South Africa's Carbon Tax: Balancing Climate Action and Economic Development

South Africa has committed to becoming a low-carbon and climate-resilient nation by signing the UN Framework Convention on Climate Change (UNFCCC). The country set greenhouse gas (GHG) emission reduction targets of 34% and 42% by 2020 and 2025, respectively. While these are ambitious, the gesture is commended. A carbon tax was introduced in 2019 and is expected to increase costs to many companies that rely on electricity to generate economic activities. More than 70% of South Africa’s electricity is produced using coal, the main polluting source in the country. This means that there are few alternatives for those that wish to avoid the carbon tax and use cleaner energy in their economic activities. The tax will thus increase production costs, and will effectively be passed on to consumers. Overall consumer welfare will be negatively affected by the increase in prices arising from the carbon tax. Another challenge is that the policy applies to domestic products, but there is no equivalent policy to address imported products that may have been produced using similar methods. This will make domestic products uncompetitive, while imported products may undermine the whole policy. Producers of domestic products that directly compete with imports will also be negatively affected. This is a point where international treaties on trade and the environment are likely to be in conflict. If South Africa and others that implement environmental policies introduce measures to discourage imports produced via polluting means, they may contravene the World Trade Organization (WTO) principle of nondiscrimination. This is despite such measures being supported under the UNFCCC. In addition to this potential conflict, the implementation of environmental policies tends to place short-term restrictions on the use of resources that can drive economic growth. In the case of South Africa, coal is an important resource that anchors the entire economy. Developing countries that still struggle with modest economic growth, high unemployment and other socio-economic challenges can hardly afford such restrictions. It is therefore important to find a balance between international treaties and domestic policies. Developing countries that wish to implement environmental policies must be allowed a period of transition. They must also be supported by building their capacity to deal with the impacts of climate, and ensuring that they are climate resilient.