Government urged to earmark green taxes
14 March 2011

This article 1st appeared in Business Day

The government must earmark or ring-fence environmental and carbon taxes for investment in environmental projects if these levies are to serve any purpose, tax analysts say.

The government does not earmark green taxes because it does not like to be limited in how it should make its spending decisions, says Bernard du Plessis, a director for tax at corporate law advisers Edward Nathan Sonnenbergs.

“The government needs to be more transparent and provide the public with more information about the environmental benefit of taxation and how the revenue will be used,” says Mr du Plessis.

He points out that taxpayers do not understand how green taxes are used to generate revenue, particularly where they are not earmarked. The earmarking of taxes takes place when all or part of revenue from a tax is allocated for a specific spending purpose, such as projects.

The term “earmark” is used in several countries, including the US and SA.

In SA, the only taxes that are earmarked are the Road Accident Fund levy, which is used to compensate victims of road accidents, and the skills development levy, which goes towards sector education and training authorities.

The Treasury says the earmarking of selected taxes such as the carbon tax is not a preferred option for several reasons. These include the risk of misallocation of public funds depending on the amount of money collected from a specific tax, with too much or too little funding going to a target area. Furthermore, earmarking may impose undue constraints on the government in a way that serves special interest groups, it says.

However, partial “on-budget” earmarking of some revenue for specific purposes may be appropriate to promote public and political acceptance of the benefits of the reform, the Treasury says.

The carbon emission tax came into effect for all new passenger vehicles on September 1. The tax relates to the amount of CO2 emitted by the vehicle. An amount of R75 is added to the price for every gram of CO2 per kilometre the vehicle emits over 120g/km.

Finance Minister Pravin Gordhan said in February's budget review that proposals for carbon emissions would be unveiled in next year's budget.

Peter Surtees, a director for tax at Deneys Reitz, says a lot of suspicion has been raised around the introduction of the carbon tax.

He says SA is not the only country in which the debate around the earmarking of green taxes has taken place.

For instance, the UK has refused to earmark revenue under its emissions trading schemes. Instead, it has earned about $1,35bn through auctioning allowances.

A recent study released by Sweden's Centre for International Climate and Environmental Research says politicians risk undermining support for green taxes if they do not make it explicit that the revenue raised is spent on environmental projects.

The report comes in the wake of a number of calls from businesses and environmental groups for the European Union (EU) to ensure that revenue generated from the auctioning of carbon credits under the EU Emissions Trading Scheme is ploughed back into climate change mitigation and projects.

France has also postponed a carbon tax indefinitely in order not to damage the competitiveness of local companies. Mr Surtees says the government should earmark the tax in order for it to achieve the purpose of reducing carbon emissions. “There is no reason why the tax authorities cannot deploy the funds.”

He points out that the government has successfully earmarked the skills development levy.

AJ Jansen van Nieuwenhuizen, head of tax services at Grant Thornton, says the introduction of specific green taxes, such as the carbon tax, should not fall into the revenue fund.

“For this tax to work effectively and be convincing to taxpayers, it needs to further the ‘green cause’,” he says, adding that this would include funding research projects and creating grants and incentives for people who are doing good for the environment.

Rob Stretch a director for tax at Ernst & Young, says the carbon tax, just like other ad hoc taxes which have been imposed on taxpayers, is going into a “big black hole”.

“The carbon tax is just another excuse for the government to collect revenue and to reduce the deficit,” he says.