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South Africa, as an upper middle-income, resource-intensive developing country with an open economy, has to find innovative ways to combat poverty, promote economic growth and reduce the intensity of resource use, simultaneously. One option is to explore the plausibility of achieving a double dividend by levying a tax on water and energy and recycling the revenue back to the economy by allowing for a reduction in other forms of taxation. According to the double dividend theory it is possible, under some conditions, to achieve both environmental and economic objectives. We investigated such a possibility in the South African economy using an integrated economy/environment CGE model and found that it is indeed possible to achieve such double dividend benefits. Given the prevailing economic and environmental contexts, government should actively search for ways to achieve such dividends.
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SAJEMS NS 9 (2006) No 4 537
REDISTRIBUTING ENVIRONMENTAL TAX REVENUE TO REDUCE POVERTY
IN SOUTH AFRICA: THE CASES OF ENERGY AND WATER
Jan van Heerden, James Blignaut and Margaret Mabugu
Department of Economics, University of Pretoria
Reyer Gerlagh and Sebastiaan Hess
Institute for Environmental Studies, Vrije Universiteit
Richard SJ Tol
Institute for Environmental Studies, Vrije Universiteit and Economic and Social Research Institute
Mark Horridge
Centre of Policy Studies, Melbourne.
Ramos Mabugu
Fiscal Commission
Martin de Wit
De Wit Sustainable Options (Pty) Ltd
Tony Letsoalo
National Department of Agriculture, Pretoria
Keywords: CO2, Water, Poverty, Double-dividend, CGE, Environmental tax
Abstract
South Africa, as an upper middle-income, resource-intensive developing country with an open
economy, has to find innovative ways to combat poverty, promote economic growth and reduce
the intensity of resource use, simultaneously. One option is to explore the plausibility of achieving
a double dividend by levying a tax on water and energy and recycling the revenue back to the
economy by allowing for a reduction in other forms of taxation. According to the double dividend
theory it is possible, under some conditions, to achieve both environmental and economic
objectives. We investigated such a possibility in the South African economy using an integrated
economy/environment CGE model and found that it is indeed possible to achieve such double
dividend benefits. Given the prevailing economic and environmental contexts, government should
actively search for ways to achieve such dividends.
JEL Q43
1
Introduction
South Africa, as an upper middle-income,
resource-intensive developing country with
an open economy, has to find innovative ways
to combat poverty, promote economic growth
and reduce the intensity of resource use
simultaneously. The double dividend theory
has been a popular research theme for at least
15 years, following papers by Pearce (1991)
and Bovenberg and De Mooij (1994)1. The
main reason for this popularity is its seeming
promise of a free ride: environmental taxes
could diminish pollution at no costs or even
lead to additional benefits, if the revenues of
the tax are used to reduce other distortionary
taxes, for instance on labour or capital. These
538 SAJEMS NS 9 (2006) No 4
additional benefits – the second dividend – are
usually an increase in welfare or GDP, or a
decrease in unemployment2. In this study, our
focus is on GDP and poverty. In South Africa
the latter is not linked to employment in general,
but to employment of the poor and prices
of commodities bought by poor households
specifically. We carry out an empirical analysis
using a CGE model to calculate the potential for
a triple dividend – an environmental, economic
(GDP) and poverty dividend.
The question that is posed in this paper is
whether there is empirical support for the
possibility of double (or even triple) dividends
concerning specific environmental tax reform
initiatives relating to the energy and water
sectors. To give effect to this question, the next
section provides a brief synopsis of the South
African economy, followed by a discussion of the
literature concerning double dividends. This is
followed by a description of the model used to
test for such a dividend in South Africa, the data
and empirical results. The paper is concluded by
two policy recommendations.
2
Background
Since South Africa’s first democratic elections
in 1994 the GDP/capita has been growing
positively for the fist time since the early 1980s.
Unfortunately the growth in GDP/capita has not
led to an improvement in income distribution. In
1998 the Gini-coefficient was 0.56, it deteriorated
to 0.59 in 2004, with an unemployment rate of
between 25 and 40 per cent (Statistics South
Africa, 2004). Consequently, a large percentage
of the population (between 45 and 55 per cent)
lives in poverty (Committee of Inquiry into a
Comprehensive Social System for South Africa,
2002).
Additionally, South Africa has a resource
extraction economy that is heavily dependent
on mining, agriculture and manufacturing, even
though the combined contribution of the former
two sectors to GDP is less than 10 (South African
Reserve Bank, Quarterly Bulletin). These sectors
are the major employers and they generate much
economic activity, through electricity generation
and fuel production from coal. Therefore,
although being a developing country, South
Africa’s electricity consumption (93 per cent
of which is coal based) is 3.8 megawatt hours
(MWh) per capita compared to 1.3 MWh for
other lower-middle-income countries and 2.5
MWh for upper-middle-income countries. The
country’s carbon-dioxide emissions lie between
that of upper-middle-income and high-income
countries at 7.4 (metric) tonnes (t) carbon
dioxide (CO2) per capita.
