## sipea2023040 - 1. South Africa has ambitious climate mitigation goals. South Africa is the largest greenhouse gas

## Source details

**Canonical URL:** [sipea2023040 - 1. South Africa has ambitious climate mitigation goals. South Africa is the largest greenhouse gas](https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023040.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023040.pdf.md)
- [Structured JSON version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023040.pdf.json)

---

### A. Emissions profile and policy instruments
- South Africa is the largest greenhouse gas (GHG) emitter on the African continent.
- Total GHG emissions (excluding forestry and other land use) increased by over 67 percent from 1990 to 2019.
- The energy sector:
  - Accounted for close to 86 percent of the emissions in 2019.
  - Contributed to almost 91 percent of the GHG emission increase over the past three decades.
- National targets:
  - Updated Nationally Determined Contribution (NDC): reduce GHG emissions to 350–420 MtCO2e by 2030 and reach carbon neutrality by the midcentury.
- Carbon tax design and coverage:
  - Implemented in June 2019; follows the polluter-pays principle and uses emission factors and procedures in line with IPCC standards.
  - Covers about 90 percent of the country’s total GHG emissions, with agriculture, forestry, land use, and waste excluded.
  - Transition features:
    - Basic tax-free allowance ranging between 60 percent and 75 percent of emissions across sectors.
    - Additional allowances and offsets potentially adding up to 95 percent depending on the sector.
    - Performance adjustment using a carbon emission intensity factor for output relative to a sector benchmark, capped at 5 percentage points.
    - Additional allowances for participants in the carbon budget system, companies with significant trade exposure, and those utilizing carbon offsets.
- Official and effective rates:
  - Official carbon tax rate set at R120 (or about $7) per ton of CO2e initially and increased to R134 (or about $8) by end 2022.
  - Estimated effective rate based on carbon tax revenue collected was less than R7 per ton of CO2e during the FY2021–22.
  - Transition phase extended from end 2022 to end 2025; effective carbon tax rate expected to remain low despite planned headline increases.
- Other environment-related taxes:
  - National and local taxes include transport fuels, vehicle taxation, aviation taxes, product taxes, electricity, water supply, and wastewater.
  - Revenue from national level instruments averaged about 1.7 percent of GDP in recent years.
  - The general fuel levy accounted for close to 84 percent of that total.
  - Existing fuel excise taxes significantly raised South Africa’s price of carbon compared with other G20 countries.
- Pre-existing levies and interactions:
  - Electricity generation levy introduced in 2009 on power generation from fossil-fuel and nuclear sources.
  - During the transition, the energy sector can use the electricity generation levy to offset carbon tax liabilities.

### B. Fiscal transfers, Eskom, and incentives
- Eskom and incentives:
  - Eskom, the state utility monopoly, relies primarily on coal and depends on large government transfers to continue operating.
  - Eskom currently enjoys offset from the electricity levy paid under the Carbon Tax Act and, with the extension of the transition phase, does not expect to have a liability for the tax until 2026.
  - Subsidies to Eskom on a rand per ton of CO2e basis are vastly greater than both the electricity levy on the same basis and the official carbon tax rate.
  - Continued subsidies and uncertainty over tax liability provide little incentive for Eskom to move away from coal.
  - Eskom’s challenges in reducing costs and ensuring power availability will likely result in continued subsidies.

### C. Projected carbon tax paths and modeling results
- Government proposed carbon tax trajectory (2022 Budget and Draft TLAB):
  - Raise carbon tax rate progressively between 2023 and 2030.
  - Long-term trajectory up to 2050 and beyond proposed.
  - Specific targets:
    - At least US$20/tCO2 by 2026.
    - US$30/tCO2 by 2030.
    - Accelerating to higher levels up to US$120/tCO2 beyond 2050.
- Modeling tool:
  - Carbon Pricing Assessment Tool (CPAT): reduced-form model of energy consumption incorporating growth forecasts, price and income elasticities, technical progress, and price changes; uses input-output tables and household expenditure survey data for distributional insights.
- CPAT results — current tax proposal:
  - NDC commitment: 350–420 MtCO2e during 2026–2030 (between 15 to 30 percent reduction from the current level).
  - Under the current carbon tax proposal (headline US$30 by 2030 scenario), projected GHG emissions are in the range of 475–492 MtCO2e during 2026–2030.
  - Simulation assumption: no tax exemptions or allowances over the modeling period and carbon tax is the only policy instrument deployed.
- CPAT results — alternative/high tax scenario:
  - Scenario with carbon tax raised to $120/tCO2 by 2030.
  - Projected GHG emissions during 2026–2030: 377–453 MtCO2e, consistent with the NDC commitment range.
  - By 2030, emissions expected to reduce to the mid-point of the NDC target under this scenario.
  - To achieve net zero by midcentury, carbon tax would need to ramp up faster after 2030 and rise above $120/tCO2.
  - The current proposal in the 2022 budget to raise the carbon tax to $120/tCO2 after 2050 would not deliver the NDC and the net zero target in the absence of additional mitigation measures.

