Emissions trading scheme for South Africa : opportunities and challenges
ENGLISH ABSTRACT: This research report aims to determine whether an emissions trading scheme or carbon tax is the most suitable market-based emissions reduction mechanism for South Africa, given its multiple environmental, social and economic objectives. Key factors considered in this comparison include: environmental effectiveness; economic efficiency; social welfare impacts; public finance considerations; administrative complexity and costs; and, finally, the relationship to global greenhouse gas reduction mechanisms. These factors are compared in the short and long term to determine which mechanism is most likely to deliver South Africa’s emissions reduction targets within the given time frames. The comparison of these factors involves a non-empirical literature review, followed by a rating of the mechanisms in order to distil a best fit in terms of the various aspects of an effective emissions reduction mechanism, taking into account the specific needs and conditions of South Africa. The research found that, in the short term, a carbon tax was best suited to the South African context. This is because of the fiscal certainty inherent in this mechanism, which provides clear price signals and a stable public income. However, the reasons for these comparative advantages over an emissions trading scheme relate to the long lead times and structure of the latter mechanism, which requires years of implementation and favours environmental effectiveness over economic efficiency. Further reasons include a lack of understanding and buy-in in terms of market-based mechanisms, a situation that favours familiarity over effectiveness in some instances. Taking these issues into account, the research shows that an emissions trading scheme is better suited to the South African context in the long term. Once properly implemented, this mechanism provides superior results in terms of the above-mentioned factors, and specifically in terms of environmental effectiveness and the potential for benefit through international integration. This research report concludes that the South African government has failed to take a long-term view of the mechanisms available for emissions reduction, choosing instead to implement a carbon tax, which favours economic growth at the expense of the environment and future generations. A general lack of understanding of the structures and opportunity costs of the two mechanisms necessitates an investigation by government of the applicability and structure of an emissions trading scheme in the South African context before market-based mechanisms can play an effective part in the future development of the country’s environmental regulatory regime.