Background

South Africa is a middle-income emerging economy with abundant natural resources including minerals (gold, iron ore, coal, platinum, and diamonds among others) and timber. It is mostly semi-arid with a vast interior plateau surrounded by hills and a narrow coastal plain. As one of the highest energy consumers in the world, South Africa is increasingly facing problems related to  electricity supply, leading at times to power cuts (as happened in 2008) and a big gap between growing demand for energy and limited generation capacity to meet it.  South Africa has many environmental concerns including climate change, water scarcity, pollution of rivers from agricultural runoff and urbanization, as well as soil erosion, desertification and air pollution. For example, a recent estimate on climate change effects on water resources suggests that South Africa may experience a 10% average reduction in rainfall, reducing surface water runoff by up to 50-75 per cent by 2025.

Overall Fiscal Profile

Since 1994, South Africa has made significant strides in economic and social development, with growth averaging at 3.3 per cent,  and per capita GDP growing by 1.2% on average between 2009 and 2013. Since 2010, the average fiscal deficit has amounted to 5 per cent of GDP; while government debt increased by 15 percentage points to 42 per cent of GDP. In 2013, the government scaled back expenditure in the budget, and undertook a trimming program for underspent allocations and reducing the contingency reserve in order to reduce the deficit to 3.1 per cent of GDP by 2015/16.

Policy and Legal Framework for a Green Economy

The government of South Africa has elaborated a number of policies and strategies in support of the green economy and the country’s sustainable development.

After hosting a Green Economy Summit in 2010, with the goal of laying out a blueprint for a Green Economy Plan, a Green Economy Accord was established to forge a partnership between the government, the business community, trade unions and civil society on developing a green economy in South Africa. The Accord provides for R22 billion (about US$2 billion) in government funding for green projects over five years, through the Industrial Development Corporation. In addition, R3 billion (about US$ 300 million) in funding will be provided to support local manufacturing of green products and components.

This green focus is aligned with the New Growth Path, the government’s blueprint for economic growth and job creation, which identifies five job drivers, including the opportunities offered by the green economy. The New Growth Path aims to create 400,000 jobs by 2030 in manufacturing, construction, and operations and maintenance of low-carbon infrastructure. In addition, the National Development Plan 2030, the long-term development strategy for South Africa, includes targets to generate 20,000MW of electricity from renewable energy sources by 2030; to introduce a nation-wide carbon tax by 2030; and to increase public investment in agricultural technologies and sustainable farming practices.  Moreover, the National Strategy for Sustainable Development and Action (2011 to 2014) was endorsed in 2011 and outlines 113 interventions that could be monitored for progress with specified indicators. One of the strategic objectives identified within the NSSD is movement towards a green economy, thus providing movement forward in terms of measuring progress with newly identified.

Fiscal Measures for a Green Economy

According to a UNEP study of South Africa’s green economy, by allocating 2 per cent of GDP to green economy sectors, South Africa can reap many benefits including: 737,000 created jobs, crop yield can increase by 23.9 per cent, amount of land restored can increase by 46.4 per cent.

South Africa has already adopted a number of fiscal incentives that promote a Green Economy that have been introduced  in the past decade. Many levies and charges exist including a levy on plastic bags, a charge on electricity, filament lamps, and a vehicle tax based on engine capacity and level of emissions. The charge on electricity, in particular has been increasing. Under the National Electricity Regulator of South Africa there will be a price increase of 8 per cent per annum from 2013-2018.

In 2009, environmental taxes reached ZAR 26.4 billion (US$ 2.54 billion), equivalent to 4.2% of total tax revenues. Fuel levies, in particular, have been increasing, amounting to 43.6 billion ZAR, as of 2013 and signifying an 8.3% increase from the previous year.  In 2013, an increase of 23 per cent on fuel levies occurred, of which 8 cents were allocated to the Road Accident Fund. In 2013, 96 cents per liter of diesel and petrol was collected for the Road Accident Fund, which seeks to compensate damages occurred through motor vehicles through the levy. Other funds collected by the levy are distributed to other sectors, such as the provision of staple food goods to the poor. In 2014, levy prices are expected  to increase around the country.

