South Africa’s National Treasury released its Carbon Tax Policy Paper in May 2013. The paper proposed a
R120/tCO2-equiv. levy on coal, gas and petroleum fuels. Here, we model the possible impacts of such a tax
on the South African economy using the computable general equilibrium (CGE) 53-sector model of the
University of Pretoria’s Department of Economics. The model shows that the carbon tax has the capacity to
decrease South Africa’s greenhouse gas (GHG) emissions by between 1 900MtCO2-equiv. and
2 300MtCO2-equiv. between 2016 and 2035. The extent of emissions reductions is most sensitive to the rate
at which tax exemptions are removed. Recycling of carbon tax revenue reduces the extent of emissions
reductions due to the fact that economic growth is supported. The manner in which carbon tax revenue is
recycled back into the economy is therefore important in terms of the extent of emissions reductions
achieved, but not as significant as the influence of different exemption schedules. The model shows the
carbon tax to have a net negative impact on South Africa’s gross domestic product (GDP) relative to the
baseline under all exemption regimes and all revenue recycling options assessed. The negative impact of
the carbon tax on GDP is, however, greatly reduced by the manner in which the tax revenue is recycled.
Recycling in the form of a production subsidy for all industries results in the lowest negative impact on GDP.