25th AIM international workshop
NIES, Tsukuba, 19 November 2019

How choosing a Carbon Tax revenue
recycling scheme can & cannot
contribute to decarbonizing an economy
An analysis with IMACLIM South Africa
Jules Schers (CIRED , UCT/Expertise France)
Co-authors: Frédéric Ghersi, Franck Lecocq (CIRED)
Funding or support:

IMACLIM « hybrid » CGE modelling network& model coupling developments•

From integrated BU energy tech-rich Recursive, to KLEM, and detailed socio-economic rich models:–Global (IAM), IMACLIM-R monde, CIRED–France (2 versions), CIRED, Recursive and using reduced forms of BU models–Brazil, COPPE/UFRJ, soft-coupling to MESSAGE and LEAP & land use models–South Africa, CIRED with UCT, exogonous tech coefficient from SA TIMES–India, IIMA, with AIM/end use model–China, Tsinghua University, KLEM - TIMES coupling–

Saudi Arabia, CIRED & EDF with KAPSARC, with KEM bottom-up model••

Under development:–Argentina, Fondacion Bariloche, coupling with LEAP model–Russia, HSE Moscow–Viet Nam, USTH, Ha Noi–Senegal, ENDA, coupling with LEAP model–Ireland, CIRED with UCC, coupling in TIAM-KLEM model

Next week, 27-29 Nov : 5th international IMACLIM workshop in Cape Town

2 / 24

Content overview
1. Introduction : Problem definition
2. Methodology : IMACLIM South Africa
3. Scenarios & results
4. Analysis : Why choice of revenue recycling scheme
matters or not for decarbonizing the economy
5. Recommendations
3 / 24

The other model of UCT: SATIM-GE: coupled,optimisation models for South Africa
Model comparison improves model quality and insights

BU energy model

Model coupling

CGE model

Source: Merven etal, UCT/SATIED,(2019)4 /24

1. Introduction / Problem definition

Overview of SA’s GHG emissions & climate policy➢ Very high energy and CO2
intensity of the economy;➢ Big minerals sector, Power
is 90% from coal, and Coalto-Liquids used for fuels;

Source: Climate
Transparancy (2019)➢ SA’s NDC: peak-plateaudecline is outdated byrecent trends, but
insufficient for 1.5oC➢ SA’s Carbon Tax, since June2019 : 120 ZAR/tCO2 (~$6),
but 60-95% industry
exemptions

Source: Marquard,SATIED (2019)6 / 24

South Africa’s economic problems(despite progress since 1994 / end of Apartheid)➢ Low growth, High income inequality, and High unemployment
for low & medium skilled labour:➢ Spatial segregation remaining from Apartheid era : accompanied by hightransport costs and crime rates;➢ Problems with educational quality (Spaull, 2013): Segmented labour
market➢ High-skill labour shortage.

➢ Guivarch et al. (2010): labour costs important for estimating
both costs and benefits of transition to a low carbon economy :Rigidities must be accounted for.
➢ Could carbon tax revenue be used to lift economic constraints?
➢ First exercise: Analyse growth, and Ctax for tax reform or transfers.
7 / 24

2. Methodology : IMACLIM South Africa

Main characteristics of IMACLIM-ZA➢ CGE, because 99% of jobs in non-energy sectors: macro-economic feedbacks thus
very important!
➢ IMACLIM “hybrid”, open economy CGE, with dual accounting of values &quantities of energy flows;➢ Myopic simulation in a one-step projection from 2005 to 2035;➢ 3 Labour markets segmented by skill (Low, Medium, High) with for each a wagecurve (Blanchflower & Oswald)➢ 5 « income-skill » household classes;➢ Secondary income distribution: direct taxes, social security & transfers, forFirms, Government, the 5 Hhs, Rest of the World;➢ Capital market: Amortisation of physical capital separated from Net Operating
Surplus; NOS modelled as a fixed mark-up; modelling net saving/borrowing;debt accumulation; endogenous rate of interests & dividends.
9 / 24

Technology in electricity sector by Leontief
coefficients per scenario➢ Hybridisation of I-O table with energy balance & price data:➢ Allows better accounting of energy in economy➢ To fit I-O to Bottom-Up energy modelling insights and e.g. integrate
rigidities in energy supply and demand➢ Leontief coefficients for ELC per Ctax scenario from SA TIMES*:No Ctax

R100 Ctax

R300 Ctax
renewables

nucleargascoal➢ Future plans: estimate reduced forms of SATIM and expand.
* Thanks to Bruno Merven and colleagues of the Energy Systems research group of the University of Cape Town.

