Figure 5.6, provided by Pauw (2007:38), shows that none of the revenue recycling options provides any positive responses to GDP. A food subsidy seems to the closest positive option. A similar result was discovered by Van Heerden et al (2006: 134), where a direct tax break on both capital and labour and an
79 | P a g e indirect tax break to all households resulted in a poor response for GDP, whereas a reduction in the food price (a food subsidy) had a positive impact on GDP. These issues are discussed further through the various revenue recycling options previously stated in sections 5.3.1 and 5.3.2.
(Pauw 2007: 38)
Figure 5.6 – the Effects on GDP of Carbon Tax Revenue Recycling
Even at a low carbon tax level, an income tax subsidy would have provided no positive increase in GDP (figure 5.6).These results are in stark contrast to those experienced in Ireland. In Ireland, an income tax subsidy had a positive effect on employment and GDP through the labour distortions that occurred. In South Africa, as explained before, the majority of income tax payers are high-income households. This implies there would be a limited distortion in the labour market due to an income tax subsidy. The reason for this is that high-income households would spend their increased disposable income on imports and to a lesser extent locally produced goods. However, the possibility of experiencing a fall in the nominal wage rate is limited due to South Africa’s powerful labour unions and their influence on the wage rate, particularly in the primary and secondary sectors Thus, there would be a limited positive impact on GDP. An income tax subsidy would only have a positive impact on GDP if the majority of the population received an income tax rebate. This would encourage increased consumption in the local market and hence increased demand and quantity supplied to clear the market.
Figure 5.6 illustrates the effect a VAT subsidy would have on GDP in South Africa. At a carbon tax level of R600, GDP is expected to decrease significantly by 7.5%. As explained earlier, a VAT subsidy would
80 | P a g e provide a cushioning for all households up until a certain threshold where the carbon tax level would exceed the VAT subsidy’s benefits. However, these effects are very limited and a VAT subsidy has limited to no positive effects on GDP as the carbon tax level rises.
Regarding a renewable and nuclear energy, and a biofuels subsidy, there is a large expected decline in output of fossil fuel energy, specifically coal output and, consequently, a negative impact on GDP. The reason for this is the incentive to switch from fossil fuel energy to alternative energy, which causes a decrease in employment in the coal industry. A fall in employment causes a fall in disposable income and consumption, which, in turn, reduces GDP. Bio-fuels are expected to experience the largest fall in GDP of the two, at a maximum decrease of 20% with a carbon tax of R1000. This is a rate 5% higher than any possible alternative method of revenue recycling. This is because of the poor biofuel technology and the large increase in energy prices that would be experienced if a biofuel subsidy were to be implemented.
Where a food subsidy and welfare transfer was very similar with regards to welfare effects for low- income households, the two options differ very much in the impact on GDP. This largely is due to the employment effects of the two mentioned earlier. A food subsidy, similar to the food subsidy considered in Mexico, benefits a developing country significantly through providing employment for the unskilled. Agriculture, in the primary sector of developing countries, is a large contributor to employment. The boost in agricultural output in turn would encourage a positive impact on GDP. This is illustrated by the small positive increase in GDP at carbon tax levels up to R300. However, as mentioned earlier, the long term positive effects of a food subsidy are diminished by the rising carbon tax levels. The increased carbon tax would continue to increase energy costs and the cost of food production. This would decrease the quantity demanded of food and so the supply of food, reducing employment and thus GDP.
Welfare transfers share the same result as an income tax subsidy in terms of their expected impact on GDP. Because a welfare transfer has no positive impact on employment and, hence, supply, there is no opportunity for a welfare transfer to improve South Africa’s GDP. Therefore at a carbon tax rate of R300, GDP is expected to fall a little over 5%.
Regarding all the above options for revenue recycling in South Africa, the results are generally fragile. Devarajan et al (2009: 3) found that a carbon tax that would reduce emissions by 15% in South Africa and would also reduce household welfare by an amount of 3%, if implemented on energy intensive
81 | P a g e industries. The most positive result that is presented is a food subsidy. The same method was promoted for a carbon tax in Mexico. A food subsidy provides ample protection for the poor regarding welfare effects, through the reduction in food prices. It moreover provides job creation and employment opportunity for the low skilled and semi-skilled, as well as support an increase in output and thus GDP, which in the least is equivalent to a double dividend. Winkler and Marquard (2011:56), Alton et al, (2012:14), Pauw (2007: 21) and Van Heerden et al (2006) all agreed that a food subsidy is a promising method of revenue recycling for a market based instrument in South Africa. Van Heerden et al (2006; 116) continued that a food subsidy may go as far as providing the opportunity of a triple dividend, the third being through a reduction in poverty. This places a high preference for a food subsidy as an optimum option of revenue recycling.
However, these authors also agreed that the effects of a food subsidy and benefits it may provide are temporary and over time will be made redundant through rising energy prices due to a rising carbon price. The DEAT (2011: 84) strongly supports these considerations by stating that at high levels of taxation, economic activity (specifically production) and employment will decline. DEAT (2011: 84) goes as far as to say that GDP will decline by 2-7% at a R250 tax and 9-12% at a R750 tax per ton of carbon dioxide. This leaves an opportunity for alternative means of revenue recycling to be explored. A possibility exists in implementing a hybrid approach, potentially combining multiple channels through which revenues may be recycled. An example of this would be through the implementation of a food subsidy, coupled with welfare transfers. Where a food subsidy would benefit South Africa in such a way as to provide a triple dividend, the effects as mentioned are limited. Thus, a combination with welfare transfers may help provide a more stable welfare effect and strengthen at least the possibility of a double dividend through the improvement of welfare and reduction in carbon emissions. However, more research needs to be done on the possibility of using multiple channels to strengthen the chance of a double or triple dividend.