South Africa established a US$ 7.5 billion fiscal stimulus package in 2008, during the financial crisis, that was in effect for three years. The package dedicated 11 per cent of its value (US$ 825 million) to the environmental sector. In 2012, a national Green Fund was established with an allocation of ZAR 800 million (US$ 76.9 million) over a three year period to finance various environmental initiatives that demonstrate innovation and scaling up of the green economy . The Fund has been created to support green economy policy coherence and coordination, as well as development towards a national green economy vision.

Other fiscal measures for the green economy in South Africa include use of  feed-in tariffs (FITs) and the possible introduction of a carbon tax. Feed-in-tariffs were introduced in 2008 as a means of stimulating investment in renewable energy generation. Since then, the Renewable Energy Independent Power Producer Programme, a public procurement program introduced in 2011 places a ceiling tariff level on renewable energy and replaces the FiTs.  In terms of reducing the impact of fossil fuels, the Ministry of Finance announced a phased approach for the introduction of a new carbon tax. The first phase, from 2015 to 2019, will tax actual carbon emissions at a rate of 120 rands (US$11) for every tonne of carbon emitted above a 60 per cent threshold (World Bank, 2018). In the second phase, from 2020 to 2025, the tax rate would increase by ten percent a year for the following six years. The government projects that the tax could generate revenues of between ZAR 8 (US$ 0.755) billion and ZAR 30 (US$ 2.83) billion a year and could cut emissions by 34 per cent by 2020 and 42 per cent by 2025. However, implementation of the carbon tax has been delayed repeatedly. It is currently planned for June 2019. Moreover, the increase of the carbon tax rate to 2022 will now be the amount of consumer price inflation plus two percent annually, whereas after 2022, only inflationary adjustments are planned.

Fossil Fuel Subsidy Reform

South Africa has fossil fuel subsidies in place for producers and consumers that are applied through fuel price controls, electricity access programmes and regulations. On the producer side, the government provides Eskom, the national electricity utility, and municipalities with a capital subsidy, valued at R2900 (US$ 280) in 2003 per household connection and an operating subsidy of R6.3 billion (US$ 600 million) in 2014-2015. On the consumer side, the government provides a direct subsidy to households under the Free Basic Services programme, which is targeted at the 59% of households with an income of R2300 (US$ 222) or less per month. The subsidy is in the form of a package of free basic services valued at R293.03 (US$ 28) per month and covers water, sanitation, electricity and waste removal.

A zero rate VAT is applied to petrol and diesel, which are subject to a fuel levy, and to illuminating paraffin. The VAT cost the government R15, 914 million (US$1.5 million) in the year 2011-2012. Moreover, there have been serious externality costs from accidents and deaths as a result of ingestion and pollution through using inefficient and dangerous appliances with the fuel. The government introduced a diesel refund scheme in 2000. The scheme aims to address international competitiveness concerns of mostly primary and offshore economic activities, including agriculture, forestry, mining, fishing and diesel-powered electricity generation of 2000 MW or more.

Additional Reading

Department of Energy, 2010. Integrated Resource Plan for Electricity 2010-2030 Retrieved from: http://www.doe-irp.co.za/content/IRP2010_updatea.pdf

Department of Environmental Affairs, Republic of South Africa (2014). Policy Brief 1 The Green Fund: Establishment, Process and Prospects. Retrieved from: http://www.sagreenfund.org.za/SiteCollectionDocuments/GF%20Policy%20Brief.pdf

OECD, 2013. Economic Surveys: South Africa. Retrieved from: http://www.treasury.gov.za/publications/other/OECD%20Economic%20Surveys%20South%20Africa%202013.pdf

Republic of South Africa, 2011. National Strategy for Sustainable Development and Action Plan. Retrieved from: https://www.environment.gov.za/sites/default/files/docs/sustainabledevelopment_actionplan_strategy.pdf

UNEP, 2013. Green Economy Modelling Report of South Africa. Retrieved from:  http://www.unep.org/greeneconomy/portals/88/Modelling%20Report%20SA/SAModellingReport.pdf  

World Bank (2018). State and Trends of Carbon Pricing 2018. https://openknowledge.worldbank.org/bitstream/handle/10986/29687/9781464812927.pdf?sequence=5&isAllowed=y