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South Africa, Chile need cheap alternative to carbon price: officials

31 May 2022 Cristina Brooks

Chile and South Africa seek cheap policy options to decarbonize their power sectors because their carbon taxes are too low to be effective.

Government and state power officials in South Africa and Chile pulled back the curtain on the problem at a workshop during a 24 May event hosted by the World Bank Group and the International Emissions Trading Association.

The World Bank Group, the International Carbon Action Partnership, and the International Energy Agency (IEA) are preparing to publish a joint study on carbon pricing policies in the power sector.

In the run up to the study's publication, World Bank's Carbon Markets and Innovation unit Practice Manager Wendy Hughes said carbon prices or taxes were being considered in emerging countries including Indonesia, Turkey, and Botswana, but needed to be tailored for markets with unstable access to electricity.

Power services in emerging markets are often low-quality and unreliable, according to a blog by international development consultancy Oxford Policy Management.

Using carbon pricing to spur low-carbon spending in poorer countries is not as effective as in high-income countries, said Hughes. Networks must be developed before power investments take place.

Also, electricity tariffs in emerging countries are not always cost-reflective, and consumers and investors may not respond to carbon pricing signals.

Questions linger over whether carbon taxes can drive state-owned monopoly power suppliers to invest in decarbonization.

"About half of the emissions of the electricity sector come from specifically state-owned enterprises. And one of the questions is: to what extent is carbon pricing the right, cost-effective tool to incentivize?" asked Philippe Benoit, an adjunct senior research scholar at Columbia University's Center on Global Energy Policy.

Power plants are the most polluting facilities operated by state-owned enterprises, accounting for 85% of direct emissions in some high-emitting countries including China and Russia, according to a Columbia University report authored by Benoit and researcher Alex Clark.

State-owned enterprises might respond to carbon prices internally, said IEA Energy and Environment Division Head Tom Howes.

At least carbon price revenues can be used to finance low-carbon power upgrades or redistribute their costs, he said. "There's a growing need: governments need revenues, and in practically every carbon pricing place you look at, it's raising millions, if not billions in revenues across the broad tax base … [Governments are] able to use those revenues in a very targeted manner, whether it's to compensate households or to compensate utilities, or to finance R&D in green tech," said Howes.

South Africa to rely on foreign investors

South African state-owned utility Eskom leans heavily on coal-fired power, which makes up 88% of its 54 GW of installed capacity, said Maddy Rambharos, Just Energy Transition general manager at Eskom Holdings.

South Africa's High Court in March ordered the government to cut pollution at its power plants. The utility was named the largest emitter of sulfur dioxide in 2021 by the Centre for Research on Energy and Clean Air.

While Eskom in 2020 established an office to help it plan to reach net-zero by 2050, and it targets shutting down 22 GW of coal-fired capacity by 2035, it has also faced power supply problems reportedly caused by insufficient investment and debt.

This led to rolling blackouts in 2019 and 2020, according to Oxford Policy Management Programme Director Simon Trace.

At last year's COP26 climate summit, wealthy countries pledged to finance Eskom's shift away from coal power and coal producer Sasol's from mining, under the International Just Energy Transition Partnership.

South Africa's government rolled out a carbon tax in 2019, and this January increased it to about $9 per metric ton (mt) of CO2-equivalent (CO2e).

The rate remains lower than the $40-$100/mt CO2e experts say will drive greening, according to former Research Advisor at the Grantham Research Institute on Climate Change and the Environment Patrick Curran.

But with its economy dependent on coal mining, South Africa's situation is different to Europe's. "If you had to do something like an Emissions Trading System, it really wouldn't work if you included all of these players, so what we would have to look at is what we would call a mix of instruments," said Rambharos. Carbon pricing might be effective for industrial players, for example steel producers, but a carbon tax might work for the power sector in South Africa, she added.

She suggested foreign investors with emissions targets pay for emerging countries to decarbonize. "If you look at that price differential, what we are what we are working on is offering to the market to say it is actually cheaper to meet your compliance targets by investing in decarbonization projects in South Africa than you would in your own country," she said.

Foreign investors already finance renewable projects in exchange for carbon credits from voluntary carbon markets, for example within the UN's Clean Development Mechanism, but nonprofit Carbon Market Watch claims some voluntary markets lack integrity.

Chile taxing carbon, for now

Chile's government has pledged to close all of Chile's coal-fired power plants by 2025, having already shuttered six coal plants.

In a less impactful measure, the country also implemented a carbon tax in 2017.

"The instrument is not working as …. carbon pricing should do for instance, it doesn't change any investment decision. It also doesn't change the dispatch order. But what's good for the electricity sector, and also for consumers, is that it's not affecting the energy tariffs," said Chief of Climate Change at Chile's Ministry of Energy, Juan Pedro Searle Solar.

The current government is reforming the tax system. "The Ministry of Energy is trying to see if there's any chance of introducing a different instrument, a more flexible instrument, that could be more cost-effective," said Solar.

While the government's current carbon tax keeps energy prices low for consumers, a proposal to increase the carbon tax to $40/mt CO2e, he said, would be a "complete mess" if implemented today.

"We need to understand better how to reach those levels of carbon pricing. Maybe the answer is not the tax, maybe the answer is another instrument, or the tax but properly implemented … in the most fair [way], taking care of the just transition, taking care of how we could minimize the distributional impacts," Solar said, adding, "I'm pretty convinced that maybe the tax is not the answer, and we should look for a different instrument."

Posted 31 May 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.



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