### D. Complementary mitigation measures and policy alignment
- Need for multiple instruments:
  - International experience: comprehensive packages of price-based and non-price policies are typically necessary to meet ambitious mitigation goals.
  - For South Africa, carbon tax is key but must be complemented by other policies and investments (IRP, Green Transportation Strategy, enhanced energy efficiency programs, draft Climate Change Bill with carbon budgets).
  - The Just Energy Transition Investment Partnership as a flagship initiative to leverage public and private financing.
- Policy alignment:
  - Combined effect of policies varies across countries; South Africa’s carbon tax plus planned renewable investment (IRP) expected to be main drivers.
  - Current policy package translates to approximately $30/tCO2 in carbon price equivalent terms based on current carbon tax and sectoral policies.
  - Ensuring instruments are well aligned and not in conflict is crucial.
- Integration of carbon tax and carbon budgets:
  - Company-level carbon budgets planned; entities with allocated budgets must prepare GHG mitigation plans.
  - Government proposes a higher carbon tax rate of R640/tCO2 for GHG emissions exceeding the carbon budget in the transition phase (and no penalty for non-compliance for the carbon budget).
  - Unclear how penalties will be adjusted or aligned with new carbon tax proposals from 2026 onward.
- Sectoral feebates:
  - Feebates employ a revenue-neutral sliding scale of fees for above-average emitters and rebates for below-average emitters; avoid fiscal cost to government.
  - Existing performance benchmark allowances and carbon budgets have similar features to feebates.
- Green financial policies and financing needs:
  - Decarbonization financing needs could amount to 4 ½ percent of GDP per year between 2022 and 2050, requiring private finance.
  - Green financial sector reforms can crowd-in private climate finance and enhance financial sector resilience.
  - National Treasury (2021) recommended actions: guidelines for reporting and disclosure of climate-related risks, climate stress testing guidelines, scaling-up green bond issuance, building on green finance taxonomy.
- Priority actions to address energy carbon intensity:
  - Phase out exemptions from the carbon tax.
  - Raise carbon tax rates as planned.
  - Remove regulatory barriers to alternative green energy generation.
  - Promote contestability in the energy sector.
  - Provide enabling conditions to crowd in green private sector investments.

*IMF staff summary based on sipea2023040, selected issues paper.*

### Sectoral impacts and economic shifts (chapter continuation)
- Two carbon tax scenarios modeled: the current tax proposal ($30 by 2030) and the NDC-aligned scenario ($120 by 2030).
- Carbon price in the CPAT model simulation is assumed to pass through to energy prices, with largest effects on coal prices followed by natural gas, oil, and electricity prices; increases in fuel and electricity prices push up output prices.
- Transport and industry sectors are the most vulnerable in both carbon tax scenarios.
- IMF-ENV model scenarios based on South Africa’s 2030 GHG emission target range of 350–420 MtCO2e show:
  - Energy-intensive and high-carbon sectors contract while green and low-carbon sectors expand.
  - Value-added in the fossil extraction sector can fall between 17 to 31 percent relative to the baseline scenario.
  - Smaller decreases in value-added occur in iron and steel, chemicals and non-metallic mineral sectors.
  - Value added in the power sector can increase by 17–47 percent relative to the baseline.
  - The overall share of renewables in 2030 increases from 10 percent in baseline to 30–53 percent.
  - Coal remains the biggest source for electricity generation in 2030, but its share falls over the years as renewables grow.

### Employment reallocation and labor-market implications
- Overall total employment in South Africa can increase by about ½ percent relative to the baseline (or roughly 70–90 thousand more jobs), driven by increased employment in collective, business, and other services.
- Employment falls relative to baseline in fossil extraction and transport services.
- Total employment in the power sector increases, with solar and wind sectors driving growth.
- The total reduction in fossil electricity employment is almost entirely driven by coal-powered electricity.
- Job reallocation estimates (the sum of job destruction and creation) are about 10–17 percent higher on average under the NDC scenarios compared to the baseline over 2022–30.
- Policy implication: mitigating impacts on affected workers and communities requires promoting labor market flexibility and building human capital to support displaced workers and prepare the young.

