South Africa is considering introducing carbon taxes to reduce greenhouse gas
emissions. We evaluate potential impacts using a dynamic economy-wide model linked
to an energy sector model. Simulation results indicate that a phased-in carbon tax that
reaches US$30 per ton of CO2 by 2022 achieves the ambitious national emissions
reductions targets set for 2025. Relative to a baseline with free disposal of CO2, constant
world prices and no change in trading partner behaviour, the preferred tax scenario
reduces national absorption and employment by 1.2 and 0.6 per cent, respectively, by
2025. However, if South Africa’s trading partners unilaterally impose a carbon
consumption tax then welfare and employment losses exceed those of a domestic carbon
tax. Border tax adjustments improve welfare and employment while maintaining the
same emissions reductions. The mode for recycling carbon tax revenues strongly
influences distributional outcomes, with tradeoffs between growth and equity.