South African Carbon Tax Could Spur GDP Growth, Study Shows

Updated on
  • Redirecting tax revenue back into the economy may boost GDP
  • First impact on GDP may be `marginally negative' then improve

South Africa’s proposed carbon tax will boost growth in the economy provided the revenue is reinvested in green-energy projects, according to Folsom, California-based Applied Development Research Solutions.

The government is completing a law to tax emissions and help it meet a target to reduce greenhouse gases by 34 percent below a scenario of “business as usual” in five years and by 42 percent by 2025. The tax will start at 120 rand ($8.50) per metric ton of carbon dioxide-equivalent emissions and increase by 10 percent a year until 2019. The law will probably come into effect in about a year and would add to costs for the nation’s biggest polluters such as power utility Eskom Holdings SOC Ltd. and oil company Sasol Ltd.

The Johannesburg-based Chamber of Mines says the tax will harm investment in Africa’s most-industrialized economy and undermine an industry battling rising costs and low commodity prices. The Treasury estimates that less than half of emissions will actually be taxed. It projects the initial impact on gross domestic product to be “marginally negative,” but will improve as it uses the revenue to reduce other taxes and provide incentives for green-energy projects.

The economy narrowly avoided a recession when gross domestic product increased an annualized 0.7 percent in the three months through September compared with the previous quarter, the statistics office said on Tuesday.

ADRS, an economic-modeling group, shows in its forecasts that economic growth and household spending could be boosted through tax recycling measures. It based its study on the assumption that half of the revenue from the carbon tax will go into the government’s infrastructure-investment budget for “greening” the economy, and the remainder toward investment by state-owned companies in green technology and services.

According to the ADRS model, average annual economic growth from 2015 to 2030 will be 2.4 percent if the government introduces the tax without supporting measures, compared with an estimated 3.1 percent rate without the charge. Reinvesting the revenue will boost expansion to 4.3 percent a year.

Investment in the primary sector, most of which is mining and agriculture, could swing to negative from positive, even with the tax-recycling measures.

Growth in investment in the economy would more than halve because of the effect of the carbon tax. Recycling the revenue could boost average investment growth to about 6 percent.

Growth in household income would also be lifted by reinvesting the income from the tax.

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