Reflections on “Combining price and quantity instruments: insights from South Africa”, by Emily Tyler and Brent Cloete, published in Climate Policy, Vol. 15 issue 3
The Paris COP in November 2015 is expected to usher in a dramatic change in the international climate negotiations. A global climate agreement is on the cards that for the first time will require all countries, both developed and developing, to undertake actions to combat climate change. Exactly what form the agreement will take is unclear, however a new concept, Intended Nationally Determined Contributions (INDCs) will be central. INDCs highlight an evolution of thinking within the UNFCCC processes. In 2009 the Copenhagen Accord called on developed countries to “commit to implement individually or jointly … quantified economy-wide emissions targets for 2020” and developing countries to “implement mitigation actions” on a voluntary basis. In 2013, at COP 19, these two qualitatively different undertakings now converge into “intended nationally determined contributions … applicable to all Parties”. The Lima Call for Climate Action shed some light on what INDCs could look like, but significant discretion is left up to countries. INDCs are however expected to “represent progression beyond the current undertaking” of countries.
What this is likely to mean from the perspective of mitigation policy development at the country level is that a growing number of developing countries may offer quantitative mitigation aspirations, and that quantity based mitigation policy instruments are thus going to be required. In many of these countries, including South Africa, an Emissions Trading Scheme, the most efficient way of addressing a quantity goal, may not be appropriate for various reasons.
The 2011 South African National Climate Change Response Policy (NCCRP) called for both a broad-based carbon tax (which had already been under development for quite a while by the National Treasury) and a “carbon budget approach” to drive mitigation action. At the time it was not clear exactly what form this carbon budget approach would take, but it was expected that it would include the use of quantity-based policy instruments to drive emissions reduction outcomes. The Department of Environmental Affairs rightly identified that combining the use of a broad-based price instrument (the carbon tax) with quantity-based instruments could lead to policy incoherence and potential unintended consequences if not managed carefully, and it commissioned the research underpinning our paper in Climate Policy to consider how these two approaches could be integrated successfully. The analysis showed the complexity of such an undertaking, and how beneficial developing both in a co-ordinated manner could be to policy coherence, efficiency and effectiveness. We hope that the analysis in our paper of the challenge of combining price and quantity policy regime in South Africa will be useful for countries that put forward quantitative contributions as part of their INDCs.
However since our analysis, very little further attention has been paid to this issue in South Africa. The National Treasury has been working incrementally on the carbon tax, and it has successfully remained an item within each successive Budget. The Department of Environmental Affairs has focused on fleshing out the carbon budget approach, which combines voluntary (initially, at least) sector-level emissions targets (referred to as Desired Emission Reduction Outcomes or DEROs) and company-level carbon budgets. But there is no influential platform for engaging with the design of both approaches together, and exactly how these approaches will interact has not been finalised. It is also not clear to what extent the two departments driving the different approaches have a common vision of how local mitigation policy is to be implemented (i.e. the role of market-based versus regulatory approaches, the importance of economic versus environmental integrity, etc).
The inability to co-ordinate at a departmental level is most likely rooted in two related factors. The first is the lack of an executive level commitment to the low carbon agenda beyond the rhetorical. The National Development Plan speaks to both a carbon price and carbon budgets within an ‘equitable transition to a low carbon society’ in its environmental chapter, but these concepts are not integrated into the remaining chapters covering Economy and Employment, Economy Infrastructure, etc. There are major inconsistencies between the National Climate Change Response White Paper, other government policies like the Industrial Policy Action Plans, and the ruling party (ANC)’s State Intervention in the Minerals Sector strategy document. The country’s on-going and deepening electricity crisis has deprioritised the low carbon issue further down the political agenda, with unanswered questions around the role of a carbon tax in an environment of an electricity monopoly and steeply rising electricity prices.
Secondly, the lack of an explicit strategy as to how the country will transform from one with a high dependence on coal and mining at a central level makes it very difficult for departments to work this out individually. How will the losers in this transition be dealt with? A low carbon transformation is in any event an extremely difficult challenge for South Africa’s coal- and minerals-based political economic structure given the broader development context of fragmenting governance, skills scarcity, resource constraints and corruption. Without a strong steer from the centre, it is going to be very hard to ensure consistent policy implementation.
The South African experience appears to be exemplifying that in developing countries mitigation policy is complicated by complex political economy backdrops (ranging from excessive market power in some sectors to very interventionist government policies in others, often driven by opaque goals), limited capacity (which ironically can lead to very complicated policies as seemingly clever ideas remain unchecked), pressing developmental challenges, and a lack of coordination. Within such a context, policy co-ordination is especially challenging, and it is likely that what is currently considered unorthodox climate policy approaches in the developed world will become more prevalent.
The paper to which this post relates is thus very topical from a South African, and increasingly from a broader developing country perspective. Both a broad-based carbon price and quantity instruments are quite far down the line in terms of development in South Africa, and it looks as if the issue of how these approaches are going to be aligned is only going to be addressed as they move towards implementation. As suggested in our paper, this is going to seriously complicate the task of aligning these two approaches. And the risk exists that many, if not all, of the potential benefits of combining price and quantity instruments may be lost. Whatever happens, though, this will provide an interesting case study for other countries that are considering going down the same route.
Emily Tyler and Brent Cloete