Comparison of emissions trading and carbon taxation in South Africa

There is consensus that carbon pricing is required to support a lower carbon pathway for South Africa. However, a debate remains on the most appropriate mechanism to introduce such a price. Although theoretically similar under restrictive assumptions, carbon taxes and emissions trading have very different environmental and economic implications in practice. The differences between price and quantity instruments remain fundamental, but there are other important criteria when comparing instruments. On the basis of a broad set of public policy criteria, carbon taxation appears to have many merits for a middle-income developing country like South Africa. The concentrated market structure of the country's energy sector raises concerns about the ability to construct a competitive and efficient emissions trading market and further supports taxation as the more appropriate instrument for the country. Other considerations are the relative political credibility, welfare impacts and long-term stability of each instrument. A comparison of the instruments should not, however, be treated as an either/or choice, as much depends on the design of each instrument. The evaluation of the instruments in South African circumstances suggests potential criteria for evaluation and instrument modifications, which may also be useful for other developing countries.