Original Research

Unintended possible consequences of fuel input taxes for individual investments in greenhouse gas mitigation technologies and the resulting emissions

Heinz E. Klingelhöfer
South African Journal of Economic and Management Sciences | Vol 20, No 1 | a1472 | DOI: https://doi.org/10.4102/sajems.v20i1.1472 | © 2017 Heinz E. Klingelhöfer | This work is licensed under CC Attribution 4.0
Submitted: 07 September 2015 | Published: 27 March 2017

About the author(s)

Heinz E. Klingelhöfer, Department of Managerial Accounting and Finance, Tshwane University of Technology, South Africa


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Abstract

Background: South Africa is planning to introduce a carbon tax as a Pigouvian measure for the reduction of greenhouse gas emissions, one of the tax bases designed as a fuel input tax. In this form, it is supposed to incentivise users to reduce and/or substitute fossil fuels, leading to a reduction of CO2 emissions.

Aim: This article examines how such a carbon tax regime may affect the individual willingness to invest in greenhouse gas mitigation technologies.

Setting: Mathematical derivation, using methods of linear programming, duality theory and sensitivity analysis.

Methods: By employing a two-step evaluation approach, it allows to identify the factors determining the maximum price an individual investor would pay for such an investment, given the conditions of imperfect markets.

Results: This price ceiling depends on the (corrected) net present values of the payments and on the interdependencies arising from changes in the optimal investment and production programmes. Although the well-established results of environmental economics usually can be confirmed for a single investment, increasing carbon taxes may entail sometimes contradictory and unexpected consequences for individual investments in greenhouse gas mitigation technologies and the resulting emissions. Under certain circumstances, they may discourage such investments and, when still undertaken, even lead to higher emissions. However, these results can be interpreted in an economically comprehensible manner.

Conclusion: Under the usually given conditions of imperfect markets, the impact of a carbon tax regime on individual investment decisions to mitigate greenhouse gas emissions is not as straight forward as under the usually assumed, but unrealistically simplifying perfect market conditions. To avoid undesired and discouraging effects, policy makers cannot make solitary decisions, but have to take interdependencies on the addressee´s side into account. The individual investor´s price ceiling for such an investment in imperfect markets can be interpreted as a sum of (partially corrected) net present values, which themselves are a generalisation of the net present values known from perfect markets


Keywords

carbon taxes; corrected net present value; emissions; fuel input tax; greenhouse gas mitigation; imperfect markets; investment appraisal; price ceiling; production planning; uncertainty

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