south africa’s economy of tax...3. there are sectoral winners and losers – both in terms of...

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

Tax scenarios

— 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

— 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

— 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

Revenue recycling scenarios (all revenues

recycled)

— R1: Recycling of tax revenues is applied

through an output-based rebate on all

production across all sectors

— R2: tax revenue is recycled through a decrease

in the VAT rate on all the goods that make up

household spending

— 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

2

The modelling considers a range of scenarios

We identify one combination as the ‘focus’ scenario, but all sensitivities are explored

Modelling the impact on South Africa’s Economy of introducing a carbon tax

Contents

3 Modelling the impact on South Africa’s Economy of introducing a carbon tax

1. Focus scenario results

2. Sensitivity analysis

― tax

― revenue

― baseline GDP forecasts

3. International comparisons

4

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


0

50

100

150

200

250

CO

2 Index 2

014 =

100

Baseline CO2 emissions rebased to 2014 = 100 T2R1 CO2 emissions rebased to 2014 = 100

- 33%

5

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


0

50

100

150

200

250

GD

P Index 2

014

= 1

00

Baseline GDP rebased to 2014 = 100 T2R1 GDP rebased to 2014 = 100

-3%

6

Other macroeconomic aggregates are also only modestly affected


0

50

100

150

200

250

Em

plo

ym

en

t a

nd

ho

use

ho

ld c

on

su

mp

tio

n in

de

x,

20

14

= 1

00

Baseline employment T2R1 employment

Baseline household consumption T2R1 household consumption

-1.4%

-4.6%

Household

consumption

Employment

7

There are some sectoral winners and losers…but many sectors are largely unaffected The winners and losers reflect the efforts to restructure the South African economy in line

with its international commitments


-100%

0%

100%

200%

300%

400%

500%

% d

evia

tion fro

m b

aseline in o

utp

ut at 2035

WindGen

HydroGen

OtherGen

SolarPVGen

CoalGen

OtherManuf

GasGen

PetroRef

NucGen

62% of the sectors included are only marginally affected by the introduction of the carbon tax

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

8

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


-80%

-60%

-40%

-20%

0%

20%

40%

60%

De

via

tio

n fro

m b

ase

lin

e e

xp

ort

s a

t 2

03

5

Contents




― tax

― revenue



10

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


0

50

100

150

200

250

GD

P Index 2

014

= 1

00

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

-3%

-1%

Note: T1R1 and T3R1 overlap, as do T2R1 and T4R1.

11

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


0

50

100

150

200

250

CO

2 e

mis

sio

ns le

ve

l 2

01

4 =

10

0


T2R1 CO2 emissions rebased to 2014 = 100 T3R1 CO2 emissions rebased to 2014 = 100

T4R1 CO2 emissions rebased to 2014 = 100

- 33%- 26%

Contents




― tax

― revenue



13

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


0

50

100

150

200

250

GD

P Index 2

014

= 1

00

Baseline GDP rebased to 2014 = 100 T2R1 GDP rebased to 2014 = 100 T2R4 GDP rebased to 2014 = 100

- 15%

- 3%

14

Although, targeting recycling to renewable electricity generators does increase the emission reduction potential of the tax


0

50

100

150

200

250

CO

2 In

de

x 2

01

4 =

10

0


T2R4 CO2 emissions rebased to 2014 = 100

- 33%

- 46%

Contents




― tax

― revenue



16

A more conservative baseline makes very little difference to the expected change in GDP from the carbon tax


0

50

100

150

200

250

GD

P I

nde

x 2

01

4 =

100

Alt baseline GDP rebased to 2014 = 100 Alt T2R4 GDP rebased to 2014 = 100

Alt T2R1 GDP rebased to 2014 = 100 Baseline GDP rebased to 2014 = 100

T2R1 GDP rebased to 2014 = 100 T2R4 GDP rebased to 2014 = 100

Alternativebaseline

Baseline

-3%

-15%

-12%

-4%

17

A more conservative baseline implies that the carbon tax might give more abatement


0

50

100

150

200

250

GD

P I

nde

x 2

01

4 =

100

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

Alternativebaseline

Baseline -33%

-46%

-50%

-40%

Contents




― tax

― revenue



19

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)

International modelling and experience confirm that carbon taxes and revenue recycling have small macroeconomic impacts


20

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

Summary


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