Mitigating climate change through carbon pricing: An emerging policy debate in South Africa

South Africa is considering how best to contribute its fair share to the global effort to mitigate climate change. The domestic policy debate is characterized by a vibrant engagement involving government, business, labour and civil society. The policy option with greatest potential for reducing emissions is carbon pricing through a carbon tax or emissions' trading scheme. The welfare and development impacts need to be carefully considered. The broader debate considers economic efficiency, environmental effectiveness, welfare impacts, competitiveness impacts, design implications given market concentration, and complexity and transaction costs. This article examines the challenges of pricing carbon given considerations of political economy, such as high unemployment, poverty and lack of access to basic services. The article shows a preference emerging for a carbon tax. A carbon tax does not create equivalent certainty with respect to environmental outcomes, but the tax level can be adjusted to achieve desired emissions reductions. Where the policy priority is price stability a tax is advantageous, providing long-term policy signals to investors, as well as price transparency, fiscal revenue stability, economy-wide coverage of emissions and administrative efficiency. However, three implementation issues need clarity: limiting welfare impacts on poor households; the feasibility of a hybrid model; and integrating carbon pricing with the broader transition to a low-carbon economy.