Green Taxation as a Pathway towards Africa's Energy Transition: Legal and Policy Considerations for Promoting Carbon Taxation

INTRODUCTION

Africa’s economy today, is threatened by two factors: the crash in commodity prices; and the effects of climate change on the environment and investment opportunities in the continent. Occupying about 17 percent of the world’s population, Africa contributes to 4% of global carbon emissions at 1.45 billion tonnes, with Egypt, South Africa and Algeria contributing to more than 60% of the Continent’s carbon emissions. To address these issues, there is growing interest in exploring innovative policy measures, with green taxation emerging as a key solution. Green taxations, in particular, are critical to economic development as they serve as a key lever for the government in regulating the national economy and improving environmental quality. Moreover, examining the legal and policy considerations for promoting carbon taxation as part of green taxation presents a promising strategy for Africa’s energy transition.

GREEN TAXATION AS A PATHWAY TOWARDS AFRICA’S ENERGY TRANSITION

In 2023, the world recorded its highest atmospheric carbon dioxide (CO2) levels yet, at 424 parts per million (ppm). The disturbing trends in CO2 emission from one region to another have forced policymakers both at the level of the national governments and international organizations to put into place other environmentally friendly measures that will limit environmental degradation and encourage the adoption of renewable energy usage. In response to this immense pressure, countries have applied a variety of tools to attain the sustainable development and environmental preservation goals. “Taxes are in particular a key part of this tool kit”

One of the most efficient measures that governments have been taking seriously is the adoption of the environmental tax to force individuals and firms to move towards environmentally friendly measures. Green taxes are employed to control the negative effect on the environment. These taxes normally come in the form of energy taxes, transport, pollution taxes and natural resources taxes. The pivotal objective is to discourage unfriendly ecological activities and actions by companies and citizens as well as to stimulate environmental sensitivity among individuals and corporate citizens. The theoretical origin can be traced back to the work of Pigou who posits that environmental tax should be equivalent to marginal damages and levied directly on the source of emission.?

Environmental or green tax as used interchangeably has been argued to have varying effects on various economic sectors. It is argued that environmental tax curb environmental pollution as polluters turn to reducing their pollution habits to escape such a tax. Besides, the revenue from the said tax can be used to invest in environmental governance to further curb environmental degradation, which could take the form of investments in renewable energy sources.

Carbon taxation can be considered as a crucial aspect of green taxation, particularly within the broader framework of promoting sustainability and driving the energy transition in Africa. Within the realm of green taxation, carbon taxation specifically targets the external costs associated with carbon emissions, such as climate change and air pollution. Carbon tax is tax paid on the emission of carbon (CO2) into the atmosphere. It refers to a form of explicit carbon pricing; a tax directly linked to the level of carbon dioxide (CO2) emissions, often expressed as a value per tonne CO2 equivalent (per tCO2e).? It is a fee placed on greenhouse gas pollution mainly from burning fossil fuels.?

According to the African Development Bank, the African continent holds 8% of the world’s proven oil reserves, 7% of the global natural gas stock and roughly 30% of all global mineral reserves. This fact alone could be responsible for granting African states a competitive advantage over other countries across the globe, in exercising their primary right to tax carbon intensive mineral ores at a level that is sufficient to spur regional economic development, while at the same time addressing environmental concerns.

The United Nations held that, carbon pricing alone could reduce the cost of climate change mitigation by 32% by 2030 and achieve full potential when associated with other energy and environmental policies. The Heads ofState by a joint declaration at the African Climate summit held that the impact of climate change and need to build decarbonized economies calls for a paradigm shift through the introduction of a global tax on carbon emissions, including a tax on fossil fuel trade, air and sea transport.

Despite international support from institutions as world bank and international Monetary Fund, as of 2023, only 38 carbon tax initiatives have been implemented globally, covering a meagre 6% of global greenhouse gas emissions. Of the world’s top 10 emitters, only Japan has adopted a carbon tax. Significant emitters like the US, Russia, India, Iran, and Saudi Arabia remain cautious. While subnational emission trading systems exist in some US states, China has adopted the world’s most extensive systems.

In Africa, among the 54 African countries, only South Africa has established a direct carbon tax regime. Nonetheless it is worth acknowledging that various African nations have adopted diverse approaches to combat environmental pollution. For instance, Nigeria has implemented measures such as the gas flaring commercialization program in Nigeria.

According to Kaufman, the fuel specific charges that would be imposed by a carbon tax are a popular policy option because many believe that a carbon tax will reduce emissions of carbon dioxide in an economically efficient manner. If one knows how much fossil fuel is employed in a process, then both the taxpayer and the tax administration can predict the amount of carbon tax revenue that will be generated as a result of the combustion of that product.

In the context of Africa's energy transition, integrating carbon taxation into broader green taxation strategies holds significant potential for advancing environmental goals and funding sustainable development projects. However, to realize these benefits, it is crucial to emphasize the importance of implementing a comprehensive policy framework that encourages the effective use of carbon taxation.

