The competitiveness effects of electricity generation taxes : a computable general equilibrium analysis

Abstract

The South African Government, in the Budget Review of 2008, proposed to impose a 2c/kWh tax on the sale of electricity generated from non-renewable sources, to be collected at source by the producers/generators of electricity. This tax will create distortions in the South African economy. The research study aims to identify measures that can be taken to negate the negative competitiveness impact of the tax. In the first part of the study, we applied the Global Trade Analysis Project (GTAP) model, which is coordinated by the Centre for Global Trade Analysis at Purdue University. The GTAP model is the pre-eminent modelling framework for the analysis of trade and environmental issues across countries. GTAP is a multi-region CGE model designed for comparative-static analysis of trade policy issues. Various versions were constructed and the closure was changed to reflect the South African reality more accurately. After the national as well as international economic and environmental impacts were analysed, we considered Border Tax Adjustments (BTAs) as a possible remedy to negate the negative competitiveness impact of the tax. Utilising theoretical Heckscher-Ohlin methodology, as well as the GTAP model, we showed that BTAs will not negate the adverse economic impact of an environmental tax. Instead, reversed BTAs, through gains of trade, could reverse the negative economic impact of an electricity generation tax, while enabling an economy to retain most of the environmental benefits of the tax. We also considered the impact of an integrated approach, consisting of an electricity generation tax and a demand side policy, on the welfare of households. To analyse this, we used the University of Pretoria General Equilibrium Model (UPGEM). The model was extended to reflect Equivalent Variation values and we updated the database to include import tariffs. It was then shown that reversed BTAs could be used to offset the regressiveness of the electricity generation tax. Policy implications from the study will be useful for macroeconomic policies, international trade negotiations and environmental policies to increase the welfare of society.