Tuesday, April 23, 2024
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Africa: Carbon Tax – A Surprisingly Simple Contribution to Fighting #AfricaClimateCrisis

Reducing carbon emissions is critical for combating climate change. And one effective way to do this is through the use of carbon taxes.

Carbon taxes are among some of the most efficient policies in pricing carbon, particularly if employed at “choke points” – specific points in the production or supply chain where carbon taxes can be applied – at the upstream level. This is because it allows the process to reach the whole of the economy, without the need to focus on certain industries or sectors.

The lack of a robust tax policy framework that accounts for the environmental damage resulting from private investment means that companies have ultimately been free riding on the environment and society has been paying for that price by now being confronted with the adverse effects of climate change

An upstream carbon tax is simple to administer and can impact both the formal and the informal economies, a point which is particularly relevant for Africa where most countries are either middle- and low-income countries.

Carbon taxes can incorporate the environmental cost of doing business to a product’s final price. The environmental cost of doing business ultimately translates into the cost of the emissions released and waste produced because of a manufacturing process. That cost has been largely avoided or undervalued by corporates.

The lack of a robust tax policy framework that accounts for the environmental damage resulting from private investment means that companies have ultimately been free riding on the environment and society has been paying for that price by now being confronted with the adverse effects of climate change.

Failure to account for the environmental cost of doing business through a carbon tax also provides for the indirect subsidization of carbon intensive products. These products are at a competitive advantage because they have been using “standard” technologies and are part of the routine industrial functions.

A shift in the way society consumes and relies on energy products will require also a change in the valuation of energy forms. By internalizing the carbon equivalent externality via a carbon tax, a government is capable of equalizing consumption patterns by using cardon laden fuel sources as the pricing benchmark.

As a result, every additional ton of carbon in a particular fuel source is accounted for in the final price. Green and brown energy sources can hence compete in parity of conditions, in an environment where the least carbon intensive product receives the lowest price.

Consumers sensitive to the price difference, will seek to consume more of the low carbon fuels and products, fostering the green transition process. The mechanics are more pronounced in Africa where the proportion of low-income consumers is highest and therefore even a small price difference can cause a change to a consumption pattern.

The Africa Tax Administration Forum (ATAF) has recently released a carbon tax policy brief to guide African governments on how to best apply a carbon tax policy that is capable of conferring a whole of government approach. By this we mean how governments can act to establish a carbon price that equally burdens all segments of the economy.

The policy brief explores the key features in the design of a carbon tax that can meet the dual objective of raising revenues while conferring a positive effect on the environment. Beyond carbon tax, the brief also discusses the role of supplementary policies in achieving climate goals. For example, there is ample discussion concerning the need for countries to assess and eventually eliminate harmful fossil fuel subsidies, in line with the commitments assumed by African countries under the Glasgow Pact, the role of implicit carbon pricing in complementing explicit pricing approaches, and general remarks on measures to alleviate concerns around potential competitive disadvantages triggered from the implementation of a carbon tax.

African countries are also facing the increasing use of Border Carbon Adjustment (BCA) measures, like the European Union’s Carbon Border Adjustment Mechanism (CBAM). These measures add a carbon price to products imported into a country if the carbon price has not been added in the country of origin or production. This means that, if there is no carbon price in the country of origin, the destination country will add a carbon fee at the border upon import.