PRUNING THE MONEYTREE TO ENSURE SUSTAINABLE GROWTH : FACILITATING SUSTAINABLE DEVELOPMENT THROUGH MARKET-BASED INSTRUMENTS

South Africa’s pristine landscapes and natural resources are under significant threat. This is not subject to debate, but what is, is how to implement a regulatory regime to deal effectively with these environmental realities – a challenge complicated by competing socio-economic imperatives; significant capacity and resource constraints and the need to redress past inequalities, efforts to increase access to land and natural resources as well as perceptions that the environment is an elitist concern.


Introduction
South Africa's pristine landscapes and natural resources are under significant threat.This is not subject to debate, but what is, is how to implement a regulatory regime to deal effectively with these environmental realities -a challenge complicated by competing socio-economic imperatives; significant capacity and resource constraints and the need to redress past inequalities, efforts to increase access to land and natural resources as well as perceptions that the environment is an elitist concern.
Following South Africa's conversion to a constitutional democracy, the government introduced many significant environmental laws to fulfil its constitutional mandate to take 'reasonable legislative and other measures' to protect the environment. 1* BSocSci LLB (Cape Town) LLM Environmental Law (Cape Town).Senior Lecturer, Institute of Marine and Environmental Law, Faculty of Law, University of Cape Town.
The majority of these laws adopt the traditional 'command-and-control' approach to environmental management.This approach is based on the assumption that the way to regulate human behaviour impacting on the environment, is to prescribe a range of legislative standards, prohibitions and restrictions and to sanction any person who contravenes them.There is, however, growing realisation, internationally and domestically, that this command-and-control approach is unsatisfactory in many The primary purpose for introducing these was revenue generation and not environmental management.However, owing to the fact that their tax base is a physical unit which has a proven negative impact on the environment (mainly pollution), they can strictly be regarded as environmentally-related.

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Revenue generated by these taxes and charges is not generally earmarked for expenditure on environmental management objectives.
There are, however, certain exceptions to this rule where the imposition of the tax or charge is directly related to achieving an environmental outcome and/or generated revenue is dedicated to achieving such an outcome.Firstly, an incentive exists for manufacturing and using alternate environmentally friendly fuels such as biodiesel in that the general levy for these fuels is rebated by forty percent of the diesel rate.Secondly, water supply charges and levies are generally spent on developing and implementing catchment management strategies, managing water quality and use, water resource protection, water demand management, and on funding catchment management agencies which are responsible for managing the majority of the above tasks.The Department of Water Affairs and Forestry (DWAF) currently also is developing a Waste Discharge Charge System, 44 the aim of which is to recover the costs associated with different water treatment and water quality management programmes and to provide incentives for water users returning water to a water resource to reduce their pollution loads.Thirdly, the tax incentive currently offered to mining companies in respect of contributions to mining rehabilitation funds is clearly based on facilitating environmental management.
Fourthly, the plastic bag levy, although not originally introduced to change consumer consumption of plastic bags, but rather to finance plastic recycling reforming legal aspects of non-environmentally-related taxes with perverse environmental incentives and creating incentives to improve environmental outcomes.

Transport sector
Vehicle emissions cause significant environmental externalities as a result of oil spills, refinery and vehicle emissions.Vehicles are powered by fuel and with the exception of the rebate accorded to biodiesel, the general fuel levy is currently not specifically designed to mitigate or account for these externalities.
Nonetheless, the price of fuel indirectly operates as an incentive to reduce these externalities as higher fuel taxes tend to discourage the use of private  shopping bags.However, as has been undertaken in various other jurisdictions, similar product-taxes could be levied on goods such as packaging, tyres, batteries, electronic equipment, fluorescent tubes, paper, glass and cardboard.
The main environmental externalities related to these products relate to their disposal rather then their use and imposing product-related taxes on such products holds potential to minimise their production.A second method is to introduce a comprehensive deposit-refund system in terms of which a refundable charge is imposed on certain products at point of sale.Although not providing incentives for waste avoidance or minimisation, they hold potential to encourage the removal of many recyclable products from the disposal stream.
Although certain deposit-refund schemes exist in South Africa, 53

