The Dividends from a Revenue Neutral Tax on Coal in South Africa

South Africa is a significant contributor towards CO2 pollution on the African continent and authorities have started to examine different approaches available to manage the country’s extensive resource base. In this regard, a concern towards sustainable development in South Africa is the current levels of carbon dioxide (CO2) pollution in the country. Because the country is endowed with a significant portion of the world’s coal reserves, this natural resource is used relatively cheaply to supply in more than 75 percent of the country’s energy needs. Even higher on the list of social preferences in South Africa, is the problem of unemployment. Because the country has a high unemployment rate (28%), which has been the subject of numerous research and policy debates in the country, the notion of a possible “double dividend” that currently features strongly within the European research agenda could also be applicable to the South African market and the possibility of the achievement of such a benefit should be investigated. The attainment of a double dividend would allow the South African government to reduce CO2 emissions while the environmental tax revenue could be used to reduce the cost of labour, and thus decrease unemployment. Although the notion of a double dividend seems attractive, economic literature indicates that the double dividend will only occur in certain circumstances, of which the existence of current market distortions, caused by existing taxation measures, seems to be a necessary condition. Further, in the case where a lower level of unemployment needs to be achieved, it is also necessary for the labour market to react positively to lower real labour costs. Because the current tax system in South Africa is structured such that most of the tax burden falls on labour the aim of this research is to determine whether a fiscal reform that introduces a revenue neutral tax on the use of coal, will result in an increase in the overall welfare of South African citizens. We test this with an applied general equilibrium model of the South African version of the ORANI-G model. The model distinguishes between 45 sectors of production in South Africa, which includes the coal sector. 14 different households are distinguished along income groups, while capital, labour and land are included as primary factors of production. Distinction is also made between 4 different types of labour. Because of the high level of unemployment in South Africa, we assume a short-run closure in the model that allows the level of employment to adjust in response to a policy shock, while capital and land remains fixed. Because the industries that make intensive use of coal are capital and land intensive the tax burden on capital and land is significant.