10 / 24

Nested CES KLEM production function
for other sectors
Domestic output

KLE part: Basedon Van der Werf(2008)
Coal mining

COA

Oil (imports)

OIL

Gaseous fuels GAS
Refineries (oil, REF
Coal-to-Liquids)
Electricity

ELC

Y
EIN
KLE

E
EnergyKL

L1
Low skill
LabourKL-part Inspiredby Krusell et al.
(2000)

MANMatK
CapitalEnergy intensive industry
Manufacturing

TRA

Transport services

LSS

Low skill sectors

HSS

High skill services

KL23
KL3

L2
Med skill

L3
High skill
LabourConstant Elasticity of
Substitution (CES)

Fixed production
coefficients (Leontief)
11 / 24

3. Scenarios & results

Carbon tax revenue recycling scenarios➢ Revenue Recycling scenarios for 2 carbon tax rates:
1. Per capita Lump Sum for all households
2. Reduction of profit taxes, with:•

Case 1: No-change in profit mark-up rates (fixed)•Case 2: Reduction of profit mark-up rates

3. Reduction of a Sales tax on final consumption
4. Subsidies to labour➢ Economic impacts small for Ctax 100 ZAR2005/tCO2 (20 $2017/tCO2)➢ Next: Results for Ctax 300 ZAR’05/tCO2 (60 $2017/tCO2)

13/ 24Choice of revenue recycling matters for GDP, jobs,
and inequality, but not much for CO2-intensity
GDP growthBroad2005 tounemploy2035
ment rate

Base Year (2005)
Reference (2035, No Ctax )EnergyCO2 emiss.
(Mt)

CO2 intensity
GDP (kg CO2/$'13 GDP)

Ratio of class 5
over 1 income

-39%

443

1.54

42+141%

24%

728

1.05

45

Results of revenue recycling of Ctax 300 ZAR2005/tCO2 (60 $2017), vs Reference:
GDPNr of jobs

CO2emissions

CO2 intensity ofGDPClass 5 over 1
income ratio

-20%

-19%

-49%

-36%

-49%

-20%-20%

-49%

-36%

-4%

-12%

-11%

-44%

-36%

-2%

Sales tax reduction

-11%

-11%

-44%

-37%

-2%

Labour subsidies-8%-6%-43%-38%-4%

Lump Sum transfer
Profit tax cut & Constantmargins
Profit tax cut & Lower
marginsAbsolute results likely too pessimistic,
but comparison of schemes holds➢ No border tax adjustments, no foreign Ctax;➢ Labour market maybe too rigid;➢ No fuel switching in refineries and transport;➢ Model not up-to-date for RE now 2 to 3 times cheaper thannewest coal in SA :LCOE of Solar PV &Wind RE biddings
LCOE Kusile &Medupi Coal
power plants

Source: Steyn et al., Meridian economics (2017)
Source: Ireland & Burton, UCT/SATIED (2018)15/ 24

4. Analysis : Why choice of revenue recycling scheme
matters or not for decarbonisation

Economic equilibrium requires that an increase of revenue atone place (CO2 tax) is compensated at another place… all other things (e.g. productivity, trade) almost equal

Comparison with RP for R300 Ctax & Recycling via:

Lump
sum

Corporate profit tax cut+ Fixedmargins+ Lowermargins

Sales tax
cut

Laboursubsidies

Indirect taxes→ Ctax effect, unless recycling

+1.5%

+1.5%

+1.5%

+0.1%

+1.5%

Labour costs→ wage elasticity or recycling effect

-1.6%

-1.6%

-0.7%

-0.7%

-1.6%

+0.3%

+0.3%

+0.3%

+0.3%

+0.3%

-0.2%

-0.2%

-1.1%

+0.3%

-0.1%

Sum of primary income components (by definition 0)

