Putting a Price on Carbon

1. Putting a Price on Carbon 2009 Climate Summit March 2009, Midrand Michael Goldblatt

2. General Response • Very useful starting point for the debate in South Africa • Sound review of available research in SA and international experience • Key decision and design elements outlined • Discussion needs to be moved out of the corridors of National Treasury • Useful research agenda presented • Clarity in the discussions is crucial because of the huge vested interests (regulators and regulated), misconceptions, large fiscal impacts (5% of national revenue), competitiveness impacts • Map out a discussion process • Clarify relationship to SA negotiating position, contribution to post-2012 mitigation efforts and global carbon markets

3. Carbon Tax • Modelling • Valuable review of the pertinent work conducted in SA • Would like the model drivers and assumptions to be more transparent • Difficult in a paper of this nature but needed • Tax incidence is not sufficiently explained or analysed (market structure) • Practical approaches and innovative ideas with respect to tax setting • More detailed analysis required – concerns with free-rider problems in the context of an effective ‘duopoly’ of emitters • Use of revenue • Interesting insights from the modelling with respect to distributional impacts • Greater detail on options required • Poverty reduction and mitigating tax impacts • Useful options emerging internationally (USA, Australia…) • Relationship to fiscal policy important • Carbon tax is a declining revenue stream • Flexibility is hard in the context of fiscal requirements • Some differences of opinion over subsidies to firms unable to respond • Why keep them in the system? • Agree in large measure with the policy and design issues outlined • Relationship to global carbon markets

4. Emissions Trading • Again, very useful starting point and laying out of the key issues and debates • Dynamic efficiency bears more thought and discussion. • Relates to many aspects of design such as system stability, cap setting etc. • Market structure crucial • As with tax. Needs more analysis and discussion. Affects costs pass through, gaming/market power, market control requirements etc.. • Need more insight into price pass through and incidence • Target setting • Further lessons would be valuable • Some mixed messages • Pragmatic discussion on lead times and information revelation • Our regulators need to appreciate the lead times and set well defined and clear policy development processes • Difference of opinion on information revelation. Believe that this will only occur through regulation (cf. country studies). Australian process of reporting phase first is useful • Linkages to PCP understood and interesting to consider • Some significant concerns through related to Eskom’s interests and the likely changes in the power price cycle

5. General ‘Critiques’ • Seen in the context of very useful research papers • Some confusion between the relative administrative and information requirements of a tax vs. emissions trading. • There is probably less difference than suggested • Similarly – there are likely to be very similar price impacts of both instruments • The incidence of these impacts needs to be better understood as well as impacts on poor households • Revenue recycling needs to be considered under ET as with tax • Similarly – scheme stability is equally important/unimportant under both approaches • Analysis of dynamic impacts and which instrument or approach introduces the best dynamic incentives • Needs to be seen in the context of investment paths and technology transfer • Some conflicts within the papers • Impacts on consumer behaviour, transport and urban planning • ‘Principal- agent problem’ (who makes the investment decision) • Will be increasingly important

6. Future Research Agenda • Much of the agenda usefully laid out in the papers • Possibly greater attention to • Tax incidence • Market structure • Relationship to global carbon markets • Impacts on SA ability to receive carbon revenue • ‘Fundamental’ research and analytical research. • Fundamental: elasticity of demand, substitutability, technology transfer and turnover… • Analytical: market structure, global markets, revenue use • Eskom • Government has to ensure that Eskom information and planning is revealed (ISEP and others) • Eskom is 100% state owned – affects fiscal and scheme design considerations

7. Future Research Agenda • British High Commission Project • Comparison between instruments (and combinations) • Relationship to global carbon markets • Tax setting mechanisms • Tax incidence (analytical not modelled) • Market structure considerations • Revenue recycling and poverty alleviation • Legislative requirements • Administrative requirements and costs • Recent ET schemes (CPRS, WCI..) • Discussions with large emitters (with ERC and others)

8. Blank slide for graphics