An industry lobby group comprising large mining groups and mineral processing companies is cautioning against the proposed introduction of a carbon tax in South Africa until South Africa has fully charted its abatement potential and the costs implications of implementing its renewable-energy heavy power generation plans.
The Industry Task Team on Climate Change (ITTCC), which includes such corporate heavyweights as Anglo American, AngloGold Ashanti, BHP Billiton, Exxaro, PPC, Rio Tinto and Xstrata, would also like government to make transparent the implicit price that has already been attributed to carbon emissions through the adoption of South Africa’s Integrate Resource Plan (IRP2010) on electricity, which was promulgated early last year.
The IRP2010 indicates that South Africa will introduce 17 800 MW of new renewables capacity between 2010 and 2030, representing 42% of all the capacity expected to be added over the 20-year period.
The National Treasury released its first carbon tax discussion document in December 2010 and is due to release a revised discussion paper in the coming months. However, National Treasury spokesperson Bulelwa Boqwana tells Mining Weekly Online that there document will not be released before the February 22 Budget, but that there will be communication on the issue thereafter.
In the initial paper, the National Treasury comes out in favour of a direct tax on carbon emissions, which it says will “impose the lowest distortion” on the economy. A tax of R75/t of carbon dioxide-equivalents (CO2e), increasing to around R200/t CO2e over time, “would be both feasible and appropriate to achieve the desired behavioural changes and emissions reduction targets”.
But the ITTCC’s Mike Rossouw, who is also chairperson of the Energy Intensive Users Group, argues that there has been inadequate fact-based research on the abatement potential of the South African economy to make the carbon tax leap. He argues further that there has been no recognition by government that South Africa has already introduced an unspoken carbon price through the IRP2010.
Research conducted on behalf of the ITTCC shows that the cost of the transition to the proposed new generation mix could be substantial.
It suggests that the IRP2010 includes an implicit carbon price of R142/t by 2020, falling to around R129/t by 2030, based on an assumption that the generation costs associated with renewables are likely to fall as the industry matures.
The 2020 and 2030 figures include the R27/t environmental levy that has already been introduced by the National Treasury, while the balance is calculated using comparisons between the prevailing levelised cost of coal-fired production against a range of other sources – conventional and unconventional gas, nuclear, wind, solar photovoltaic (PV) and concentrated solar power (CSP).
The results are premised on a rand per megaWatt-hour (R/MWh) rate for coal of R485, as compared with R489/MWh for shale gas, R834/MWh for liquefied natural gas, R700/MWh for nuclear, R642/MWh for wind, R1 065/MWh for solar PV and R1 383/MWh for CSP.
Rossouw acknowledges that the prices levels selected can be contested, but he stresses they are based on the latest available international benchmarks. He adds that the analysis serves to demonstrate that South Africa has already started to attribute a price to carbon. “What we are calling for is for that price be made transparent.”
Where South Africa is far less advanced, the ITTCC argues, is in developing an understanding of the country’s abatement potential and the costs associated with such activities. Theoretically, this abatement potential is likely to be found in areas such as improved building and industrial efficiencies, in changes to land-use patterns and transport solutions, as well as in the introduction of new power generation solutions and even carbon capture and storage.
A number of other countries, including Australia, which has opted to introduce a carbon tax, have already conducted research into both the potential and the costs of pursuing such abatement opportunities.
No such formal assessment has been made in South Africa, however. “Until such fact-based research is available, we believe it would be unwise for government to begin introducing a carbon tax,” Rossouw avers.
The ITTCC also warns that, for South Africa, energy, climate change and carbon pricing cannot be considered in isolation, owing to the fact that about half of South Africa’s yearly emissions of about 436-million tons of CO2e arises from within the power generation sector. Therefore, reducing carbon flows and intensity is directly related to the power generation choices being made and how that will be funded.
The group warns that the price path associated with the IRP2010 not only includes an implicit carbon price, but is also suggestive of domestic power prices rising from the lowest globally to among the highest.
These “runaway” power prices are already having a negative impact on the competitiveness of South Africa as a mining and minerals beneficiation investment destination and should a carbon tax be added that competitiveness could be undermined further.
The ITTCC shows that while mining’s contribution to gross domestic product (GDP) declined by 1% over the last decade, the growth in mining value added to GDP has been rising strongly in other countries. Between 2001 and 2008, the value added to GDP by mining in China rose 19%, it was 12% higher in Chile, 10% in Russia, 8% in Indonesia, 7% in India, Colombia, Australia and Brazil and even 4% in Venezuela.
South African industrial electricity prices are rising faster than elsewhere and are becoming among the most expensive globally, the ITTCC says. To emphasise the point, it highlights a survey of seven energy intensive companies, which shows that power as a percentage of produciton costs has already surged and will continue to rise strongly.
By 2015, some of these companies are facing the prospect that power will have risen from 25% of production costs in 2007 to over 50%. On the lower end of the scale those reporting that power represented 5% in 2007 believe that electricity will comprise more than 15% of produciton costs by 2015.
“South Africa still has significant geological prospects, but the contribution of the South African mining industry to GDP has already declined over the last decade and prospects could deteriorate further unless efforts are made to moderate the rate of increase in power prices,” Rossouw warns.
Should a carbon tax of R100/t be included, Rossouw warns that there is a real risk that energy costs will make it prohibitively expensive to produce commodities such as ferrochrome or to smelt silicon.
The main objective of the introduction of a carbon tax is also not immediately apparent. “Is the aim to internalise the cost of externalities, or is the objecive to achieve an explicit target emissions reduction target through behaviour change,” he asks, adding that such certainty is criticial before any carbon tax is introduced.