Electricity sector
Electricity generation in South Africa causes many environmental externalities, the most notable of which is air pollution. 55Many countries have imposed taxes on electricity generation, consumption and to a lesser extent, emissions.
The Draft Policy Paper highlights two different potential approaches for using MBI to regulate this sector: a fuel consumptive tax and a fuel input tax. 56The former involves imposing a tax on consumers proportional to their use with the aim of decreasing demand.This approach would, however, appear to be at odds with current governmental policy to increase access and encourage the use of electricity in low-income households.The latter entails imposing a tax on electricity generators relative to fuel inputs thereby encouraging improved fuel conversion efficiency and indirectly reducing harmful emissions.This approach would appear to be more in line with components of government's future energy policy such as: improving energy efficiency; reducing emissions, mitigating climate change; and promoting the use of renewable energy sources. 57 These occur at all points in the life-cycle of electricity production and include natural resource overexploitation; land degradation and the pollution of the land, air, fresh water and marine environments.

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National Water Act 36 of 1998.The potential of implementing similar charges in the context of atmospheric emissions, effluent discharge into the marine environment and noise pollution also should be explored further.

Reforming legal aspects of non-environmentally-related taxes with perverse incentives
Various current taxes in South Africa create perverse environmental incentives. 63Those requiring amendment are specifically identified in the Draft Policy Paper.Firstly, tax deductions granted to the agricultural sector to undertake a limited range of conservation-related activities need to be reconsidered and possibly extended to other sectors and a broader array of activities. 64Secondly, the diesel fuel tax refund granted to primary producers and non-road freight operators needs to be reassessed and as a minimum, be extended to fuel used in undertaking conservation activities. 65Thirdly, the zerorating for Value-added-tax (VAT) of certain products with extreme negative environmental externalities requires reconsideration. 66Finally, opportunities for using South Africa's new property tax regime as a tool for supporting conservation initiatives needs to be explored. 67 Perverse incentives actively encourage the opposite of the desired outcome.Where, for example, the desired outcome is pollution control, a tax benefit that rewards pollution amounts to a perverse incentive.64 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 85-87.Farmers can deduct their costs incurred in clearing alien invasive vegetation and preventing soil erosion for income tax purposes.This tax benefit is not available to other landowners and therefore potentially creates the perverse incentive for them to develop land, potentially of high conservation value, in order to secure the tax benefit.It is proposed that similar benefits should be extended to all landowners and that a far wider range of conservation activities qualify for deduction.65 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 87.The major beneficiaries of the rebate are currently responsible for a significant proportion of environmental damage and include the following sectors: fishing, coastal shipping, offshore mining, agriculture and forestry.Under the operation of the diesel rebate scheme borderline operations may become viable and expanded to the detriment of wider environmental and conservation objectives.66 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 88.These products include pesticides, fertilisers and illuminating paraffin.The zero-rating for VAT effectively promotes their use.Socio-economic imperatives, which underlie their introduction, need to be balanced against environmental imperatives.67 Ibid.Property tax significantly influences land-use as it directly impacts on the viability of holding or using land for various purposes, such as conservation.Property tax can be PATERSON PER/PELJ 2006(9)3 102/118

Tax incentives to improve environmental outcomes
The Draft Policy Paper considers various broad overlapping categories of tax incentives for possible implementation in South Africa, as a means to directly encourage certain activities, including those geared toward achieving environmental outcomes.

Promoting environmental outcomes through alternate state revenue allocation mechanisms
The allocation of state resources towards achieving environmental outcomes is a complex issue, particularly in developing countries where other socioeconomic imperatives often prevail over their environmental counterparts.The Draft Policy Paper considers two main alternatives for increasing state expenditure on environmental objectives, namely, environmental funds and earmarking.Environmental funds 68 can be used as an effective tool to achieve environmental management, but are on the decrease internationally and the National Treasury is of the opinion that where environmental considerations are sufficiently reflected in government's budgeting process, it is difficult to see how environmental funds can offer any value.
An alternate approach is introducing earmarked taxes 69 which already exist in various non-environmentally-related contexts in South Africa. 70ed as an incentive for landscape protection where, for example, incentives are offered to landowners to hold land for conservation purposes.Alternatively, the imposition of property tax can lead to landscape degradation where, for example, it makes conservation one of the highest taxed land-uses and compels landowners to increase the economic productivity of their land through cultivation or development.

