26 November 2012 – South African industry is extremely coal-reliant, with an estimated 90% of CO2 emissions resulting from coal production. The entire economic system is geared towards coal dependency with an abundance of relatively inexpensive natural resources.

Various options are now being investigated to accelerate moving away from coal dependency. In this context, the proposed carbon tax by South Africa will have significant financial consequences for selected industries in South Africa who are either unprepared to implement the carbon tax, or unable to mitigate its effects.

“The ultimate competitiveness of South African businesses affected by the proposed carbon tax, needs to be urgently evaluated by not only the relevant business, but also by government,” Frost and Sullivan’s team leader for energy and power, Johan Muller, says. “As an investment destination, South Africa stands to be seriously affected by the proposed carbon tax if the status quo is upheld.”

South Africa is a developing country with a hybrid economy that attracts foreign investors for a variety of reasons (generally, the relatively low cost of operation and resource availability). By imposing a carbon tax, the economic results would vary greatly, depending on the industry.

“Certain industries, motivated by profit considerations, would open plants in other countries where there is no (or less) carbon taxation, since the carbon tax would effectively influence their competiveness to a great extent,” Muller says. “Other companies not being able to pass on the cost to the consumer may have to close down.”

The consumer will also be affected negatively should the full price increase be passed onto them by certain industries that have indicated their inability to shoulder the new financial burden imposed by the tax. This will have negative effects on various developmental levels in South Africa.

“Businesses need to understand the elasticities of their product, possible mitigating options of the carbon tax, their specific market share and growth paths,” Muller advises. “Subsequent to a complete analysis of the business, submissions should be made to government at the appropriate time in order to provide input as to the direction of the carbon tax. This would have the result of possibly affecting some exemptions and taxation scales in favour of the specific industry, to not only protect the specific industry, but also the South African economy as a whole.”

Informed industry adaptation will be imperative to surviving the proposed carbon tax. Strategies for the medium- to long-term should include in-depth discussions and evaluations of certain liabilities as well as potential liabilities such as the carbon tax.