South Africa had 44 million people in 1998
and a total water inflow of 65.3 million m3,
therefore the number of people per flow unit is
1 481, or 982 m3 per capita per annum (World
Bank, 2005). Not only does South Africa have
a disproportionately high carbon footprint, the
country has a chronic water scarcity as well, as
indicated in Table 1. To address this water scarcity
problem in the past, South Africa resorted to
the development of new water sources. This
option is no longer feasible and government
has embarked on a program to reduce water
consumption using other mechanisms, such as
water pricing (DWAF, 1998 and 2002).
Table 1
Categories of water scarcity associated with varying levels of water supply per person per year, the
typical scales of problems encountered in each category in Africa
Water scarcity category and
associated problems
Original index: number of people
per flow unit
(million m3)
Modified index: volume of water
available per person
(m3 person year)
Beyond the “water barrier”:
continual, wide-scale water supply
problems, becoming catastrophic
during droughts.
> 2000 < 500
SAJEMS NS 9 (2006) No 4 539
Chronic water scarcity: continual
water supply problems, worse
during annual dry seasons, frequent
severe droughts (South Africa falls
in this category)
1000 –2000 500 – 1000
Water stressed: frequent seasonal
water supply and quality problems,
accentuated by occasional droughts.
600 – 1000 1000 – 1666
Moderate problems: occasional
water supply and quality problems,
with some adverse effects during
severe droughts.
100 – 600 1666 – 10 000
Well-watered: very infrequent
water supply and quality problems,
except during extreme drought
conditions.
< 100 > 10 000
Source: Ashton (2002)
South Africa’s economy is currently growing
strongly, but the growth in the commercial
sector is not directly benefiting the unemployed
and the poor through more commercial
opportunities for them. Moreover, this growth
depends significantly on the resources (water
and energy) sectors. The country is seeking
innovative ways to grow; ways that will benefit
the poor and reduce the impact of such growth
on the environment. In the following section
we explore international literature concerning
double dividend, in anticipation of finding
such dividend in South Africa pertaining to the
energy and water sectors.
3
Double dividend
The paper by Bovenberg and De Mooij (1994)
is a good example of earlier papers in which
relatively simple CGE models are used to prove
that double dividends are unlikely to materialise.
These earlier papers only incorporate one factor
of production, namely labour. An environmental
tax is then really just an implicit tax on labour
and leads to a decrease in labour supply. The
recycling of revenues through lower labour
taxes only partly compensates for the lower
labour supply. The reason for this is as follows:
The environmental tax not only distorts the
labour market, but also the commodity market:
it reduces the demand for the dirty good3. This
is, of course, the intention of the environmental
tax reform. However, Bovenberg and De Mooij
assume that initially the tax on the dirty good is
at its Pigouvian level, and in that case, an extra
distortion of the distribution of consumption
over the two goods must decrease total welfare.
These results are corroborated in other papers,
which similarly use only one factor of production
(Fullerton & Metcalf, 1997; Goulder et al.,
1997).
In later papers, the introduction of more
than one production factor (capital) enhances
the scope for a double dividend because it
allows the possibility of inefficiencies in the tax
system4. These inefficiencies occur when the
marginal efficiency costs of taxation are not
the same for all production factors, i.e. one of
the factors is over-taxed relative to the other5.
By shifting the tax burden from the over-taxed
to the under-taxed factor, efficiency can be
increased and the total costs of taxation reduced.
A double dividend becomes possible when an
environmental tax reform induces such a shift.
Conditions for this route to a double dividend
are: (i) the difference in marginal efficiency cost
is large, (ii) the burden of the environmental
tax falls primarily on the under-taxed factor,
and (iii) the revenues from the tax are used
to reduce the tax rate on the over-taxed factor
(Goulder, 1994).
540 SAJEMS NS 9 (2006) No 4
Results from papers using more than one
factor of production are mixed. Goulder (1995)
and Bovenberg and Goulder (1997) study the
results of a revenue neutral environmental
tax reform for the United States with an inter-
temporal CGE analysis and find no double
dividend. On the other hand, Jorgenson and
Wilcoxen (1993), who also use a model for the
US, find a double dividend when they lower
capital taxes with the revenues of a carbon
tax, but it does not materialise if labour taxes
are cut instead. This agrees with the general
notion that the marginal efficiency costs of
capital taxation in the US are higher than
those of labour. The occurrence of a double
dividend in this analysis may also be explained
by the assumed full mobility of capital in the
Jorgenson and Wilcoxen model, while Goulder
and Bovenberg and Goulder assume that capital
is immobile between different sectors. The
elasticity in capital demand is thus substantially
larger in the Jorgenson and Wilcoxen model,
which increases the marginal costs of taxation of
capital. Bye (2000) also finds a double dividend
in a CGE model of the Norwegian economy.
Norway is a small open economy characterised
by a particularly high marginal excess burden
of labour taxation. The double dividend occurs
when the revenues from a carbon tax are used
to lower payroll taxes.