0%

0%

0%

0%

0%

→ indirect Ctax effect

+1.0%

+1.1%

+1.2%

+1.3%

+1.1%

-1.2%

-1.1%

-0.6%

+0.8%

-0.6%

+1.0%

+0.8%

+0.4%

+0.9%

+0.3%

Sum of non-income components

+0.8%

+0.7%

+1.0%

+2.9%

+0.8%

Total change in aggregate costs of supply over GDP

+0.8%

+0.7%

+1.0%

+2.9%

Consumption of fixed capital→ K intensity ELC and substitution effects
Net Operating Surplus→ mixed effects

Energy intermediates costs

Materials and services intermediates costs→ substitution effectImport costs→ substitution effect+0.8%

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Choice of revenue recycling matters fordecarbonisation, because …
➢ Economically succesful revenue recycling schemes (Labour subsidies,and Profit tax reduction with reduced margins) can reduce negative

economic consequences of carbon taxation and thus increase publicsupport,➢ … while such recycling of revenue into a reduction of costs of labouror production costs of energy-extensive sectors promotes labour(substituting energy) as a factor to production as well as
consumption of energy-extensive products in intermediate or final
consumption (vs energy-intensive).
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However… only up to a certain limit:
little decarbonisation beyond Reference outside ELC
Reduction mainly
from reduced
electricity demand

CO2 intensity GDP in kg CO2/ZAR'05

0.30
0.25

Reduction fromtech. change inpower generation

0.20

Change Hhs

Struct chg others
Limitedadditionalchange

Techn chg others

In blue:
Differences

Struct chg ELC
Tech chg ELC

0.15

Hhs

0.10
0.05
0.00

BYchangevs BY

RPTransport
Other
Heavy ind.
Refineries

TRAElectricity

REF

change Ct300 change Ct300
vs RP RDEF vs RP RTSC

MAN, LSS, HSS

COA, GAS, EIN

In red:Remaining
CO2intensity

ELC

19 / 24

Energy costs have to rise due to limited
efficiency gains (beyond Reference)➢ Energy efficiency gains already high in Reference Projection:➢ Price-elasticity of energy use is low in energy-intensive sectors;
COAGASREF

EINMANLSS

HSS

TRA

Reference-15.5%-1%-3%-11%-30%-22%-37%-4%

R100 Ctax avg-19%-2%-3%-14.5%-41%-28%-48.5%-5%

R300 Ctax avg-21%-3%

-3.5%

-18%

-51.5%

-34%

-58%

-6.5%

➢ Allwood et al (2011): efficiency potentials in steel, cement, plastics,aluminium, and paper range from 23 to 40% - but what is their cost?
Allwood et al. (2011). Material efficiency: A white paper. Resources, Conservation and Recycling Vol.55, pp 362-381

20 / 245. Recommendations

Recommendations
Policy:➢ Even with expensive RE + rigid labour market SA can achieve its NDC while achieving
significant economic growth at rates above current Carbon tax law;
➢ Recycling of Ctax revenue should reduce production costs, especially for use of labouror energy-extensive sectors, here: Labour subsidies;
Knowledge gaps:➢ For higher decarbonisation with continued GDP growth, energy & material efficiency
are very important, but little literature discusses the costs, e.g. capital and labour
intensity of efficient technologies or efficiency measures;➢ Also, it is unclear whether K-L and E-L price elasticities for CES production functions
sufficiently capture labour-intensity (and productivity) of future low carbontechnologies;➢ Scenario not discussed: Explore investing Ctax revenue in education & training.
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Thank you for your attention!
Jules Schers
schers | at | centre-cired.fr➢ PhD thesis: Jules Schers. Economic growth, unemployment and skills in South Africa: An Analysis ofdifferent recycling schemes of carbon tax revenue. Economics and Finance. Université Paris-Saclay, 2018.
English. NNT: 2018SACLA039. tel-02293182➢ https://tel.archives-ouvertes.fr/tel-02293182/document➢ Other publication for this study: EAERE 2019 conference paper: “The impact of carbon tax revenue
recycling on GDP and employment in South Africa”➢ http://www.fleximeets.com/eaere2019/getpaper.php?fid=1301