Carbon tax may push cost of electricity through the roof

By Sherilee L Lakmidas

Johannesburg, June 28 (BusinessLIVE) – SA’s proposed carbon tax could treble Eskom’s coal costs and the South African power utility has warned that any increase in costs due to the implementation of the green tax would be passed on to the consumer.

“We are not in a position as a company to absorb these costs,” said Eskom chief executive Brian Dames. “It will be a full pass through to SA consumers.”

Speaking just before the release of the utility’s annual results earlier this week, Dames said: “We should be cognisant of that impact on electricity prices and the economy and therefore jobs.”

SA is considering the implementation of a carbon tax on fossil fuel inputs as part of new measures to curb carbon dioxide emissions.

This follows plans by the South African government to reduce greenhouse gas emissions by 34% by 2020 and 42% by 2025.

SA is the world’s 13th biggest emitter of carbon dioxide, emitting 451-million tons a year.

A draft carbon-tax policy was approved by Cabinet in December where the government outlined that it was considering a direct carbon tax on actual measured emissions, a fossil-fuel input tax based on carbon content and an output tax applicable to emitters.

Finance Minister Pravin Gordhan said in this year’s budget review that the carbon tax’s form and introduction schedule will be released in next year’s budget.

Treasury said a tax of 75 rand per tonne of carbon dioxide, which could increase to about 200 rand per tonne of carbon dioxide, would be “feasible and appropriate” to achieve reduction targets.

Ian Hall, chairman of the steering committee for SA Coal Road Map, said last week at the Coaltrans conference that the introduction of a carbon tax could treble Eskom’s coal costs to 300 rand or 400 rand a tonne.

The proposed carbon tax also comes on top of an environmental levy of 2c/kWh, which became effective in July 2009. This levy was increased to 2.5c/kWh from April this year.

In the past financial year Eskom reported that primary energy costs rose 23% to 35.8 billion rand. While 25 billion rand of that was spent on procuring coal, five billion was attributed to the environmental levy.

Eskom said it has put forward its case to government arguing that the tax could impact the economy.

Auditing firm Deloitte has estimated the proposed carbon tax would cost Eskom about 37 billion rand a year based on a tax rate of 165 rand/ton of carbon dioxide emitted, which is also in line with the tax rate used in the draft integrated resource plan for electricity of 2010.

Eskom emitted about 220-million tonnes of carbon dioxide last year.

The utility’s financial director Paul O’Flaherty told reporters that for every 2 billion rand increase in Eskom’s cost there would be a 1c/kWh increase in the electricity price.

Electricity prices have already increased by about 25% to 40.3c/kWh and are set to increase by a further 25% for a further two years.

Based on Deloitte’s estimate and O’Flaherty’s conversion, a 37 billion rand increase in costs would translate into an 18.5 cents increase in tariffs. That is on top of the increases already coming consumers’ way.

In its annual report Eskom said while a carbon tax would penalise carbon emissions it might not bring about the technology choice that was required to address SA’s emissions.

“The greatest concern is that the use of domestic regulatory or tax instruments places the financial burden on domestic consumers,” Eskom said.

It suggested a robust macroeconomic study on the effect of such a tax on the economy.

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