to be really disastrous – but that is another story.

The Energy review also had difficulty in identifying the impact of higher energy prices on the demand for power.  All of us have felt the impact of the higher prices; all of us have tightened our belts as far as we can. The drop in consumption seems largely to be due to the restrictions on the supply and to the increasing downtime for maintaining Eskom’s power stations.  The stations used to be available 86% of the time; the target is now 80%.

This is an important finding, because the whole thesis underlying the carbon tax is the Pigovean idea that demand will drop if you increase the price.  The trouble is that energy is one of those things that are essential to our lives in general and to the economy in particular.  It is a critical factor of production. You can’t increase efficiency beyond certain limits. Once those limits are reached, reducing the energy means reducing the output.

There are already taxes on our energy.  There is the non-renewable energy levy, and the tax to pay for the additional cost of renewable energy. Neither of these have had any detectable effect on the demand.  In economic terms, the price of energy is not very elastic.  You can see this most dramatically in the oil price.  From the 1950’s to the early 1970’s, the demand grew at 150Mt/a.  In the 1970’s there was a ten-fold increase in price. Since the early 1980’s, the demand has continued to grow somewhat slower at 50Mt/a.  So even a really dramatic price increase will only slow the growth – it will not cut it in absolute terms. If you want to cut emissions, you have to find an alternative technology. We are attempting to do that with our renewable energy programme, but with the best will in the world, we cannot replace our coal-fired power stations overnight.

There is also a growing realisation that the value of energy to the economy is far more than what we pay for it.  The great power crash of 2008 allowed us to estimate the cost of unserved energy – the cost of not having power.  It is about R75/kWh.  I know of nothing else that contributes to our economy over 100 times its cost. That is why taxing it to death is a very poor concept.  So please use the year of grace drop the idea, Mr Gordhan.