### Distributional effects on households
- Under the current tax proposal ($30 per ton by 2030), CPAT simulation results show:
  - Burden on South African poorest households is over 3.3 percent of consumption.
  - Burden on the wealthiest group is about 2.1 percent of consumption.
  - Main items behind impact: increased prices of electricity (1.2 percent of consumption), food (0.4 percent), and transportation (0.4 percent); these impacts tend to be higher for lower income households.
  - Impacts from gasoline prices and other indirect effects from higher energy costs appear to be progressive.

### Use of carbon tax revenues and fiscal effects
- Carbon tax revenue is not earmarked under current design, preserving budget flexibility.
- Past use of electricity generation levy revenue included funding energy saving measures (solar water heating) and road rehabilitation from coal transport damage.
- Under the current carbon tax design, revenues can be used for: an energy efficiency savings tax incentive, support for solar water heaters, enhanced free basic electricity/energy for low-income households, improved public transport, and support for a shift from road to rail freight transport.
- CPAT simulation of revenue recycling under the current tax proposal ($30/tCO2 by 2030) assumes revenue recycling allocation of:
  - 30% of revenue toward labor tax reduction,
  - 40% for climate-smart public investment,
  - 30% for cash transfers targeting low-income households.
- Key fiscal and macro results from CPAT simulation:
  - Carbon tax revenues could reach about 2 percent of GDP by 2030, with the bulk coming from tax collected on coal consumption.
  - Recycling the revenues would result in net annual GDP growth of 1.4 percent in 2030 (compared to 1.3 percent in the baseline).
  - Recycling the revenues would result in net annual GDP growth of 2.2 percent in 2035 (compared to 1.7 percent in the baseline).
- Fiscal trade-offs: South Africa’s social assistance spending is already high relative to comparator countries; lack of fiscal space, heavy debt burden, and large investment needs imply revenue use must be balanced against deficit reduction and public finance sustainability. Avoiding earmarking is important to ensure spending efficiency and fiscal transparency.

### Model characteristics, caveats, and risks
- CPAT model: used for carbon price pass-through and consumption/price distributional analysis.
- IMF-ENV model: a recursive dynamic CGE with 36 sectoral and 26 regional aggregates that captures economic interlinkages across sectors and countries; used to estimate sectoral value-added and employment changes.
- IMF-ENV scenarios project to 2050 and incorporate:
  - Recursive dynamic equilibria with vintage capital stocks (short-term capital less reallocateable; new investment flexible).
  - Labor and land can shift across sectors in each year with limited frictions.
  - Emissions linked to economic activity via fixed coefficients or emission intensities that decrease with carbon prices (marginal abatement cost curves).
- Model limitations and risks:
  - Model may overestimate long-term decarbonization costs because it does not account for potential radical future technology innovations (hydrogen, second generation nuclear, biofuels, carbon capture and storage).
  - Upside risks: rapid technological innovations or more learning-by-doing could reduce costs.
  - Downside risks: stranded assets and difficult labor reallocation could increase costs; other risks include economic and population growth and fossil fuel producer strategies.

### Policy recommendations and concluding points
- A comprehensive and well-designed carbon pricing scheme should play a more prominent role in South Africa’s green transition and be aligned with GHG emission reduction targets.
- The generous tax-free allowances and exemptions under the carbon tax should be phased out in due course.
- Carbon tax rate combined with complementary policy instruments should be aligned with NDC targets.
- Steady implementation of energy sector reforms to streamline regulatory burden and foster competition will strengthen carbon tax effectiveness by increasing price-responsiveness of fossil-fuel use.
- Channeling fiscal resources to support the transition (increasing climate-smart public investment, reducing labor taxes, and/or providing transfers to vulnerable households) can mitigate near-term economic and distributional impacts and promote growth.
- Given limited fiscal resources and significant investment needs, difficult choices on revenue use will be necessary; advancing product market competition, labor market flexibility, and human capital will facilitate sectoral reallocation of labor and capital needed for a successful climate mitigation policy.

