In line with international trends and pressures the 2009 Budget proposals introduced a number of green taxes and further environmental tax measures. It seems that increasingly there will be a closer relationship between tax and environmental policy.
This year’s Budget announcements were foreshadowed by comments in the Sars and Treasury '2008 Tax Statistics' publication which states; “Increasingly, the tax system will also be used to help address negative environment externalities in particular climate change”. There is increasing international pressure on countries to reduce carbon emission; the United Nations has called on rich nations to forge a 'Global Green New Deal'. In particular the Group of 20 nations should commit at least 1% of GDP in the next two years to slashing carbon emission and emerging economies, including South Africa, should aim as far as possible for the 1% target (The Star 17 February 2009).
In addition to conventional regulation, two important policy instruments are used by governments to reduce carbon emissions; environmental or green taxes and emissions trading. Both of these were addressed in the Budget Proposals.
The first set of proposals relates to the creation of new, or increases in, green taxes. A tax of R3 per bulb will be imposed on incandescent light bulbs at the manufacturing level and on imports to encourage the use of compact fluorescent light bulbs. Further proposals include the levy on plastic bags increasing from 3c to 4c, increases in international air passenger departure tax and the existing excise duties on motor vehicles will be adjusted to take account of carbon emissions.
An OECD report (The Political Economy of Environmentally Related Taxes,2006) says that experience in the last decade has shown that green taxes are an effective and efficient instrument in environmental policy implementation. In addition, these taxes introduce a price signal that helps ensure that polluters take account for the environmental cost of pollution when making production or consumption decisions.
The obvious benefit of green taxes is that in addition to providing an incentive to reduce emissions, they can also serve as an important source of additional revenue. The report also states that in OECD countries these taxes raise revenue in the order of between 2 – 2.5% of GDP. In a report by the National Bureau of Economic Research in the United States (Environmental Taxes, 2008) it states that a tax reform that introduces new environmental taxes may have a 'double dividend' if it provides the duel gain of a cleaner environment and a more efficient tax system by reducing 'distortionary' taxes that discourage work effort.
An important downside of many green taxes is that the poor carry a relatively higher burden. However this can be addressed by using the additional revenue to reduce other taxes such as income tax on poorer households.
A concern with green taxes is the effect that they have on international competitiveness. For example, it is reported that American farmers are up in arms following a proposed 'cow tax' that penalises them for the harmful methane gases emitted by pigs and cows. It is feared that if introduced it would cause wide-scale closures at farms. Interestingly, the OECD report says that within the OECD countries there has not been a significant impact on the international competitiveness due to wide ranging exemptions from the taxes to the most energy intensive industries -the effect of these exemptions is that households and the transport sector carry most of the burden.
The Budget also contains proposals relating to carbon credits. Revenue earned from the trading of carbon credits will either be exempt or taxed as capital gains. It is also proposed that an incentive in the form of an additional depreciation allowance for investments by companies in energy efficient equipment is introduced.
Emissions trading and green taxes are close substitutes as policy instruments.
A number of industrial countries took on binding commitments to reduce their emission of greenhouse gases under the Kyoto Protocol in 1997. To achieve this, the clean development mechanism (CDM) was introduced which encourages joint participation between developed and developing nations.
South African businesses can participate by introducing projects to reduce emissions. The reduction of emissions is certified through the CDM and certified emission reductions (CERs) or carbon credits are issued. The carbon credits can then be sold. To clarify the tax treatment of carbon credits, the Budget proposed that income from the primary sale of carbon credits will either be treated as exempt income or capital gains tax. Secondary carbon credits will be treated as trading stock and taxed at normal income tax rates.
The Budget also proposes an additional depreciation allowance of up to 15 % on condition that there is documentary proof of the resulting energy efficiencies certified by the Energy Efficiency Agency.
The OECD report cited that developing an acceptance of green taxes is a key requirement for their successful introduction. This acceptance is linked to awareness, which can only be achieved through the provision of targeted information on the environmental issues at stake. It is hoped that, going forward, such information would be more accessible in the public domain. .
Regional Practice Head: Tax