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Border Tax Adjustments to Negate the Economic Impact of an Electricity Generation Tax

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  • Reyno Seymore

    ()
    (Department of Economics, University of Pretoria)

  • Margaret Mabugu

    ()
    (Department of Economics, University of Pretoria)

  • Jan van Heerden

    ()
    (Department of Economics, University of Pretoria)

Abstract

In the 2008 Budget Review, the South African government announced its intention to levy a 2c/kWh tax on the sale of electricity generated from non-renewable sources. This measure is intended to serve a dual purpose of helping to manage the current electricity supply shortages and to protect the environment (National Treasury 2008). An electricity generation tax is set to have an impact on the South African economy. However, several instruments have been proposed in the literature to protect the competitiveness and economy of a country when it imposes a green tax, one of these remedies being border tax adjustments.This paper evaluates the effectiveness for the South African case, of border tax adjustments (BTAs) in counteracting the negative impact of an electricity generation tax on competitiveness. The remedial effects of the BTAs are assessed in the light of their ability to maintain the environmental benefits of the electricity generation tax. Additionally, the the Global Trade Analysis Project (GTAP) model is used to evaluate the impact of an electricity generation tax on the South African, SACU and SADC economies and to explore the possibility of reducing the economic impact of the electricity generation tax through BTAs. The results show that an electricity generation tax will lead to a contraction in South African gross domestic product (GDP). Traditional BTAs are unable to address these negative impacts. We propose a reversedBTA approach where gains from trade are utilised to counteract the negative effects of an electricity generation tax, while retaining the environmental benefits associated with the electricity generation tax. This is achieved through a lowering of import tariffs, as this will reduce production costs and thereby restore the competitiveness of the South African economy. The reduction in import tariffs not only negates the negative GDP impact of the electricity generation tax, but the bulk of CO2 abatement from the electricity generation tax is retained.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201003.

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Length: 19 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:pre:wpaper:201003

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  1. R. Seymore & P. D. Adams & M. Mabugu & J. H. van Heerden & J. Blignaut, 2009. "The impact of an electricity generation tax on the South African economy," Working Papers, Economic Research Southern Africa 139, Economic Research Southern Africa.
  2. Ben Lockwood & John Whalley, 2008. "Carbon Motivated Border Tax Adjustments: Old Wine in Green Bottles?," NBER Working Papers 14025, National Bureau of Economic Research, Inc.
  3. Meade, James E, 1974. "A Note on Border-Tax Adjustments," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(5), pages 1013-15, Sept./Oct.
  4. Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, Springer, vol. 24(2), pages 137-164, October.
  5. Ismer, R. & Neuhoff, K., 2004. "Border Tax Adjustments: A feasible way to address nonparticipation in Emission Trading," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0409, Faculty of Economics, University of Cambridge.
  6. Warwick J. McKibbin & Peter J. Wilcoxen, 2002. "The Role of Economics in Climate Change Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 16(2), pages 107-129, Spring.
  7. S Roberts, 2000. "Understanding the Effects of Trade Policy Reform: The Case of South Africa," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 68(4), pages 270-281, December.
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