*Source: IMF Staff calculations and analysis as presented in the chapter.*

### 1. South Africa has ambitious climate mitigation goals. South Africa is the largest greenhouse gas

### sipea2023040 - 1. South Africa has ambitious climate mitigation goals. South Africa is the largest greenhouse gas

### A. Emissions profile and policy instruments
- South Africa is the largest greenhouse gas (GHG) emitter on the African continent.
- Total GHG emissions (excluding forestry and other land use) increased by over 67 percent from 1990 to 2019.
- The energy sector:
  - Accounted for close to 86 percent of the emissions in 2019.
  - Contributed to almost 91 percent of the GHG emission increase over the past three decades.
- National targets:
  - Updated Nationally Determined Contribution (NDC): reduce GHG emissions to 350–420 MtCO2e by 2030 and reach carbon neutrality by the midcentury.
- Carbon tax design and coverage:
  - Implemented in June 2019; follows the polluter-pays principle and uses emission factors and procedures in line with IPCC standards.
  - Covers about 90 percent of the country’s total GHG emissions, with agriculture, forestry, land use, and waste excluded.
  - Transition features:
    - Basic tax-free allowance ranging between 60 percent and 75 percent of emissions across sectors.
    - Additional allowances and offsets potentially adding up to 95 percent depending on the sector.
    - Performance adjustment using a carbon emission intensity factor for output relative to a sector benchmark, capped at 5 percentage points.
    - Additional allowances for participants in the carbon budget system, companies with significant trade exposure, and those utilizing carbon offsets.
- Official and effective rates:
  - Official carbon tax rate set at R120 (or about $7) per ton of CO2e initially and increased to R134 (or about $8) by end 2022.
  - Estimated effective rate based on carbon tax revenue collected was less than R7 per ton of CO2e during the FY2021–22.
  - Transition phase extended from end 2022 to end 2025; effective carbon tax rate expected to remain low despite planned headline increases.
- Other environment-related taxes:
  - National and local taxes include transport fuels, vehicle taxation, aviation taxes, product taxes, electricity, water supply, and wastewater.
  - Revenue from national level instruments averaged about 1.7 percent of GDP in recent years.
  - The general fuel levy accounted for close to 84 percent of that total.
  - Existing fuel excise taxes significantly raised South Africa’s price of carbon compared with other G20 countries.
- Pre-existing levies and interactions:
  - Electricity generation levy introduced in 2009 on power generation from fossil-fuel and nuclear sources.
  - During the transition, the energy sector can use the electricity generation levy to offset carbon tax liabilities.

### B. Fiscal transfers, Eskom, and incentives
- Eskom and incentives:
  - Eskom, the state utility monopoly, relies primarily on coal and depends on large government transfers to continue operating.
  - Eskom currently enjoys offset from the electricity levy paid under the Carbon Tax Act and, with the extension of the transition phase, does not expect to have a liability for the tax until 2026.
  - Subsidies to Eskom on a rand per ton of CO2e basis are vastly greater than both the electricity levy on the same basis and the official carbon tax rate.
  - Continued subsidies and uncertainty over tax liability provide little incentive for Eskom to move away from coal.
  - Eskom’s challenges in reducing costs and ensuring power availability will likely result in continued subsidies.

### C. Projected carbon tax paths and modeling results
- Government proposed carbon tax trajectory (2022 Budget and Draft TLAB):
  - Raise carbon tax rate progressively between 2023 and 2030.
  - Long-term trajectory up to 2050 and beyond proposed.
  - Specific targets:
    - At least US$20/tCO2 by 2026.
    - US$30/tCO2 by 2030.
    - Accelerating to higher levels up to US$120/tCO2 beyond 2050.
- Modeling tool:
  - Carbon Pricing Assessment Tool (CPAT): reduced-form model of energy consumption incorporating growth forecasts, price and income elasticities, technical progress, and price changes; uses input-output tables and household expenditure survey data for distributional insights.
- CPAT results — current tax proposal:
  - NDC commitment: 350–420 MtCO2e during 2026–2030 (between 15 to 30 percent reduction from the current level).
  - Under the current carbon tax proposal (headline US$30 by 2030 scenario), projected GHG emissions are in the range of 475–492 MtCO2e during 2026–2030.
  - Simulation assumption: no tax exemptions or allowances over the modeling period and carbon tax is the only policy instrument deployed.
- CPAT results — alternative/high tax scenario:
  - Scenario with carbon tax raised to $120/tCO2 by 2030.
  - Projected GHG emissions during 2026–2030: 377–453 MtCO2e, consistent with the NDC commitment range.
  - By 2030, emissions expected to reduce to the mid-point of the NDC target under this scenario.
  - To achieve net zero by midcentury, carbon tax would need to ramp up faster after 2030 and rise above $120/tCO2.
  - The current proposal in the 2022 budget to raise the carbon tax to $120/tCO2 after 2050 would not deliver the NDC and the net zero target in the absence of additional mitigation measures.