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Treasury believes that earmarked taxes are generally not a viable option due to the constraints they impose on the budget process and the rigidities that tend to follow from earmarking which can lead to the inappropriate allocation of resources.In addition, the Draft Policy Paper concludes that international experience has shown that earmarking taxes is almost universally ineffective in raising the level of expenditure on the service for which the tax is earmarked and, therefore, it should not be assumed that earmarking revenue streams will provide straightforward solutions to more complex budgeting problems.
However, given the financial crises facing many environmental departments and the general environmental crises facing South Africa, government should seriously re-evaluate its current budget allocations and/or reconsider introducing environmentally-related earmarked taxes to specifically fund environmental objectives, given the apparent success of earmarking in raising revenue in other contexts.

Rehabilitation funds/guarantees
The use of rehabilitation funds and guarantees are commonplace internationally and are on the increase in South Africa. 71 Various tax revenues are currently earmarked for funding the Unemployment Insurance Fund, Road Accident Fund and Skills Development Fund.
These mechanisms provide a valuable tool for encouraging industry to finance mitigation and minimisation of their environmental externalities.Extending their current implementation in South Africa would appear to be well advised and equitable 71 Rehabilitation funds and guarantees can take many forms, but generally involve the mandatory setting aside of finances, in the form of dedicated funds or financial guarantees, for the purpose of funding rehabilitation following specific activities.Incentives, in the form of tax deductions, are commonly allowed in respect of the quantum of any resources allocated to the fund or guarantee.They are expressly recognised in three laws.the policies and laws they administer, appears to be a further prerequisite for success.In addition, constructively engaging the private and corporate sectors within this process would similarly appear to be essential to ensure their understanding and potential buy-in to the system.
Nonetheless, it must be remembered that MBI are but one of the alternative regulatory interventions available to government.Others include, for example, co-opting civil society participation and creating markets for environmental goods and services.Selecting between these different interventions is a complex process and is often dependant on specific contextual circumstances such as the nature of the market failure and the economy involved.No one approach is necessarily better than another and it is generally accepted that a 82 The tax base should be close to the environmental objective, and the tax rate set according to the level of externality and procedures put in place to minimise tax avoidance, tax evasion, compliance and collection costs.83 The impact of the tax on domestic industries and other aspects of the economy such as employment, inflation and international competitiveness need to be considered and mitigated through mechanisms such as reduced tax rates, tax ceilings, tax refunds and tax shifting options.84 The impact of the proposed tax in different income groups must be assessed and mitigated where necessary to ensure equity.85 The tax reform must be aligned with other relevant tools such as environmental regulatory frameworks and voluntary schemes.
