- Meridian Economics has published analysis on the implications of the Phase Two design of the carbon tax for the electricity sector contained in the draft TLABs.
- It finds that the Phase Two tax does not incentivise mitigation in the sector beyond that of the Environmental Levy already in place since 2009, despite the introduction of the South African Wholesale Electricity Market.
- The reasons for the lack of mitigation incentives are found deep in the numbers, the continued regulation of the Eskom’s plant via transitionary measures, and Treasury’s objective of keeping the tax electricity price neutral.
The tax is critical to drive the transition to a low emissions power system in line with SA’s climate commitments. In a forthcoming Briefing Note we will propose that the transitionary measures provide options for increasing its effectiveness which must be exploited. The resulting electricity price increase will be small, and on balance necessary for the country to maintain economic competitiveness in a decarbonising world.
Phase Two design will not achieve Treasury’s behavioural change objective, even under power market reforms. Mitigation in the power sector is achieved by increased Emissions efficiency at the plant level, a change to the power dispatched, and a change in demand for power. For Eskom, by far the sector’s largest emitter, the carbon tax is purely a pass through. It claims the tax in its pricing and pays it through to SARS. There is therefore no incentive for Eskom to increase emissions efficiency at the plant level.
Because of the size of the calculated carbon tax relative to the Post RE Offset carbon Tax, there is also no change to the environmental charge included in the generator bids in Phase Two, and therefore no change to dispatch. Because the tax is price neutral, there can be no change to consumer demand.
However, the transitional market structures being developed as part of the power sector reform process could be leveraged to change this outcome, provided the commitment to price neutrality is (at least slightly) relaxed. This possibility will be explored in a forthcoming Briefing Note.
Link to the full briefing note HERE
Author: Bryan Groenendaal