### D. Complementary mitigation measures and policy alignment
- Need for multiple instruments:
  - International experience: comprehensive packages of price-based and non-price policies are typically necessary to meet ambitious mitigation goals.
  - For South Africa, carbon tax is key but must be complemented by other policies and investments (IRP, Green Transportation Strategy, enhanced energy efficiency programs, draft Climate Change Bill with carbon budgets).
  - The Just Energy Transition Investment Partnership as a flagship initiative to leverage public and private financing.
- Policy alignment:
  - Combined effect of policies varies across countries; South Africa’s carbon tax plus planned renewable investment (IRP) expected to be main drivers.
  - Current policy package translates to approximately $30/tCO2 in carbon price equivalent terms based on current carbon tax and sectoral policies.
  - Ensuring instruments are well aligned and not in conflict is crucial.
- Integration of carbon tax and carbon budgets:
  - Company-level carbon budgets planned; entities with allocated budgets must prepare GHG mitigation plans.
  - Government proposes a higher carbon tax rate of R640/tCO2 for GHG emissions exceeding the carbon budget in the transition phase (and no penalty for non-compliance for the carbon budget).
  - Unclear how penalties will be adjusted or aligned with new carbon tax proposals from 2026 onward.
- Sectoral feebates:
  - Feebates employ a revenue-neutral sliding scale of fees for above-average emitters and rebates for below-average emitters; avoid fiscal cost to government.
  - Existing performance benchmark allowances and carbon budgets have similar features to feebates.
- Green financial policies and financing needs:
  - Decarbonization financing needs could amount to 4 ½ percent of GDP per year between 2022 and 2050, requiring private finance.
  - Green financial sector reforms can crowd-in private climate finance and enhance financial sector resilience.
  - National Treasury (2021) recommended actions: guidelines for reporting and disclosure of climate-related risks, climate stress testing guidelines, scaling-up green bond issuance, building on green finance taxonomy.
- Priority actions to address energy carbon intensity:
  - Phase out exemptions from the carbon tax.
  - Raise carbon tax rates as planned.
  - Remove regulatory barriers to alternative green energy generation.
  - Promote contestability in the energy sector.
  - Provide enabling conditions to crowd in green private sector investments.

*IMF staff summary based on sipea2023040, selected issues paper.*

### 18. The impact of higher carbon pricing varies significantly across sectors. The carbon tax policy will

### 18. The impact of higher carbon pricing varies significantly across sectors. The carbon tax policy will 

### Sectoral impacts and economic shifts
- Two carbon tax scenarios modeled: the current tax proposal ($30 by 2030) and the NDC-aligned scenario ($120 by 2030).
- Carbon price in the CPAT model simulation is assumed to pass through to energy prices, with largest effects on coal prices followed by natural gas, oil, and electricity prices; increases in fuel and electricity prices push up output prices.
- Transport and industry sectors are the most vulnerable in both carbon tax scenarios.
- IMF-ENV model scenarios based on South Africa’s 2030 GHG emission target range of 350–420 MtCO2e show:
  - Energy-intensive and high-carbon sectors contract while green and low-carbon sectors expand.
  - Value-added in the fossil extraction sector can fall between 17 to 31 percent relative to the baseline scenario.
  - Smaller decreases in value-added occur in iron and steel, chemicals and non-metallic mineral sectors.
  - Value added in the power sector can increase by 17–47 percent relative to the baseline.
  - The overall share of renewables in 2030 increases from 10 percent in baseline to 30–53 percent.
  - Coal remains the biggest source for electricity generation in 2030, but its share falls over the years as renewables grow.

### Employment reallocation and labor-market implications
- Overall total employment in South Africa can increase by about ½ percent relative to the baseline (or roughly 70–90 thousand more jobs), driven by increased employment in collective, business, and other services.
- Employment falls relative to baseline in fossil extraction and transport services.
- Total employment in the power sector increases, with solar and wind sectors driving growth.
- The total reduction in fossil electricity employment is almost entirely driven by coal-powered electricity.
- Job reallocation estimates (the sum of job destruction and creation) are about 10–17 percent higher on average under the NDC scenarios compared to the baseline over 2022–30.
- Policy implication: mitigating impacts on affected workers and communities requires promoting labor market flexibility and building human capital to support displaced workers and prepare the young.

