Green and health taxes could clean our economy

The Intergovernmental Panel on Climate Change (IPCC), which is the United Nation’s body for assessing the science related to climate change, has been instrumental in increasing the awareness on the climate change impacts. It has consistently warned that a “no action” scenario against changing climate will be detrimental to the current and future generation.

Green and health taxes could clean our economy but their introduction is inopportune

South Africa is ranked among the top 15 emitters of greenhouse gas emissions (GHG) per capita in the world, making it the most polluted non-oil producing nation. Parallel to growing emissions, the country is faced with an increasing obesity problem where 28.3 percent of the population was considered obese by the World Health Organization (WHO) in 2016.

The South African government has responded to these environment and health issues by enacting taxes, that is the carbon tax and health promotional levy (HPL), to addressing these problems. The HPL came into effect on 01 April 2018 at a rate of 2.1 cents per gram of sugar per 100 milliliters of a beverage. In the budget speech of 2019, the Minister of Finance announced a 5.24 percent increase in the sugar levy. He also affirmed that the carbon tax will come into effect in June 2019 at a rate of one hundred and twenty rands per ton carbon dioxide equivalent (R120/tCO2-eq).

The introduction of various taxes also provides government with alternative streams of income, even though government has declared that there will be recycled back into the economy. The 2018 tax revenue report released by the South African Revenue Services showed that green taxes have increased to R11.2 billion, which is equivalent to a one percent share in total tax revenue collected by government in the country.

Benefits of green and health taxes

The introduction of a carbon tax is aimed at changing the behavior of emitting industries and incentivize them to make environmental-friendly investment decisions in the future. The carbon tax will form part of a suite of policies created to help the country mitigate its GHG emissions by 42 percent below business as usual scenario in 2025. This is a GHG reduction target committed by South Africa under the Paris Climate Agreement in 2015.

Some studies[1][2] have assessed the social and economic impacts of introducing environmental taxes and they confirm that a carbon tax would be effective in mitigating emissions. They estimate a reduction in GHG emissions of up to 38 percent relative to business as usual (Baseline) scenario. Moreover, these studies found that majority of sectors, except coal-generated electricity, petroleum, metal, steel and transport services, will not be significantly affected by the carbon tax because of tax-free allowances proposed in the carbon tax policy. The agricultural sector is one of the sectors that would be less impacted by the introduction of tax conditional the government recycles the revenue.

In terms of the HPL also known as the sugar tax, it is designed to  curb the consumption of sugar, thus help to reduce the  the rise of  obesity. The benefits of the HPL would presumably include longer life expectancy and less pressure on the public health bill as the government seeks to reduce the overall public spending.

The use of taxes to internalize the cost of damaging the environment is not unique to South Africa as many countries such as Finland, Norway, Sweden and others have implemented the carbon tax to mitigate emissions. Similarly, countries such as Mexico, the UK, and some states in the United States have also introduced sugar taxes.

Timing of taxes coincides with weaker economic conditions in South Africa

The government declared that the introduction of the carbon tax, health promotion levy and other environmental taxes are not for revenue generation purposes but to modify the behavior of citizens and industries in order to preserve the environment and promote healthy living. Though the intent behind the introduction of taxes is noble, their implementation will lead to some structural adjustment costs in the economy as industries and people changes their behavior. Unintentionally, poor households will bear bigger proportion of the impact as industries will pass these costs to consumers.

Based on the aforementioned socio-economic studies, the adjustment costs could range from 0.9 to 1.3 percent decline in real GDP growth relative to the business as usual (Baseline) scenario over the long run. Policymakers view these adjustment costs as minimal and justifiable to achieve a bigger goal of preserving the environment for the current and future generations. However, such adjustment costs could drain the economy that is currently experiencing sluggish growth and job losses.

Between 2014 and 2018, the real Gross domestic product (GDP) grew by an annual average of 1.2 percent whereas the employment leapfrogged by an average of 2 percent per annum. The National Treasury anticipates the GDP growth to remain modest at an annual average of 1.7 percent in the next three years. Within the agricultural sector which employs 845 000 people, external shocks such as the 2015 and 2017 drought and disease outbreaks (e.g. listeriosis, Avian Influenza) have collectively limited the growth rate in agriculture to an annual average of 1.43 percent between 2014 and 2018, thus pruning more than 35 000 jobs in the sector.

The current conditions in agriculture and the economy at large makes it too vulnerable to withstand any new external shock such as the introduction of carbon tax. This is can be illustrated with the sugar industry that lost R4.6 billion in value in the 2018/2019 season, with approximately R1.35 billion attributed directly to the HPL. This loss is value is likely to affect economic activity in deep rural areas and thus impede the creation of thriving rural economies as outlined in the National Development Plan. [3].

Getting the balance correct

The importance of mitigating GHG emissions cannot be overemphasized and a “no-action” approach is not a viable option. However, addressing the environmental and health issues should also consider the structural adjustment costs of transforming the current economy into cleaner energy sources and healthy-living citizens. The adjustment costs are neglectable when the economy is growing at healthy rate such as the rate proposed in the National Development Plan (NDP), however, in the current sluggish growth the economy might not afford the adjustment costs. A mistimed implementation of green and health taxes will lead to industry productivity loss consequently shedding more jobs and decaying the ability of agricultural industry to generate foreign earnings as South Africa’s commodities become less competitive in the international markets.

[1] Ntombela, S.M., Kalaba, M. & Bohlmann, H. 2018. A general equilibrium analysis of the effects of carbon tax policy on South Africa’s agricultural industries. Ph.D Thesis, University of Pretoria, South Africa.

[2] Van Heerden, J., Blignaut, J., Bohlmann, H., Cartwright, A., Diederich, N. & Mander, M. 2016. The economic and environmental effects of a carbon tax in South Africa. A dynamic CGE modeling approach. SAJEMS 19(5): 714-32

[3]Mhlaba, S. 2019. Numbers don’t lie.

Green and health taxes could clean our economy
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