The one tax South Africa needs to hike

The OECD says South Africa’s carbon tax is too low to reduce emissions, but admits that the government has difficulty getting support for further taxes.

In its latest economic survey, the OECD said that carbon pricing is a key policy tool to reduce emissions cost-effectively.

Carbon pricing provides incentives to abate emissions cost-effectively and invest in low-carbon technologies.

Moreover, it can increase government revenues, which are then used to support green investment or social policies to offset the affordability impact of these mitigation policies.

The OECD said that South Africa’s average net effective carbon price is low by international standards, with significant variations across sectors and energy sources.

Average net effective carbon prices are below the OECD average in the electricity and industry sectors and above the OECD average when it comes to buildings, agriculture and fisheries and transport sectors.

This is primarily due to fuel excise taxes, which have resulted in relatively higher prices for diesel, gasoline and kerosene.

South Africa’s effective carbon tax rate, which firms pay by accounting for the low carbon tax rate and the significant share of emissions exempt from taxation, is too low to meet its 2030 emissions targets.

“Achieving this target would require effective carbon tax rates to be significantly higher than those currently proposed by 2030, assuming no other mitigation measures,” said the OECD.

“An increase in the effective carbon tax rate could occur through a higher carbon tax rate, which is currently planned to increase but will remain relatively low.”

The government has enacted annual increases in the carbon tax rate until 2030, but no increases are scheduled beyond 2030.

The government has committed to quadrupling the rate between 2030 and 2050.

Although the OECD said that incremental increases are necessary, this current approach may be needed in the short term to address constraints.

It added that the more substantial commitment to climate policies, such as effective carbon tax rates, will encourage firms to increasingly prioritise investments to lower their carbon footprint.

“Adhering to announced future tariffs increases and demonstrating a consistent track record of action up to 2030 can provide the necessary policy certainty without prematurely committing to a specific annual outlook for carbon tax rates,” said the OECD.

What a higher tax can do

The OECD said that a more ambitious approach to effective carbon prices could provide a significant source of revenues for climate policies until the decrease in emissions begins to lower revenues.

For instance, a broad-based effective carbon price of around R1,100 per tonne of CO2 could generate 8.4% of GDP based on South Africa’s emissions and revenue in 2018, up from 2.6% of GDP.

“Such an increase is also estimated to reduce emissions by 18.5%, assuming a linear emission responsiveness to effective carbon prices,” said the OECD.

That said, making higher effective carbon taxes politically acceptable is a significant challenge.

Low economic growth and elevated geopolitical uncertainty are increasing the vulnerabilities of firms, limiting the acceptance of higher effective carbon tax rates.

The unpopularity of further tax increases was recently seen in the 2025 Budget debacle, where Finance Minister Enoch Godongwana had to walk back on a proposed increase in VAT.

Offsetting regressive elements can help increase the public acceptance of climate policies. This is what South Africa already does with the carbon tax. However, it only accounts for 0.03% of GDP.

The OECD said that an increase in the carbon tax could help increase support, such as funding the expansion of the electricity grid and transmission infrastructure, free basic electricity and reskilling programmes.