the use of public transport, and increase consumerdemand for more fuel-efficient technologies.There is, however, vast scope for existing environmentally-related taxes and charges to create far more direct incentives in this regard.Three specific options are discussed in the Draft Policy Paper.51First, the introduction of differentiated tax rates for cleaner fuel specifications could encourage the development and use of such fuels, thereby decreasing air pollution.It is proposed that lead replacement petrol be taxed at a higher rate than unleaded petrol to discourage the use of the former.Secondly, existing vehicle excise duties could be reformed to encourage the production and purchase of vehicles using cleaner technologies.Current vehicle excise duties are imposed on new passenger and light commercial vehicles and are based solely on the value of a vehicle.Were these vehicle excise duties linked to environmental criteria such as the use of clean technologies, fuel consumption, fuel type and emission standards, they could facilitate environmental objectives.In addition, medium and heavy commercial vehicles, which generally cause far higher external environmental costs than their passenger and light-weight counterparts, should similarly be subject to any reformed excise duty scheme.Thirdly, provincial transport levies and fees, currently based on the net weight of the vehicle, could similarly be reformed to include environmental criteria such as those discussed above.4.1.2.Solid wasteThe Draft Policy Paper considers four broad ways through which environmentally-related taxes and charges can be used to improve waste management practices by minimising production and encouraging recycling and re-use. 5251 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 71-74.First, by taxing a particular product or product component, incentives can be created to reduce the amount of waste generated.Currently, the only environmentally-related product tax is the levy imposed on plastic 52 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 75-78.
86 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 41-64. to be adopted. 8787 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at i.The MBI proposed in the Draft Policy Paper should, therefore, not be used to replace any current command-andcontrol and other measures, but rather to complement them and any future alternate regulatory interventions and incentives introduced by government.109/118 Deloitte and Touche Environmental Resource Economics Deloitte and Touche Consortium of Consultants Environmental Resource Economics Discussion Document Three -The Proposed Method for the Introduction of Economic Instruments as Tools of Environmental Management in South Africa (DEAT Pretoria 1996) DWAF Draft Pricing Strategy for Raw Water Use Charges 2005 Department of Water Affairs and Forestry Draft Pricing Strategy for Raw Water Use Charges in GN 1045 Government Gazette 27732 of 1 July 2005 DWAF Pricing Strategy for Water Use Charges 1999 Department of Water Affairs and Forestry Pricing Strategy for Water Use Charges (Government Printers 1999) DWAF Water Quality Management Series 2003 Department of Water Affairs and Forestry Water Quality Management Series Sub-Series No MS 11 "Towards a Strategy for a Waste Discharge Charge System" 1 st ed (Government Printers 2003) ELI Legal Tools and Incentives Environmental Law Institute Legal Tools and Incentives for Private Lands Conservation in Latin America: Building Models for Success (ELI Washington 2003) Faruqee Economic Policy Faruqee F "Using economic policy to improve environmental protection in Pakistan" 1997 World Bank Policy Research Working Paper No WPS1757 Henderson 1994 SAJELP Henderson P "Fiscal incentives for Environmental Protection -Introduction" 1994(1) South African Journal of Environmental Law and Policy 49 Huber et al Market-based Instruments for Environmental Policymaking Huber R et al "Market-based Instruments for Environmental Policymaking in