Overall, the literature concludes that the
correct tax reform would reduce environmental
emissions while stimulating economic growth
and employment. This would be the case if
the environmental tax reform reduces the
overall level of distortion of the economy, and
this depends on the state of the economy, the
pre-existing tax system, and the details of the
reform. That is, environmental tax reforms need
to be smart to yield a double dividend. This is
already true in the simplified representation of
the economy and tax system used in models. In
reality, environmental tax reform should be very
clever indeed.
Based on these previous studies, we can
say that the attainment of a double dividend
in South Africa will depend mainly on the
current inefficiencies in the tax system, and
how these are influenced by the environmental
tax reform. Concerning the elasticity of capital
and labour supply, saving rates in South Africa
are low, and capital formation depends to a
large extent on foreign capital inflow. The
capital supply is therefore dependent on trust
in present and future institutional quality,
absence of corruption, secure property rights
and low inflation. In that context, a marginal
change in the rate of return on capital may
be less important. As for labour, a distinction
must be made between skilled and unskilled
labour. Most skilled labour is employed, while
unemployment rates for unskilled labourers
are very high. In abstract terms, we can assume
that unskilled labour is in infinite supply, and
that the effect of tax shifting on the unskilled
labour market will be of major importance
for its overall effect on output and income.
Therefore, a double dividend is most likely to
occur if the environmental taxes fall mostly
on capital and skilled labour, and the tax
revenues can be used to increase the demand
for unskilled labour.
4
Philosophy of double dividends with
energy and water
The typical second target variable studied in
the double dividend literature is real GDP. The
decrease in GDP that results from an increase
of R1,00 in total tax revenue is referred to as
the marginal excess burden (MEB) of a tax,
that is:
MEB = decrease in real GDP/increase in real
government income6
Conversely, when a tax is reduced, as under
the recycling schemes, the MEB measures
the increase in GDP per decrease in total
tax revenues. The MEB is a measure of the
distortionality of a tax. As both the numerator
and the denominator have the same unit of
measurement (rand), the MEB measure is
without dimension. By comparing MEBs of
different scenarios, we find combinations of
scenarios that produce a second dividend, i.e.
an increase in GDP, while maintaining total
government revenues constant.
SAJEMS NS 9 (2006) No 4 541
The third dividend in this study is poverty
reduction. We define the marginal poverty
burden (MPB) as:
MPB = decrease in real income of the poorest
households/increase in real govern-
ment income
As GDP is our income measure, MPB has the
same properties as MEB. Indeed, MEB is the
weighted average of the MEB per income class,
while the MPB is the same, but then with zero
weights for the higher incomes.
Could appropriate ways of recycling revenue
from energy and/or water-related environmental
taxes result in double or triple dividends? We
implement a CGE model to calculate and
compare the marginal excess burdens of energy-
and water-related environmental taxes with the
MEBs of recycling the revenue, in order to find
possible double or even triple dividends.
4.1 Tax instruments for carbon
reduction
Four policy simulations are run to analyse the
effects of various environmental tax instruments
related to CO2 reduction, namely (i) a carbon
tax, (ii) a fuel tax, (iii) an electricity tax and (iv)
an energy tax.
The carbon tax implies a levy of R35 per tonne
CO2
7, which is approximately equivalent to 5
USD/tonne CO2
8, based on the conservative
estimate of Sandor (2001)9. Such a tax would
capture all emissions from burning fossil fuel
at the point of combustion and is applied to the
CO2-emission by sector. From an environmental
perspective, this tax would be the best alternative
since it is directly linked to the environmental
objective of a reduction in CO2-emissions (Van
Heerden et al., 2006). (Note that emissions from
burning biomass - mostly firewood gathered by
households - are not taxed.)
The fuel tax is relatively easy to implement,
since it excludes coal used in electricity and
gasoline production. It amounts to a tax of 4,330
R/TJ, 2,337 R/TJ, and 2,454 R/TJ on the final
consumption of coal, crude oil and gas, and
gasoline. The tax is calculated as the carbon
tax (35 R/tonne CO2) multiplied by the average
carbon content per energy unit of the fuels
(124, 67, and 70 tonne CO2/TJ, respectively).
The industrial use of coal, crude oil and gas,
and petroleum products is taxed, as well as the
household consumption of petroleum products
(Van Heerden et al., 2006).
In scenario three a tax is levied on all
intermediate and household consumption of
electricity. The tax per MWh is again based on
a carbon tax of 35 R/tonne CO2, using conversion
factors from Blignaut and Zunckel (2004: 298-
303). In SI units, the tax level is equivalent
to an electricity tax of 10,651 R/TJ, using the
conversion of 1MWh = 0.0036TJ. The gap
between the electricity tax and the fuel tax levels
(in rand per energy unit) is due to conversion
losses when fuels are converted to electricity
(Van Heerden et al., 2006).
