The Impact of a Multilateral Electricity Generation Tax on Competitiveness in Southern Africa: A Computable General Equilibrium Analysis Using the Global Trade Analysis Project

Abstract

The South African Government announced, in the 2008 Budget Review, the intention to tax the generation of electricity from non-renewable sources with 2c/kWh. The intention of the tax is to serve a dual purpose of managing the potential electricity shortages in South Africa and to protect the environment. The primary objective of this paper is to evaluate the impact of an electricity generation tax on the international competitiveness of South Africa. Specifically, different scenarios are assessed to establish whether the loss of competitiveness can be negated through an international, multilateral electricity generation tax. The paper firstly considers the beneficial impact of environmental taxation on the competitiveness of a country. We subsequently apply the Global Trade Analysis Project (GTAP) model to evaluate the impact of an electricity generation tax on the competitiveness of South Africa, given multilateral taxes on SACU, SADC and European Union economies. It is shown that an electricity generation tax will indeed affect the competitiveness of South Africa in a negative way. Furthermore, SACU and SADC wide implementation will marginally reinforce these negative effects. However, a multilateral electricity generation tax across SACU or SADC countries will result in emission reductions, but lower than in the case of a unilateral electricity generation tax. In contrast, the cost to the South African economy could be limited, if the European Union would follow suit and implement an electricity generation tax. One could therefore argue in favour of global rules for environmental taxes, since this will ensure minimum negative competitiveness effects on participating countries.