Is the use of carbon offsets in the South African carbon tax a smart mix?

Analyses have shown that a carefully designed policy package, with the carbon price at the centre, can reduce emissions at a significantly lower social cost than any single policy. In policy packages with a carbon tax, the major integration concern is ensuring cost efficiency and avoiding policy redundancy. A typical package of climate policies would include carbon pricing to incentivise emission reductions, policies for developing, deploying and reducing the costs of new technologies and policies to address non-price barriers. For South Africa, a pricing instrument in the form of a carbon tax will be combined with a carbon offset scheme which allows companies to cost effectively reduce their tax liability by 5 to 10 per cent of their total emissions. Only activities or sectors outside the tax net, projects implemented in South Africa and not listed on the negative list are permissible as carbon offset projects under the carbon tax scheme. Allowing companies to develop carbon offset projects in activities or sectors not covered by the carbon tax is premised to incentivise mitigation in sectors or activities not covered by the carbon tax. Will the flexibility of allowing carbon offsets to be traded between the project developers and carbon tax paying entities establish a mini emissions trading scheme (ETS)? Is the carbon tax going to act as a maximum cost or minimum price of trade equalising costs across participants hence limiting the overall cost of the policy? This chapter will examine scenarios on how the built-in flexible arrangement or instrument mix of using carbon offsets within the carbon tax will work to enhance emissions mitigation overall in the different activities and sectors. Are there benefits (emissions and costs) to having a combination of the carbon tax and carbon offset flexibility mechanism or not? Could these evolve and influence the instrument choice beyond the first phase of the carbon tax i.e. updating the policy design (policy recalibration) to allow one or both instruments to adapt to the abatement delivered by the other instrument in the package?