Lastly, in scenario four, a tax is levied on
intermediate and household consumption of
energy a combination of scenarios two and
three. This tax is comparable to scenario one
(except for the exclusion of the conversion
losses from coal to petroleum products which
account for approximately 10 per cent of the
emissions), but is based on the consumption
of energy and not the level of emissions itself.
Also, coal consumption by poor households is
excluded from taxation as this consumption
is considered part of their basic needs. Poor
households only pay the environmental tax
on petroleum products and electricity (Van
Heerden et al., 2006).
4.2 Tax instruments for reduced water
consumption
Figure 1 describes water requirements by sectors
in South Africa. Irrigated agriculture is the
largest consumer at 62 per cent; afforestation
requires 3 per cent of the total water use; rural
and urban populations 4 per cent and 23 per
cent, respectively. Mining and bulk industrial,
and power generation use 8 per cent on
aggregate.
542 SAJEMS NS 9 (2006) No 4
Source: DWAF (2004)
Figure 1
Water requirements by sectors in South Africa: 2000
The following scenarios were extracted from the
suggestions proposed by water authorities and
experts in South Africa:
(i) A surcharge of 10c per m3 water used by
forestry.
(ii) A surcharge of 10c per m3 water used by
irrigated agriculture.
(iii) A surcharge of 10c per m3 water used by all
mining industries.
In South Africa, according to the National
Water Act (Act No 36 of 1998), the government
is regarded as the public trustee of the nation’s
water resources. Under previous water
legislation, pricing of water did not generally
take into account the real cost of managing
water, the cost of water supply and the scarcity
value of water (MacKay, 2003: 64). Except
for the fact that water is required to meet
basic human needs and ecological reserve, the
principle behind the current water pricing policy
in South Africa is that payment for water should
be at a level that reflects its scarcity. Currently
25 litres of water per day per person is assumed
to meet these needs. The pricing policy is
structured into three tiers (CSIR, 2001):
First tier: raw water tariffs administered by
DWAF for the sale of water to Water Boards.
Second tier: water boards set the wholesale
price of water to bulk water users such as
municipalities and industries such as Eskom
and Sasol.
Third tier: municipalities determine the price of
water to charge end-users such as households
and industries.
A rise in raw water tariffs will automatically
lead to an increase in the price in the second
and third tiers. The South African government
is introducing a water resource management
charge to recover some of the costs for water
management and to reflect water scarcity in
the country.
4.3 Recycling schemes
Three recycling or handback schemes are
analysed: (i) a decrease in direct tax, (ii) a
general decrease in indirect taxes, and (iii)
a decrease in taxes on food. These recycling
schemes are as politically sensitive as the
environmental tax instruments discussed above,
since business usually prefers a reduction of
progressive direct taxes, while the labour unions
prefer a reduction in regressive indirect taxes
(Du Toit & Koekemoer, 2003: 49).
We implement the first recycling scenario via
a uniform ordinary change in ad valorem rates of
the direct tax on capital and labour. The second
two scenarios are implemented via reductions
in commodity taxes levied on purchases by
households (VAT). In scenario two the tax
SAJEMS NS 9 (2006) No 4 543
reduction lowers the prices of all consumer
goods by an equal percentage. In scenario three
only food becomes cheaper. All three scenarios
would be simple to administer.
4.4 Target variables
Four target variables are calculated by the model
to compare the different scenarios in terms of
the three dividends: (i) environment via CO2
emissions or water consumption, (ii) economy
via GDP and employment, and (iii) equity via
total consumption by the poor. Changes in
each target variable are expressed per change
of government revenue, so that different policy
scenarios can easily be compared to each other
on the basis of equal extra tax revenues.
These target variables have been chosen to see
which energy tax or water charge and tax-recycling
scenarios would best yield environmental,
economic and equity dividends.
5
The model and data
We use a computable general equilibrium
(CGE) model for all our simulations. It is
called “UPGEM”, and is based on the structure
of the ORANI-G model (Horridge, 2002)
written and solved using the GEMPACK
suite of software (Harrison & Pearson, 1996).
The model has a theoretical structure that is
typical of a static CGE model, and consists of
equations describing producers’ demands for
produced inputs and primary factors; producers’
supplies of commodities; demands for inputs to
capital formation; household demands; export
demands; government demands; the relationship
of basic values to production costs and to
purchasers’ prices; market-clearing conditions for
commodities and primary factors; and numerous
macroeconomic variables and price indices.
Conventional neoclassical assumptions drive
all private agents’ behaviour in the model.
Producers minimise costs while consumers
maximise utility, resulting in the demand and
supply equations of the model. The agents are
assumed to be price takers, with producers
operating in competitive markets, which
prevents the earning of pure profits.
In general, the static model with its overall
Leontief production structure allows for limited
substitution on the production side, but more
substitution in consumption. It has CES sub-
structures for (i) the choice between labour,
capital and land, (ii) the choice between the
different labour types in the model, and (iii) the
choice between imported and domestic inputs
into the production process. In the short-run
simulations reported here we do not allow for
substitution in production between either energy
or water and other inputs. Household demand
is modelled as a linear expenditure system that
differentiates between necessities and luxury
goods, while households’ choices between
imported and domestic goods are modelled
using the CES structure.
