Climate Change: A Comparison Of Market-Based Instruments From A South African Perspective

Abstract

This article aims to consider the relevancy of (i) cap-and-trade schemes and (ii) carbon tax schemes in a developing economy context. Even though both schemes have a common goal of reducing greenhouse gas emissions, they operate very differently, each with their own set of advantages and disadvantages. Sustainable developments comprise various elements categorised in three primary dimensions environmental, economic and social. The objective of reducing greenhouse gases via the implementation of carbon tax or cap-and-trade schemes primarily addresses the environmental dimension of sustainable development. Notwithstanding the aforementioned, the impact of both schemes on the economically sustainable development, including industry competitiveness and growth, still has to be determined. In South Africa, the National Treasury made a decision to implement carbon tax as opposed to cap-and-trade schemes. In this article, the reasoning behind their decision in favour of carbon tax in the South African context is critically considered, firstly by evaluating the key characteristics between cap-and-trade and carbon tax schemes and secondly by considering the effectiveness hereof in the global context. It was found primary reason behind the favourable consideration of carbon tax was the fact the implementation thereof would be simpler using the existing taxation systems, whereas cap-and-trade would require the implementation of sophisticated mechanisms that may not provide the optimum benefit in a developing economy context.