3 The current use of market-based instruments in South Africa
systems; and targeted subsidies.This article considers the contents of the Draft Policy Paper, focusing specifically on the various options it proposes for implementing and extending the current use of MBI as environmental regulatory tools in South Africa.Convention to Combat Desertification in Those Countries Experiencing SeriousDrought and/or Desertification.25Referencecan also be found in regional arrangements such as the Revised African Convention on the Conservation of 24S 24(b) of the Constitution of the Republic of South Africa, 1996, hereinafter the Constitution.These laws include, amongst others: National Environmental Management Act 107 of 1998; National Forest Act 84 of 1998; National Water Act 36 of 1998; Marine Living Resources Act 18 of 1998; Genetically Modified Organisms Act 15 of 1997; Minerals and Petroleum Resources Development Act 28 of 2002; National Environmental Management: Protected Areas Act 57 of 2003; National Environmental Management: Biodiversity Act 10 of 2004; and National Environmental Management: Air Quality Act 39 of 2004.effectiveenvironmentalmanagementsuchas:co-optingcivilsocietyparticipation; 3 creating markets for environmental goods and services; 4 and using market-based instruments (MBI).The latter form the focus of this article as the National Treasury recently released a draft policy paper for discussion titled A Framework for Considering Market-Based Instruments to Support Environmental Fiscal Reform in South Africa 2006 (Draft Policy Paper).4Mechanisms to create these markets for environmental goods and services include: introducing tradable permits and rights schemes and using international offset systems.5 National Treasury Market-Based Instruments: Draft Policy Paper 2006. 6 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 2. productive use of resources.However, some markets fail to value, or accurately value, environmental goods and services which lead in turn to environmental concerns being accorded insufficient consideration in everyday market activities.10ethisoccurs,there is a strong rationale for some form of government intervention through which the institutions operating in the market can be influenced and encouraged to practice more efficient resource use and/or mitigate the environmental externalities caused by their activities.MBI seek to alter the relative prices that individuals and companies face in the provision and use of environmental goods and services and, accordingly, potentially impact on the decisions made in relation to them.The nature, type and design of MBI can support and discourage certain values and behaviour, thereby playing an important role in helping to ensure that economic growth and development are sustainable and that activities that impose high social and economic costs in environmental terms are discouraged.Therefore, in addition to raising revenue, they can achieve other objectives, namely to mould human 7 An 'environmentally-related tax' is defined as 'a tax whose base is physical unit that has a proven specific negative impact on the environment'.National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 3. 8 A 'levy' is defined as a 'compulsory statutorily prescribed payment'.National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 5. 9 Ibid.A 'user-charge' is defined as a 'requited payment for a specific service rendered'.10Forasummary of these market failures see National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 42. 14 and countries forming part of the European Union 15 have recently implemented various MBI in contexts ranging from land-use management and planning, natural resource conservation and pollution and waste management control.These initiatives are spreading to developing nations including: Poland; 16 Pakistan; 17 Namibia; 18 Kenya, Costa Rica; 19 Brazil and Guatemala 20and various other countries in Latin America and the Caribbean.21Internationalenvironmentalconventionsanddomesticpolicydocumentsmake reference to the crucial role MBI can play in facilitating environmental management.South Africa is currently signatory to four such conventions, namely the Convention on Biological Diversity,22the Convention on Wetlands of International Importance Especially as Waterfowl Habitats,23the Stockholm Convention on Persistent Organic Pollutants,2411 See the authorities listed in n 2 supra.
Customs and Excise Act 91 of 1964.40 The only current waste-product tax in South Africa is the excise tax on plastic shopping bags introduced in terms of agreement entered into between the government and organised business and labour in 2004.Local government do, however, levy charges for refuse collection which are effectively aimed at recovering cost incurred in collecting refuse and operating waste disposal facilities.41 A complex scheme of electricity tariffs are imposed nationally and locally under an array of laws such as the Electricity Act 41 of 1987 and the Local Government Transition Act 209 of 1993.42 In terms of the Minerals and Petroleum Resources Development Act 28 of 2002, mining companies are responsible for rehabilitating mining sites and making financial provision for such rehabilitation by, for example, establishing dedicated trust funds.The Income Tax Act 34 of 1953 makes provision for establishing funds of this nature and allows fund contributions to be deducted for income tax purposes.
38 Vehicles are subject to two levies namely: a customs and excise duty is charged on all passenger and light commercial vehicles in terms of the Customs and Excise Act 91 of 1964; and provincial road licensing fees charged on all vehicles according to their weight under the Road Traffic Act 29 of 1989.39 Three separate charges are imposed on the aviation industry none of which take environmental considerations into account.First, an aviation fuel levy is imposed in terms of the South African Civil Aviation Authority's Levies Act 41 of 1998 on all aviation fuel that is manufactured, distributed, imported or sold in South Africa.Second, various airport charges are imposed under the above law on aircraft operators and passengers such as landing charges, parking charges, passenger service charges.Thirdly, passenger departure taxes are levied under the 43 The Department of Water Affairs and Forestry (DWAF) has developed a comprehensive Pricing Strategy for Water Use Charges, (1999, under the National Water Act 36 of 1998), relating to the use of raw water, water supplied in bulk by water boards and local authorities and water distributed to end users.The pricing strategy includes water resource management charges, water resource development and use of water works charges, Water Research Commission charges and local municipal water provision tariffs.PATERSON PER/PELJ 2006(9)3