The primary model database is the official
1998 SAM of South Africa, published by
Statistics South Africa (SSA, 2001). This SAM
divides households into 48 groups (12 income
by 4 ethnic), and distinguishes 27 sectors. For
the purpose of this study, we split the energy-
intensive as well as the agricultural sectors
further to arrive at 39 sectors.
The model’s closure rules reflect a short-run
time horizon. The capital stock in each sector is
assumed fixed, while the rate of return on capital
is allowed to change. The South African labour
market is characterised by large unemployment
of unskilled labour, and a shortage of skilled
labour. The model differentiates between 11
different labour groups that are classified as
either skilled or unskilled. Skilled labour is
treated as human capital in inelastic short-term
supply. The supply of unskilled labour is assumed
to be perfectly elastic at fixed post-tax real wages
(i.e. nominal post-tax wages deflated by the
economy-wide CPI). The distinction between
skilled and unskilled labour supply reflects the
South African labour market realistically and
allows for investigating the effect of certain
policies on employment of unskilled labour. The
supply of land is also assumed to be inelastic
(Van Heerden et al., 2006).
It is assumed that aggregate investments,
government consumption and inventories
are exogenous and unaffected by the change
in environmental taxes under consideration.
Consumption spending by each of the 48
544 SAJEMS NS 9 (2006) No 4
representative households follows labour
income earned by each household, and the
trade balance is endogenous. This specification
allows us insight into the effect of the suggested
policies on South Africa’s consumption and
competitiveness. All technological change
variables and all tax rates are exogenous to the
model. Finally, the nominal exchange rate is the
numeraire in each simulation.
5.1 Energy data
To update and conform the greenhouse gas
(GHG) emissions data to our SAM, a new
emissions dataset was compiled (see Blignaut
et al., 2005). The 1998 data from South Africa’s
Department of Minerals and Energy (DME)
was used for these calculations. To calculate the
energy balances, the Intergovernmental Panel
on Climate Change (IPCC) defaults were used
for non-coal and non-CO2 GHG emissions,
while CO2 factors specific to South Africa were
used for coal. The calculated balances were
used to then calculate the final CO2 and CO2
equivalent (from methane, and nitrous oxide)
figures as directed by the IPCC.
For each of the 39 activity sectors in the SAM,
three matrices are appended in terms of (i) GHG
emissions from burning of fuels, (ii) energy,
including electricity consumed, (measured in
TJ) and (iii) the same energy in (ii), including
electricity, measured in native terms. From the
calculations it was found that total emissions
were estimated at 353Tg, a figure close to the
344Tg reported by the International Energy
Agency (IEA) for the same year. Using the SAM
weights, the emissions were then shared between
final demand and intermediate demand. South
Africa extensively uses coal for energy and from
the calculations of GHG emissions, 75 per cent
of all emissions are generated by coal.
5.2 Water data
South Africa is a semi-arid country. Precipitation
has fluctuated over the years with an average of
500 m3 per annum, well below the world average
of about 860 mm per year (DWAF, 2004).
The total flow of all the rivers in the country
amounts to approximately 49,000 million
per year, less than half that of the Zambezi,
the closest large river to South Africa. The
National Water Resource Strategy estimates
the total water requirement for the year 2000 at
12,871 million m3 (at a 98 per cent assurance of
supply), excluding environmental requirements,
but including the basic human needs reserve
(DWAF, 2004).
The water supply and use accounts of the
CSIR (2001) were used to calculate a vector of
“taxable water” for each industry in the SAM,
as well as a vector of “extra water charges” that
may be charged on volumes of water used. The
total water supply includes volumes of water
from underground or rivers, or water returned
from the formal water sectors. The water use by
economic sectors was discussed in Section 4.
6
Results
6.1 Energy
An analysis of the results from the environmental
taxes versus the recycling simulations shows
that the experiments have largely opposing
effects. While the energy tax tends to raise
production costs thereby depressing sales and
overall output, the recycling schemes reduce
the production costs and thus boost sales. The
environmental tax experiments lead to price
increases through the cost effect, while recycling
the revenue back reduces prices of commodities.
Environmental taxes lead to a substitution to
non-energy-rich activities away from the energy
rich production, thus reducing emissions. On the
other hand, with recycling schemes there is an
indirect effect of increasing emissions through
increased production. The results show that for
all the four environmental taxes and the three
recycling options, there is a fall in CO2 emissions.
These emissions are recorded in CO2 Gg and are
taken as emissions per million rand increase in
total tax revenue. This reduction occurs because
the fall in emissions due to the tax is larger in
all experiments than the increase in emissions
due to recycling.
To investigate whether a second dividend is
found, the marginal excess burden (MEB) is
calculated. This is calculated as a decrease in
GDP divided by an increase in real government
SAJEMS NS 9 (2006) No 4 545
income for the case of a decrease in GDP. For
an increase in GDP due to the recycling options,
MEB is the increase in GDP divided by the
decrease in real total government income.
