Africa Carbon Forum in Nairobi, Kenya

The Africa Carbon Forum brings together policymakers and practitioners to discuss the latest developments related to climate change policy, carbon markets and finance. Its goal is to share knowledge on innovative solutions in the context of Nationally Determined Contributions (NDCs) and other strategies, and to explore possibilities for collaboration on regional and global climate change initiatives. At the 2018 Africa Carbon Forum in Nairobi, Kenya, the Climate Action Peer Exchange (CAPE) joined forces with the Green Fiscal Policy Network to organize the High-Level segment on “Fiscal Policy to support NDCs and mobilize Green Investments”. See the complete agenda here.

The session took place on April 12, 2018, and touched on a spectrum of fiscal issues related to advancing NDC and climate policy implementation. Public finance for green investment and climate policy implementation can be channeled in various ways – such as in the form of public investment programs, or provided as fiscal incentives that work alongside regulatory measures.

Carbon taxes and fossil fuel subsidy reforms are effective fiscal instruments for climate policy. They provide the necessary price signal to shift consumer and business behavior, which will also stimulate private financial flows to low-carbon investments. These fiscal instruments are considered cost-effective and efficient from the perspective of tax design and GHG mitigation. Dr Mulugeta Mengist Ayalew, Director of Climate Change Affairs from the Office of the Prime Minister of Ethiopia spoke on “Exploring Carbon Price in a Low-Income Country”.  Ethiopia aims to attain lower middle-income status by 2025, and has put forward a Climate Resilient Green Economy (CRGE) Strategy to chart a sustainable pathway to this goal. The carbon tax is one option in the policy package for the CRGE, and a CGE modelling study was commissioned to inform deliberations on the final choice of policy instruments for CRGE. The speaker reviewed the preliminary findings of the modelling study, including growth impacts, emissions impact (predicted to reduce by 17% reduction in the covered sectors, or equivalent to 2% reduction of the national baseline), and revenue potential of up to $800M.  Various revenue recycling options were studied, including a reduction in direct and/or indirect taxes, and increased public investments and social spending. As stressed in the speaker’s remarks and from questions received, further analytical work and other considerations will be taken into account before any decision on the inclusion of a carbon tax. Analysis should include in-depth studies on distributional impacts and a fully designed revenue package. Issues related to tax avoidance and the granting of exemptions would also need to be part of tax design.

Ethiopia’s emissions profile is characteristic of other low-income African countries, where land-use emissions command a large share. Landholdings are often as small as 1 hectare, and the number of emission sources to be regulated under a tax would lead to insurmountable administrative and financial costs. The Ethiopia example illustrates that a carbon tax on fuel combustion can still be a relevant policy response in such a situation, by efficiently addressing some sectors while relying on non-tax measures for others.

Mr. Hubert Ruzibiza, Chief Executive Officer of FONERWA, introduced the Rwanda Green Fund (FORNEWA). His presentation served to illustrate the use of statutory instruments to provide financial support to green growth and climate policy objectives. FONERWA was established in 2017 as a legal entity for the purpose of receiving and managing public and other funds for green growth, such as projects in waste management, clean energy, land-use management. The public financial contribution to the FONERWA is derived from revenue from pollution levies and other environmental charges.  FONERWA was also able to attract capital contributions from donors, and demonstrates how public funds can be deployed to crowd-in private finance. There were questions from the floor about FONERWA’s investment priorities, which highlighted the interest in forest and land-use projects.  In his response, the speaker made reference to the carbon tax presentation and opined that an economy-wide tax could be a more reliable source of capital for a national investment fund than environmental levies and penalty payments.

The final presentation from Mr. Maged K. Mahmoud, Technical Director of the Regional Center for Renewable Energy and Energy Efficiency (RCEEEE) focused on policy interventions that can support clean energy projects. Drawing from experience among the RCEEEE’s membership in Middle East and North Africa, the speaker pointed to the publicly-funded support programs such as Feed-in-Tariffs, end-user rebates for clean energy, duty exemption for clean energy technology, and direct public financing for land and supporting infrastructure that are critical for privately-sponsored clean energy projects. RCREEE has also supported clean energy through research and capacity building on the technical requirements for integrating renewable energy sources into electricity grids. In his remarks, the speaker drew a regional comparison to FONERWA and pointed to Tunisia’s Transition Fund which is financed by general public resources rather than a specific tax source.

In summary, a carbon tax provides an incentive towards low-emission technologies and generates revenue for investments. For an effective carbon tax, policy makers must consider numerous technical issues ranging from sector coverage, and impacts to competitiveness and welfare, as well as the political economy. A publicly-backed investment fund is one way of focusing resources and attention on climate change and green growth, and these can be designed to attract private financing as well. To ensure a robust pipeline of climate/green investments, additional fiscal incentives can be designed and targeted at specific sectors – such as clean energy. These include tax expenditures and financing of associated public works.

Knowledge Exchange on Carbon Tax: South Africa and Ethiopia

On the margins of the forum, CAPE also facilitated a bilateral peer exchange between the two countries on the carbon tax. Ethiopia has set its ambitions on attaining lower middle-income status by 2025, and has set forth this goal in its Second Growth and Transformation Plan (GTP II).  The Ministry of Finance has also placed importance on addressing climate issues, and has unveiled a Climate Resilient Green Economy strategy and plan. South Africa is an upper mid income country and has been developing carbon tax legislation for some years. In debating and designing its carbon tax, the South African government acknowledges its part in reducing global emissions but will need to account for the energy intensive nature of its economy and the need to maintain economic growth and protect vulnerable households. South Africa has legislated that the carbon tax will go into effect in 2019.