Carbon tax policy BUSA submission to Portfolio Committee on Trade and Industry August 2013

Overview South African business has already made significant progress in emission reduction South African business has already made significant progress in emission reduction Domestic mitigation options are limitedDomestic mitigation options are limited Economic impacts likely to be substantialEconomic impacts likely to be substantial

Overarching business view Carbon price supported in pursuit of lower carbon growth trajectoryCarbon price supported in pursuit of lower carbon growth trajectory Imperative to understand impact of any state interventionImperative to understand impact of any state intervention Carbon tax must be aligned with other mitigation instrumentsCarbon tax must be aligned with other mitigation instruments Need to operate in context of global climate actionNeed to operate in context of global climate action Proposed carbon tax is not only carbon priceProposed carbon tax is not only carbon price

Potential change in behaviour Change required: reduce GHG emissionsChange required: reduce GHG emissions Potential at firm level limited by: Potential at firm level limited by: –lack of choice in energy supply –non availability of mitigation technology –engineering constraints Structure of the economy energy intensive and trade exposedStructure of the economy energy intensive and trade exposed Shift to significantly lower carbon intensity not possible concurrent with beneficiation objectivesShift to significantly lower carbon intensity not possible concurrent with beneficiation objectives

Current environment State of economy Mitigation

Manufacturing trends ( the dti, 2011)

Trade trends (the dti, 2011)

South African exports 2012 Source: SARS unaudited trade statistics, BUSA calculations Energy intensive sectors (R438bn)

Trends in economic activity

Employment trends in manufacturing

Trends in energy intensity and electricity sent out

SA electricity efficiency vs average real electricity selling price

Selected electricity prices

Contribution of sources to the total energy sector GHG emissions

Carbon price Paper does not recognise current and future carbon pricing instrumentsPaper does not recognise current and future carbon pricing instruments Carbon tax on motor vehiclesCarbon tax on motor vehicles Carbon price included in electricity price:Carbon price included in electricity price: –Levy on non renewable electricity generation: R35/ton –Premium of R116/ ton CO 2 for renewable electricity generation Mitigation instruments being developed by DEA will have an implementation cost which results in a price for carbonMitigation instruments being developed by DEA will have an implementation cost which results in a price for carbon Biofuel levyBiofuel levy

Availability of mitigation technology Technology to reduce GHG emissions resulting in non energy process emissions is not available for all processesTechnology to reduce GHG emissions resulting in non energy process emissions is not available for all processes ExamplesExamples –nitric production: nitrous oxide emissions have been already been significantly reduced –Carbide and ammonia: slight efficiency improvements possible

Emission levels in the Chemical Industry, 2000 – Technology No technology Technology No technology

Desired emission reduction outcomes Mitigation analysis currently in progressMitigation analysis currently in progress Mitigation options are generally limited in energy intensive sectorsMitigation options are generally limited in energy intensive sectors Analysis will be used as basis for further detailed sectoral and firm level work to develop desired emission reduction outcomes Analysis will be used as basis for further detailed sectoral and firm level work to develop desired emission reduction outcomes DERO’s will be implemented through mandatory mitigation plansDERO’s will be implemented through mandatory mitigation plans Energy efficiency targets will be implemented through mandatory energy management plansEnergy efficiency targets will be implemented through mandatory energy management plans

Challenges with proposed carbon tax Impact Lack of policy alignment

Source: EIA, Eurostat, Direct Energy, Regulated Services, Australian Energy and Market Operator, (2013 uses year to date data) Impact of carbon tax on electricity CPI 9% 8% per annum Effect of tax on electricity price

Source: StatsSA, BUSA calculations Electricity price weight in CPI basket

*Potential impact of Z factor not taken into account First developing country with a carbon tax Premature given global negotiations More regions moving to trading schemes Effective carbon price higher than most other jurisdictions US$ per ton CO2 Illustrative effective carbon price

Electricity contribution to operating cost ( Megaflex tariff)

Alternative approaches Global agreement on mitigationGlobal agreement on mitigation –Expected in 2015 –Implementation in 2020 –Adjust timing to ensure tax supports South Africa’s commitment Desired emission reduction outcomes Desired emission reduction outcomes –Expected in 2014 –Adjust timing to base thresholds on DERO’s

Alternative approaches (2) Simplify and clarify designSimplify and clarify design Provide protection for trade exposure and energy intensive sectorsProvide protection for trade exposure and energy intensive sectors Do not limit use of offsetsDo not limit use of offsets Use desired emission reduction outcomes as basis of thresholdsUse desired emission reduction outcomes as basis of thresholds Align tax level with levels in competing economiesAlign tax level with levels in competing economies

Way forward Collaboration to find balanced approachCollaboration to find balanced approach