Table 2 shows that all environmental tax
experiments reduce the MEB for GDP, while
all recycling options increase GDP. The table
gives the difference in MEBs between the
environmental tax and recycling options. We
see, for example, that a carbon tax together
with a food tax break lead to a dividend because
GDP increases. Thus, two recycling schemes,
direct tax and indirect tax breaks, do not yield a
second dividend. Only the food tax break gives
the second dividend.
Table 2
Marginal excess burdens (MEB) of different tax instruments, for real GDP, and an indication of
scenarios that result in a GDP dividend*
Recycling scheme
Direct tax break Indirect tax
break
Food tax break
Environmental tax 0.101 0.132 0.156
Carbon tax 0.140 +
Fuel tax 0.148 – +
Electricity tax 0.145 +
Energy tax 0.151 +
* Numbers present the MEB for the environmental taxes and the recycling schemes, separately. They report
the decrease in real GDP (rand) per increase in total tax revenue (rand), for the environmental tax, and
increase in real GDP per decrease in total tax revenue, for the recycling scheme, respectively. Both series
are without dimension. The central part of the table presents results for combined scenarios. The plus signs
indicate that a budget neutral combination of the environmental tax and the recycling scheme yields a second
dividend, i.e that the column MEB exceeds the row MEB.
Source: Van Heerden et al. (2006)
All experiments that lead to an increase in
GDP also lead to an increase in unskilled
employment, and vice versa, because of the close
positive link between the two variables. Indeed,
unskilled employment contributes about half of
the GDP change. Using the change in unskilled
employment per one billion rand change in
real government income, the results show that
in addition to the food tax break experiments,
we also have a second dividend in some
indirect tax break experiments. Employment
is reduced the least by a carbon tax, then a fuel
tax, then an energy tax and then an electricity
tax. The reason for this order is that there
is high complementarity between unskilled
labour and electricity, while there is very little
complementarity between unskilled employment
and coal, the main source of carbon. This
explains the difference in the results between
the employment and GDP dividend.
The third dividend is a gain in consumption
by poor households. Calculating the percentage
change in real consumption of the poorest
household per unit of real government income,
it is realised that a triple dividend is obtained
for all environmental taxes with a food tax
break. This is because of the large share of
food in the consumption basket of the poor.
The fuel tax simulation is the best at reducing
poverty, while the electricity tax simulation is
the worst for poverty reduction, regardless of
the recycling option. This is due to the relatively
large expenditure allocated to electricity by the
poor as opposed to the fuel tax.
546 SAJEMS NS 9 (2006) No 4
Table 3
Marginal change in poverty (change in real consumption of poorest household groups per billion
rand tax revenue), and an indication of scenarios that result in a poverty dividend
Recycling scheme
Direct tax break Indirect tax break Food tax break
Environmental tax a=0.066
c=0.075
i=0.060
w=0.065
a=0.091
c=0.099
i=0.082
w=0.097
a=0.359
c=0.391
i=0.338
w=0.299
Carbon tax a=0.126 +
c=0.113 – +
i=0.077 – + +
w=0.230 – +
Fuel tax a=0.081 – + +
c=0.075 0 + +
i=0.069 – + +
w=0.083 + +
Electricity tax a=0.165 +
c=0.122 – +
i=0.080 – + +
w=0.266 – +
Energy tax a=0.129 +
c=0.102 – +
i=0.076 – + +
w=0.186 – +
a = African, c = coloured, i = Indian, w = white
Source: Van Heerden et al. (2006)
6.2 Water
The first of the three dividends is the
environmental dividend reaped which is derived
by reduction in water use. Our results show that
all the simulations do yield the first dividend,
whether the revenue collected is recycled
through a direct or indirect tax break. The water
charge increases the price of water and directly
affects the amount of water consumed, see table
with elasticities in the Appendix.
The model predicts that the water charge
will lead to a decline in water consumption in
the forestry and irrigated agricultural sector
by 32 per cent and 6 per cent per billion rand
tax revenue received, respectively. Water
consumption by the mining sector would
decrease by only 3 per cent per billion rand. The
decrease in water consumption as a result of
water charge is greater than an increase in water
consumption because of tax breaks, thereby
yielding the environmental dividend.
The second dividend is the effect on the total
economy, and is determined using the concept
of marginal excess burden. The marginal excess
SAJEMS NS 9 (2006) No 4 547
burden (MEB) is defined as the change in real
GDP divided by the change in real government
revenue. The MEBs for all eight water charge
policy measures as well as the three recycling
measures are given in Table 4.
