The government must align its energy fiscal policies with South Africa’s climate and environmental goals.

January 31, 2022—Energy subsidies in South Africa more than tripled between FY2017 and FY2020 to ZAR 172 billion (USD 10.4 billion), with the highest subsidies allocated to fossil fuels, including coal-fired electricity, according to a new report from the International Institute for Sustainable Development (IISD) released today.

The government spent nearly ZAR 67 billion on bailouts for carbon-intensive companies, particularly the state-owned utility Eskom, as well as ZAR 43 billion to support the oil and gas industry, found the report, titled South Africa’s Energy Fiscal Policies: An inventory of subsidies, taxes and policies impacting the energy transition. In addition, carbon tax exemptions cost South Africa a further ZAR 45 billion in lost tax revenues.

In total, the data shows that energy subsidies more than tripled from the ZAR 58 billion allocated in FY2017. At ZAR 172 billion, the government’s expenditure on energy subsidies in 2020 exceeds the country’s annual spending on police services and defense & state security, combined.

“Fiscal policies—subsidies, taxes, and grants—are key tools that governments can use to reach their energy and climate targets, but right now in South Africa, billions are spent propping up the existing fossil fuel system,” says IISD’s Chido Muzondo, co-author of the report. “These subsidies represent an enormous cost to the public budget and take a heavy toll on people’s health and the climate.”

IISD experts found that pollution from fossil fuel use costs South Africans ZAR 550 billion each year in environmental harm and damage to public health.

The study, which explores the extent to which South Africa’s current energy fiscal policies reflect its goal to develop a robust, low-carbon, and affordable domestic energy system, highlights that current policies are not in line with the country’s energy targets and environmental imperatives. The report’s authors provide concrete recommendations for the government to realign its fiscal policies by reforming fossil fuels subsidies and increasing investments in clean energy.

To stop the trend of rising subsidies, the government must tie bailouts to the energy transition and phase out carbon tax exemptions, particularly in the electricity sector, IISD experts recommend.

South Africa should also raise fossil fuel taxes, according to the report, and—to keep pace with growing power demand—boost investments in renewable energy, and explore alternative business models for large-scale renewables.

“On top of discouraging consumption, revenue generated by increasing fossil fuel taxes can be invested in the energy transition in ways that stimulate jobs, economic growth, and fund a just transition for coal workers and communities,” says study co-author Richard Bridle of IISD. “It can also be used to provide targeted support for vulnerable households.”

IISD experts also urge South Africa to improve transparency on energy fiscal policies to send a strong signal to market players and spur the advancement of the clean energy transition.

Media Contacts

Chido Muzondo, Policy Advisor, IISD: cmuzondo@iisd.org
Richard Bridle, Senior Policy Advisor, IISD: rbridle@iisd.org