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Our Burning Planet: As the sun sets on carbon, mining can still rise

17 Sep 2019

Mining houses and other industrial sectors heavily invested in coal and carbon-heavy activities are pushing back against the carbon tax. But, if you crunch the numbers, low-carbon investments make good business sense.

As the Minerals Council SA’s Integrated Annual Review 2018 makes clear, the mining industry makes a large contribution to the economy and to our balance of payments, and is a large employer in a country in which many people are mired in poverty.

So, we had better take seriously what they say about the impact of the carbon tax on the industry and the economy, notwithstanding that the sector is dominated by large multinationals that repatriate significant profits to other countries.

We have no reason to question the bona fides of their numbers, noting of course that, like good lobbyists, they will cherry-pick the assumptions, figures and messaging that best serve their interests and manage shareholder perceptions.

And no-one likes any tax, right?

Nevertheless, the carbon tax is an instrument designed to re-orientate the economy by making lower-carbon operations, goods and services relatively more attractive than higher carbon ones to investors and customers all along value chains. If we do not re-orientate ourselves now, we risk finding ourselves adrift in a high-carbon backwater of the global economy. And we will pay the opportunity costs of not getting into the low-carbon game with its potential for exponential growth off a low base.

There are companies, cities and many other economic actors who get this and are standing up for the new economy. To join them, see the nascent Alliances for Climate Action.

At the 2019 Coal Industry Day in July 2019 much was made of compan ies selling mines to new entrants or black-owned companies. Examples included Anglo American selling its three Eskom-tied mines to BEE company Seriti, and South32 exiting thermal coal by setting up a standalone BEE entity for its coal business. One might ask whether these were genuine BEE moves or the nifty removal of soon-to-be-stranded assets from the balance sheet.

It is against this backdrop that we should view an intensive and coordinated pushback against the carbon tax by members of the “Carbon Club”.

The real price of carbon

The truth is that the interests of heavy-emitting companies do not align with those of the economy and society as a whole.

The negative effects of their activities are costs not carried (or internalised) by producers of greenhouse gas emissions and reflect what is widely acknowledged by mainstream economists as a market failure – in that the market price does not reflect the true cost of the goods or services.

A World Wide Fund for Nature (WWF) paper captures the work being done by economists on pricing the externalities of fossil fuels. It shows that the external costs of carbon emissions from coal-based electricity in South Africa are estimated to be R430,000/GWh.

In only six months, from January to June 2019, Eskom distributed 102,314GWh of electricity with a potential carbon external cost to the economy of just under R44-billion, never mind other external costs along the coal value chain. This cost is being carried by you, me, taxpayers and your business, in coping with climate change impacts – which are rapidly accelerating.

The affordability issue

The Minerals Council cites absolute numbers of the tax liabilities of the industry – and they are scary. But let’s put them into context: in the worst-case scenario, the total potential tax bill in the second phase of R10.2-billion (as calculated by the council) is only 2.9% of the mining sector’s self-reported R350.8-billion contribution to GDP in 2018.

It is more useful to look at the cost of the carbon tax at the margin than in absolute aggregate figures.

Using data in the public domain, WWF-SA did a study in 2018 of the likely financial impacts of the tax on the top 20 emitting listed companies in South Africa. Five mining companies among those were found to generate between R5,000 and R42,000 pre-tax profit per tonne of carbon emissions (tCO₂e) they produced. Even at the headline tax rate of R120/tCO2e (before rebates), it is clear the carbon tax is affordable for them.

The Carbon Tax Act allows for inflation-pegged increases in the tax rate, which by 2023 would bring the headline tax rate to merely R137/tCO₂e, even if all the tax-free allowances fall away in the post-2022 Phase 2, which is highly unlikely.

It bears underlining, no-one will pay the headline rate, because tax-free allowances designed to cushion the impacts of the tax on exposed sectors bring the rate down to between R6/tCO₂e and R48/tCO₂e.

These rebates may well be reduced down the line and their removal would indeed expose a larger proportion of the emissions from tax-liable entities to taxation. But bear in mind that the resulting “972% increase in tax liability” that the Minerals Council speaks of is because, at present, between 90% and 95% of all the companies’ emissions have been exempted from the tax.

Allowances and offsets

The Minerals Council statement makes much of policy uncertainty (about a tax that has been on the cards since 2010 and exhaustively consulted) and speaks of a “murkiness [which] stems in part from confusion over the fate of the offsets during the second phase”. The murkiness may lie in the council eliding two different things: the tax-free allowances discussed above and carbon offsets.

There is no confusion about the offsets. Treasury has stated that offsets will remain part of the carbon tax in Phase 2, with even a possibility that it will increase the amount a company may offset.

Certainly, there is some uncertainty about the future levels or existence of the rebate allowances. Any strategic CFO worth their minerals should be able to make a call about the numbers they are going to put into projections, based on the company’s risk appetite, ability to hedge and nimbleness. What’s the bet all are factoring in the full headline rate since this is so immaterial anyhow?

It is also worth bearing in mind the potential for mining companies to reduce their tax liability by powering their operations from renewable energy – a shift that also builds stronger supply reliability and autonomy for their operations, given the challenges of Eskom’s supply. Indeed, many mining houses are already making this shift in Chile and Australia, and even some in South Africa are seeing the opportunity.

Mining new seams

The Department of Mineral Resources puts coal at 37% of total domestic and export sales of South African mineral commodities in 2018. This leaves the economy highly exposed in the global low-carbon transition. With coal having such a major share of the mining sector, the industry’s resistance to the carbon tax is shielding coal, but there is a bigger mining picture.

A 2017 World Bank report, The Growing Role of Minerals and Metals for a Low -Carbon Future, shows that the technologies in the shift to clean energy production, and those that reduce carbon emissions or increase energy efficiency, are “more material-intensive in their composition than current traditional fossil fuel-based energy supply systems”.

A WWF publication, A L ow-C arbon S unrise for the M ining I ndustry, sets out the opportunities for mining in South Africa to feed the demands of a domestic and global low-carbon economy.

This is also where growth and new jobs lie. Mining companies should rather be seeking to hasten the onset of a low-carbon economy than pushing back against a tax and other levers designed to help our economy do so. DM

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