Table 4
Marginal excess burdens of different tax instruments, and an indication of scenarios
that result in a GDP dividend *
Recycling scheme
Direct tax
break
Indirect tax
break
Food tax break
Water tax 0.586 0.722 0.703
Tax on Forestry water –0.825 –
Tax on Mining water –0.547 + + +
Gold mining –0.964
Coal mining –0.658 + +
Other mining –0.249 + + +
Tax on Irrigated Agriculture –0.372 + + +
Field crops –0.338 + + +
Horticulture –0.442 + + +
* The numbers represent the percent change in gross domestic product per 10 million rand tax revenue. In
the column, a water tax is levied; the numbers are the reduction in GDP. In the row, the tax is recycled; the
numbers are the increase in GDP. If the sum of the two effects is positive, GDP increases, and a “+” is given.
Source: Letsoalo et al. (2006)
A double dividend is indicated by a + sign in
the table, that is, when the increase in real GDP
per unit of real government revenue lost as a
result of a tax break (recycling policy), is larger
than the decrease in real GDP per unit of real
government revenue collected from a new water
charge. Only other mining, irrigated field crops
and horticulture a yield double dividend.
The percentage change in total employment
per unit of real government revenue collected
was also calculated, and the plusses and minuses
follow exactly the same pattern as in Table 3
above. That is, employment and GDP per unit
of real government revenue are closely related
to each other in the model. The explanation is
simply that the total production function in the
model has Leontief and CES characteristics in
terms of intermediate and primary inputs, so
that GDP and employment will always move in
the same direction as a result of an exogenous
shock.
The criterion used to measure an improvement
in poverty levels is the percentage change in total
real consumption of the three poorest household
groups in the economy, by race. Some policy
combinations render a net improvement for one
race group, while they have detrimental effects
on another. A tax on water consumption by
mining industries other than gold and coal is the
only water charge that could be recycled in a way
that would benefit all four race groups within
the poorest groups of households. However,
all the water taxes except one would render the
poverty dividend if they are combined with a tax
break on food.
548 SAJEMS NS 9 (2006) No 4
Table 5
Marginal change in poverty (%), and an indication of scenarios that result in a poverty dividend
Recycling scheme
Direct tax
break
Indirect tax
break
Food tax break
Water tax 0.104 0.133 0.403
Tax on Forestry water –0.291 – +
Tax on Mining water –0.285 +
Gold mining –0.568
Coal mining –0.268 +
Other mining –0.092 + + +
Tax on Irrigated Agriculture –0.196 – +
Field crops –0.175 +
Horticulture –0.239 +
a The numbers represent the percentage change in real consumption of the poorest household group per
billion rand tax revenue. In the column, a water tax is levied; the numbers are the reduction in consumption.
In the row, the tax is recycled; the numbers are the increase in consumption. If the sum of the two effects is
positive, poverty decreases, and a “+” is given.
Source: Letsoalo et al. (2006)
For irrigated agriculture, it helps to differentiate
between water charges on field crops and on
horticultural crops. We found that a tax on
irrigated horticultural crops has a more severe
influence on the consumption of the poorest
groups, in that at least one group is made worse
off with this tax, while with irrigated field crops
at most one group is made worse off.
7
Conclusion and policy
recommendations
The food tax break renders the best results
of all the recycling schemes in both groups of
simulations discussed above, namely it leads to
triple dividends in the efforts to reduce carbon
emissions as well as the efforts to reduce water
consumption in South Africa. We would like to
make the following policy recommendation for
South Africa: A tax break on food financed by:
1. A carbon tax on all emissions from burning
fossil-fuel at the point of combustion,
applied to the CO2 emissions by sector.
2. A water charge on both irrigated field crops
and some sectors of the mining industry.
Our results show that such a tax reform
would increase the real income of the poorest
households, increase economic growth, increase
employment, reduce carbon dioxide emissions,
and reduce water use.
Endnotes
1 There were, however, earlier authors who
advanced these ideas. See Goulder (1994) for a
more complete overview.
2 The literature distinguishes between a weak
and a strong double dividend. In its weak form
the theory requires revenue recycling to merely
reduce the economic costs of the environmental
tax compared to a situation where the revenues
are returned as a lump sum. The literature
widely supports this version of the theory. See
for example Bovenberg and De Mooij (1994) for
an analytical argumentation and Dellink (2003)
for numerical results. A strong double dividend
requires a revenue-neutral tax reform to produce
both environmental and economic gains. The
SAJEMS NS 9 (2006) No 4 549
discussion in the literature focuses on this more
interesting version of the theory, as do we.
3 In the theoretical tax literature, taxes on
intermediate inputs generally have larger welfare
costs than do equal-revenue taxes on primary
factors or final goods for the same reason, i.e. they
distort both the intermediate input choice and
factor markets (Goulder, 1995: 288).
4 Another important addition to the analysis
described above is the introduction of strategic
behaviour on the labour market, e.g. leading to
involuntary unemployment in the initial situation.
Because our model does not incorporate strategic
behaviour, this strand of literature is not described
here. For more information see Bovenberg and
Van der Ploeg (1998), Strand (1998), and Koskela,
Schöb and Sinn (1998).
