Tuesday, November 22, 2016

The stupidity of a carbon tax

Treasury is the one institution of Government that we have come to trust in recent months.  Why on earth does it want to sacrifice that confidence in pursuit of a hare-brained scheme, one in which its own words will “reduce the economy’s average annual growth rate” (Business Day, 10 November)? If it has its way, “household consumption falls by 0.23 percentage points, employment falls by 0.07 percentage points, and real wages fall by 0.2 percentage points.”
This is the best of a series of outcomes from a model of carbon taxes that Treasury has built.  I seem to recall some recent models, which proved beyond all doubt that Hillary Clinton would be the next President of the USA.  Do we have confidence that Treasury’s model has any greater predictive ability?
For a start, let us look at what Treasury hopes to do. “The modelling results suggest the carbon tax will have a significant effect on reducing SA’s greenhouse gas emissions.” That would be surprising. Remember we have had a carbon tax on large cars for several years – statistics show the 4x4 market growing strongly. Wherever you look in the world, it is the same.  India introduced a Rupee50/t tax on coal in 2010 and increased it to Rupee100/t in 2014.  Since 2010, its emissions have grown by over 600 million tonnes CO2. In 2012, Australia introduced a $A23/t carbon tax; by 2014, emissions had fallen by only 2.5% and the damage to the economy was enough to bring down the government (and remove the tax). So it is unlikely that the tax will have any significant effect.
That begs the question as to whether our greenhouse gas emissions constitute any problem at all.  Our total emissions are a little over 400 million tonnes a year – India’s emissions have grown by 600 million tonnes in five years, while China’s have grown by over 1 100 million tonnes at the same time. If Treasury’s tax resulted in our emissions falling by 2.5% (about 10 million tonnes), it would be less than the measurement error in India’s or China’s emissions.
But Treasury argues that “ratification of the 2015 Paris Agreement emphasises the reality that we will have to prepare to operate in a carbon-constrained economy - - .” Really?? The Paris “Agreement” is no agreement as normally understood. It asks us to state our intentions. If those intentions are not met, we can shrug our shoulders and come up with some new intentions.  And if anyone says they are cross with us for not living up to our intentions, we can walk away with nary a grey hair. Treasury’s ‘reality’ is rather like the 3D-movie reality – lift your head a little, and the illusion disappears. We have just cast off the iron shackles of the International Court of Justice; the silken threads of the Paris Agreement can brushed aside.
As always with taxes, you have to check the detail.  The carbon tax is no different.  All those little job losses, all that slowing of our growth, “will result [from] a modest tax rate - - - during the first phase of the carbon tax, up to the end of 2020.” Thereafter the tax rate increases, growth slows even further, there are more job losses, real wages fall further. Should Treasury not be worrying about us South African citizens, rather than trying to show the rest of the world that we want to play the carbon charade? Where are our priorities?
Something Treasury avoids discussing is the complexity of the system for collecting the proposed tax.  Every emitter (and there are thousands) will have to set up a measurement system to quantify its tax liability, and have an additional audit system to verify the measurements. Government will have a policing function, to make certain that all the emitters are in the tax net, and then there will be an army of assessors calculating the tax due against rules that change annually.  The rules include rebates for specific sectors and all manner of other fiddles that arise when you are trying to tax something so pervasive in nature. 
It also avoids discussing the other carbon taxes we are already paying.  In addition to the tax on large vehicles, there is a renewable energy levy and a tax on electricity generated from coal – these two add about 6cents/kWh to the price of coal-generated electricity. Then there are the liquid fuel taxes themselves, one of the largest contributors to the fiscus, and a tax which was originally set up to pay for road maintenance.  The carbon tax proposals come with a suggestion that there might be a VAT reduction, but remembering what happened to the fuel tax helps to understand the games Treasury can play.
Treasury now has a job to do, to restore our confidence in their operations.  We really don’t need a tax that will reduce the economy further, that will shrink household consumption, that will cost jobs, and that will reduce real wages – and achieve next to nothing.