Table 1 :
Policy Matrix of Interventions to Correct Environmental Market Failure 49 operations, appears to facilitate both environmental objectives.Fifthly, although not listed in the Draft Policy Paper, South Africa's new property tax regime introduced under the Local Government: Municipal Property Rates Act 6 of 2004 provides significant incentives for landowners to contract private or communally-owned land into various forms of protected areas. 4544 DWAF Water Quality Management Series 2003.45 Land formally contracted into special nature reserves, national parks and nature reserves proclaimed under the National Environmental Management: Protected Areas Act 57 of 2003 is generally exempt from property tax.See generally, Paterson 2005 SAJELP 115-121.generated from an intervention outweigh any associated costs.Inherent in this enquiry is an analysis of the underlying source of market failure and a consideration of what form of intervention would be most appropriate.The Draft Policy Paper highlights four main forms of policy intervention, namely: using markets; creating markets; environmental regulation; and engaging civil society.These are comprehensively discussed in the Draft Policy Paper and summarised in Table 1 below. 4846 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 39. 47 Ibid.48 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 43-48.49 Adapted from Table 5, National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 43. exclusively to revenue-raising environmentally-related taxes and charges and are divided into four main options, namely: reforming existing environmentallyrelated taxes and charges in the transport and solid waste sectors; introducing new environmentally-related taxes in the electricity and waste water sectors; Over ninety per cent of electricity generation in South Africa is coal-based, accounting for approximately forty per cent of all carbon dioxide emissions in South Africa.National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 17. 56 National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 78-81.
57 This future energy policy is reflected in: White Paper on the Renewable Energy Policy for the Republic of South Africa 2003 (GN 513, GG 26169 of 2004); the White Paper on the Energy Policy for the Republic of South Africa 1998 (GN 3007, GG 19606 of 1998); and the National Energy Bill 2004 (GN 2151, GG 26848 of 2004).See further National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 16-18. 60ondly, a system of tradable water use permits could be implemented which, theoretically, would better capture the scarcity value of water and ensure its allocation to the most productive use.61Finally, a waste discharge charge system could be implemented whereby a charge is levied according to the nature, quality and volume of effluent discharged.The Department of Water Affairs and Forestry is currently in the process of developing such a system, one of the express aims of which is to provide incentives for water users returning water back to the water resource to reduce their pollution (sliding scale charges imposed on dischargers who exceed a water resources target concentrations; tier 3 and 4 -deterrent charges (sliding scale charges imposed on dischargers who exceed prescribed maximum allowable resource directed values for a particular resource).See further the DWAF Draft Pricing Strategy for Raw Water Use Charges 2005 at 31, which again emphasises the value incentive-based charges can play in reducing the environmental externalities caused by waste-water discharge.
For a full discussion of the issue see Paterson 2005 SAJELP.regular basis to replenish the initial capital).They are generally funded from state and/or international sources.See generally National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 89-91.69 An 'earmarked tax' is a tax, all or part of the revenues from which are used to finance a specific activity or programme.National Treasury Market-Based Instruments: Draft Policy Paper 2006 at 66 and 101-103.
Companies, societies, associations or trusts established with the sole objective of complying with the legal obligations imposed on mining operations under the Minerals and Petroleum Resources Development Act 28 of 2002 to rehabilitate disturbances of the surface of the land, prevent pollution and protect the surface of the land and water resources can be deducted for tax purposes in terms of the Income Tax Act 34 of 1953.In addition, the National Environmental Management Act 107 of 1998 environmental impact assessment (EIA) regime (see s 24(5)(d)) and the licensing provisions under the National Water Act 36 of 1998 (see s 30) make express provision for financial security to ensure compliance with statutory obligations.The tax should be related and well targeted to achieving a clear environmental objective.79Thelevel of tax revenue generated and the way in which this revenue will be used need be clarified.80Allrelevant stakeholders must be canvassed in developing any tax proposals.81Necessaryfiscal and environmental legal reform must be clarified and aligned, and compliance with international trade instruments ensured.taxreformoptions can be evaluated.86Whenseeking to design and implement the proposals, government would be well advised to draw from the wealth of foreign experience in implementing similar mechanisms.Aligning and coordinating the roles and responsibilities of the different national, provincial and local authorities in this process, together with