5 For a given labour tax, the distortion in the labour-
leisure trade-off is greater as the (compensated)
wage elasticity of labour supply increases. For a
given capital income tax, and for a closed economy,
the distortion along the intertemporal dimension
– the margin of choice between consuming
today and consuming in the future – is greater
as the intertemporal elasticity of substitution in
consumption increases. Thus, the relative marginal
efficiency costs of labour and capital income taxes
depend on these elasticities and on the magnitudes
of labour and capital income tax rates. For an
open economy, the distortion of a capital tax also
depends on its base, either households’ capital
income or firms’ profits, and on international
capital mobility.
6 The MCPF (marginal cost of public funds) is equal
to 1+ MEB.
7 The South African currency rand is abbreviated to
‘R’.
8 It should be noted that the level of the carbon tax
has little or no bearing on the results reported
in Tables 3, 4, 5, 7 and 8, as we take ratios of tax
effects divided by changes in tax revenues. If
the model were linear, both the numerator and
denominator would be proportional to the carbon
tax level. Although the model is non-linear, the
absolute size of the environmental taxes or tax
handbacks only affects these ratios at the third
decimal place.
9 5 USD/tCO2 is close to the median of marginal
climate change damages reported in the literature
(Tol, 2005: Table 3).
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SAJEMS NS 9 (2006) No 4 551
APPENDIX
Table A1
Average water tariffs (2002) and the semi-elasticity for water demand
Industry Water tariff
(R/ m3)
% change
due to an
increase of
R1
Elasticity Semi
elasticity
Taxable water
(million m3)
Irrigated field 0.05 2000.0 –0.25 –500.0 7152.0
Dry field 0.05 2000.0 –0.15 –300.0 0
Irrigated horticulture 0.05 2000.0 –0.25 –500.0 3400.0
Dry horticulture 0.05 2000.0 –0.15 –300.0 0
Livestock 0.05 2000.0 –0.15 –300.0 191.1
Forestry 0.025 4000.0 –0.40 –1600.0 1673.0
Other Agric 0.05 2000.0 –0.15 –300.0 24.8
Coal 2.12 47.2 –0.32 –15.3 40.3
Gold 2.12 47.2 –0.32 –15.3 284.8
Crude, petroleum & gas 2.12 47.2 –0.48 –22.6 0.7
Other mining 2.12 47.2 –0.32 –15.3 368.3
Food 4.00 25.0 –0.39 –9.8 376.4
Textiles 4.00 25.0 –0.33 –8.3 104.4
Footwear 4.00 25.0 –0.33 –8.3 0
Chemicals & rubber 2.12 47.2 –0.15 –7.2 59.4
Petroleum refineries 2.12 47.2 –0.48 –22.6 92.0
Other non-metal minerals 2.79 35.8 –0.32 –11.6 44.0
Iron & steel 2.79 35.8 –0.27 –9.8 56.2
Non-ferrous metal 2.79 35.8 –0.27 –9.8 14.0
Other metal products 2.79 35.8 –0.27 –9.8 60.0
Other machinery 4.00 25.0 –0.25 –9.5 37.3
Electricity machinery 4.00 25.0 –0.38 –9.5 6.2
Radio 4.00 25.0 –0.38 –9.5 0
Transport equip 4.00 25.0 –0.38 –9.5 20.4
Wood, paper & pulp 2.12 47.2 –0.59 –27.8 157.5
Other manufacturing 4.00 25.0 –0.38 –9.5 13.0
Electricity 2.12 47.2 –0.80 –37.7 207.9
Water 2.12 47.2 –0.60 –28.3 5906.5
Construction 4.00 25.0 –0.38 –9.5 167.1
Trade 4.00 25.0 –0.19 –4.8 491.4
Hotels 6.11 16.4 –0.19 –3.1 319.8
Transport services 6.11 16.4 –0.19 –3.1 497.1
Community services 6.11 16.4 –0.19 –3.1 175.8
Financial Institutions 6.11 16.4 –0.19 –3.1 281.3
552 SAJEMS NS 9 (2006) No 4
Real estate 6.11 16.4 –0.19 –3.1 662.0
Business activities 6.11 16.4 –0.19 –3.1 26.2
General government 6.11 16.4 –0.19 –3.1 524.8
Health services 6.11 16.4 –0.19 –3.1 331.3
Other service activities 6.11 16.4 –0.19 –3.1 198.7
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A CGE model of South Africa is used to find the potential for a double or triple dividend if the revenues raised from an energy-related environmental tax are recycled to households and industry through lowering existing taxes. Four environmental taxes and three revenue-recycling schemes are compared. The environmental taxes are (i) a tax on greenhouse gas emissions, (ii) a fuel tax, (iii) a tax on electricity use, and (iv) an energy tax. The four taxes are constructed such that they have a comparable effect on emissions. The revenue is recycled through either (i) a direct tax break on both labour and capital, (ii) an indirect tax break to all households, or (iii) a reduction in the price of food. A triple dividend is found Ð decreasing emissions, increasing GDP, and decreasing poverty Ð when any one of the environmental taxes is recycled through a reduction in food prices.
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