The Distributional Impacts Of A Carbon Tax In The Mining Sector

Most policy decisions produce winners and losers in the economy. Companies and entire sectors can find themselves better or worse off as a result of new or changed regulation.

Even though the ultimate economy-wide impact of a policy may be positive in the long run, the negative impact of short-term adjustments should not be underestimated. Unmitigated, these can have debilitating impacts on the economy and erode the effectiveness of the regulation. The proposed carbon tax is one such policy; a potentially powerful tool with serious short-term distributional impacts that threaten the passage of the regulation and the stability of exposed sectors such as mining.

That a carbon tax is a worthwhile policy measure has strong theoretical foundations. The ‘polluter pays’ principle holds that companies should be made to account for their negative impacts (what economists term ‘externalities’) and factor a carbon price into their decision-making. This is expected to lead to an economy-wide reduction in emissions and the move towards a lower-carbon economy. However, the complexity of the mining sector means that the short-term distributional impacts that a carbon price will likely cause need to be built into its design to ensure its long-run effectiveness.

This complexity stems from the following realities of mining in South Africa in relation to energy use and carbon emissions; often, geology dictates that shafts are going deeper and farther to achieve the same level of output i.e. greater energy used for a given output level, which makes target-setting and benchmarking difficult.

The majority of emissions from underground mining are embedded in electricity use, and there is limited (albeit not yet fully exhausted) potential for energy efficiency or large-scale fuel-switching, especially in the short term.

The emissions profile of operations can vary between different commodities, types of mining, sites and even shafts, rendering a generic sector-wide approach to designing a carbon tax irrelevant.

Prices for many minerals and metals are internationally determined, thereby limiting the ability of South African producers to pass on the cost of the carbon tax to the customer, leading to international trade competitiveness concerns.

Through continued engagement with companies in the mining sector on these distribution issues, government can improve the design of the carbon tax and ensure its effectiveness in the long run. This should form part of the agenda for 2014, when government is expected to update the design of the tax and produce draft legislation for implementation.