### Distributional effects on households
- Under the current tax proposal ($30 per ton by 2030), CPAT simulation results show:
  - Burden on South African poorest households is over 3.3 percent of consumption.
  - Burden on the wealthiest group is about 2.1 percent of consumption.
  - Main items behind impact: increased prices of electricity (1.2 percent of consumption), food (0.4 percent), and transportation (0.4 percent); these impacts tend to be higher for lower income households.
  - Impacts from gasoline prices and other indirect effects from higher energy costs appear to be progressive.

### Use of carbon tax revenues and fiscal effects
- Carbon tax revenue is not earmarked under current design, preserving budget flexibility.
- Past use of electricity generation levy revenue included funding energy saving measures (solar water heating) and road rehabilitation from coal transport damage.
- Under the current carbon tax design, revenues can be used for: an energy efficiency savings tax incentive, support for solar water heaters, enhanced free basic electricity/energy for low-income households, improved public transport, and support for a shift from road to rail freight transport.
- CPAT simulation of revenue recycling under the current tax proposal ($30/tCO2 by 2030) assumes revenue recycling allocation of:
  - 30% of revenue toward labor tax reduction,
  - 40% for climate-smart public investment,
  - 30% for cash transfers targeting low-income households.
- Key fiscal and macro results from CPAT simulation:
  - Carbon tax revenues could reach about 2 percent of GDP by 2030, with the bulk coming from tax collected on coal consumption.
  - Recycling the revenues would result in net annual GDP growth of 1.4 percent in 2030 (compared to 1.3 percent in the baseline).
  - Recycling the revenues would result in net annual GDP growth of 2.2 percent in 2035 (compared to 1.7 percent in the baseline).
- Fiscal trade-offs: South Africa’s social assistance spending is already high relative to comparator countries; lack of fiscal space, heavy debt burden, and large investment needs imply revenue use must be balanced against deficit reduction and public finance sustainability. Avoiding earmarking is important to ensure spending efficiency and fiscal transparency.

### Model characteristics and scenario caveats
- CPAT model: used for carbon price pass-through and consumption/price distributional analysis.
- IMF-ENV model: a recursive dynamic CGE with 36 sectoral and 26 regional aggregates that captures economic interlinkages across sectors and countries; used to estimate sectoral value-added and employment changes.
- IMF-ENV scenarios project to 2050 and incorporate:
  - Recursive dynamic equilibria with vintage capital stocks (short-term capital less reallocateable; new investment flexible).
  - Labor and land can shift across sectors in each year with limited frictions.
  - Emissions linked to economic activity via fixed coefficients or emission intensities that decrease with carbon prices (marginal abatement cost curves).
- Model limitations and risks:
  - Model may overestimate long-term decarbonization costs because it does not account for potential radical future technology innovations (hydrogen, second generation nuclear, biofuels, carbon capture and storage).
  - Upside risks: rapid technological innovations or more learning-by-doing could reduce costs.
  - Downside risks: stranded assets and difficult labor reallocation could increase costs; other risks include economic and population growth and fossil fuel producer strategies.

### Policy recommendations and concluding points
- A comprehensive and well-designed carbon pricing scheme should play a more prominent role in South Africa’s green transition and be aligned with GHG emission reduction targets.
- The generous tax-free allowances and exemptions under the carbon tax should be phased out in due course.
- Carbon tax rate combined with complementary policy instruments should be aligned with NDC targets.
- Steady implementation of energy sector reforms to streamline regulatory burden and foster competition will strengthen carbon tax effectiveness by increasing price-responsiveness of fossil-fuel use.
- Channeling fiscal resources to support the transition (increasing climate-smart public investment, reducing labor taxes, and/or providing transfers to vulnerable households) can mitigate near-term economic and distributional impacts and promote growth.
- Given limited fiscal resources and significant investment needs, difficult choices on revenue use will be necessary; advancing product market competition, labor market flexibility, and human capital will facilitate sectoral reallocation of labor and capital needed for a successful climate mitigation policy.

*Source: IMF Staff calculations and analysis as presented in the chapter.*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023040.pdf_