LEGAL AND POLICY CONSIDERATIONS FOR PROMOTING CARBON TAXATION

When exploring the promotion of carbon taxation, several legal and policy considerations come into play. Some key factors to consider include:?

• Establishing a Carbon Tax Framework: ?Creating an effective Carbon Tax framework involves several key steps. Firstly, policy makers must determine which sectors and emissions sources will be taxed and set appropriate tax rates based on the social cost of carbon. Secondly, mechanisms for tax collection, monitoring emissions, and ensuring compliance need to be established. Thirdly, decisions regarding how generated revenues will be utilized must be made. Finally, clear communication and stakeholder engagement are crucial throughout the process to build support and ensure transparency. By addressing these aspects, policy makers can lay the groundwork for a Carbon Tax regime that effectively reduces emissions and contributes to global climate action.
• Revenue Distribution: Revenues from carbon taxes are directed in different ways. They can be directed specifically to carbon mitigation programs, funding renewable energy projects, supplement government budgets or to individuals through reduction in income taxes. Deciding how the revenue generated from carbon tax is distributed is critical as it can significantly influence public perception and support for the initiative. For instance, the United Kingdom and British Columbia return tax revenue to customers through income tax reduction. Another instance is Quebec and Boulder who uses their direct carbon tax revenue to fund carbon mitigation programs. On the other hand, Sweden and Norway use their carbon tax revenue specifically to raise revenue for the government.? By transparently allocating revenue in a manner that aligns with broader climate and social goals, policy makers can enhance the effectiveness and acceptability of Carbon Taxation while maximizing its positive impact on emission reduction efforts.

• Establishing Transparency and Accountability Mechanisms: Ensuring transparency and accountability is crucial for the successful implementation of Carbon Taxation. When revenues are allocated to compensate vulnerable industries, households, or environmental initiatives, the perception of fairness and effectiveness becomes crucial for public acceptance. The indirect and less salient effects of the policy necessitates deliberate efforts by the government to communicate the purpose and design of the policy package. Clear communication regarding how revenues are used and how they address concerns about negative competitiveness, fairness, or environmental objectives is essential for fostering public trust and acceptance of the taxation scheme.

• Policy Integration and Interactions: When introducing carbon tax, it is necessary for policy makers to monitor the interaction with policies or regulations already in place which can either enhance or inhibit its effectiveness or prompt additional administrative requirements. Examples of such instruments include energy or fuel taxes, emission trading systems (ETS) and fossil fuel subsidies, as well as regulatory measures, such as renewable portfolio standards (RPS).?Complimentary policies are those that can be introduced or applied together, with one policy improving the performance of another. In Chile, The Renewable Energy Law (Law No. 20.257) is a complementary energy policy that support the generation of electricity by renewable sources such as biomass, small hydraulic energy (capacity of less than 20 MW), geothermal, solar, wind power and marine energy. This law was amended in 2013 (Law 20,698, better known as “Law 20/25”) stating that by 2025, 20 percent of the energy matrix in Chile must be composed of renewable energy. Asides complementary policies, there could also be overlapping and countervailing policies. Hence, it is necessary to integrate carbon tax policies with other policies to create a comprehensive and cohesive climate policy framework across Countries to maximize the effectiveness of carbon taxation and accelerate transition to a low-carbon economy.
• Investment incentives: Providing investment incentives is a crucial consideration in promoting carbon tax policies. By offering tax credits, subsidies, and grants for renewable energy projects, energy efficiency initiatives, and other low-carbon technologies, governments can stimulate innovation, create jobs, and accelerate the transition to a low-carbon economy. Additionally, incentives can help offset initial costs and improve the competitiveness of clean energy investments, driving greater private sector engagement in climate solutions. In 2022 alone, in South Africa, $1,843,030 was invested in energy with private participation.
• Protection of Investors and Stakeholders: In implementing carbon taxation policies, it is essential to mitigate potential financial risks and uncertainties for investors in carbon-intensive industries. Additionally, safeguards should be put in place to protect the interest of stakeholders, including workers, communities, and businesses affected by the transition to a low-carbon economy. According to International Energy Agency (IEA), global investment in clean energy reached $26 billion as at 2023. By implementing robust legal frameworks, providing incentives for sustainable investments, and offering support for affected stakeholders, policy makers can foster a conducive environment for investment and stakeholder engagement in the transition to a greener economy.

CONCLUSION

Carbon taxation emerges as a pivotal instrument within broader green taxation strategies, particularly in the context of Africa's energy transition. The integration of carbon taxation facilitates revenue generation for sustainable development initiatives. However, realizing the full potential of carbon taxation necessitates a multifaceted approach that addresses various legal and policy considerations. By enhancing a carbon tax. Framework, establishing transparency and accountability mechanisms to policy integration and interactions and so on., governments can harness the potential of carbon taxation to accelerate Africa's energy transition, mitigate climate change impacts, and foster sustainable development for generations to come.

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