Green jobs potential in a skill-constrained economy Analysis of different carbon tax recycling schemes for South Africa

Jules Schers Co-authors: Frédéric Ghersi, Franck Lecocq

Supported by Agence Française de Développement (AFD)

3rd Annual GGKP conferenceVenice, 29 - 30 January 2015

Content

South Africa’s questions of green growth and fiscal reform

The IMACLIM South Africa model

Reference projection and carbon tax recycling scenarios

First results

Considerations for labour market modelling

Conclusions

South Africa’s development challenges: economic, social and environmental

South Africa’s economy: Middle income country: GDP per capita 108th worldwide (2013) Low annual GDP growth (2010-14: ~2,5%) Persistently high unemployment: around 25% last decade High income inequality: Gini index 0.65 in 2011 (“top 10” worldwide) Skills shortage: university grad. unemployment only 3.8% (2005 estimate)

High CO2 emissions: 9 tCO2 per capita in 2010 (Germany 9,1) Copenhagen Pledges (COP15) to reduce GHG emissions relative to baseline:

• by 34% in 2020• by 42% in 2025, then plateau and decline• meaning an estimated 400 to 600 Mt CO2-eq by 2035

CO2 tax (Ctax) proposal of 120 ZAR/tCO2, to start in 2016 ( ~10 USD/tCO2)

Research Questions

What CO2 tax revenue recycling scheme achieves South Africa’s economic, social and environmental goals?

Can investment in education and skills release drivers of green growth for the South African economy?

Tool developed for analysis: IMACLIM-South Africa, a “hybrid” open economy CGE-model, with exogenous drivers for growth, in a one-step projection (2005 to 2035)

IMACLIM-South AfricaTool for analysis of transitions

Hybrid means dual energy/economy accounting in which we: Hybridise National Accounts data with energy data (quant. & prices) Inform behavioural specifications (technology), e.g. the change in factor

intensity of electricity production, based on expert/engineering insights

ideal for testing visions with experts and stakeholders

10 Products/Sectors (5 energy) & nested-CES consumption, and production functions (with capital - high-skilled labour complementarity)

Secondary income distribution (firms, government, 5 household classes) Second-best features:

Mark-up pricing Imperfect labour markets: 3 skill levels as separated sub-markets

Reference projection and scenarios

No damage (function) for climate change

Reference Projection 2035 (RP): Productivity increase: capital (+2%/yr) and labour (+1%/yr) Constant international prices, exogenous export trend (+1.5%/yr) Education projection: constant enrollment numbers per education type

CO2 tax (Ctax) scenarios for 2035: Ctax: 100 ZAR(2005)/tCO2 (18 USD(2012)/tCO2) No border tax adjustment, no Ctax export rebates No foreign or international Ctax

Recycling schemes:1. Reduction of VAT/sales tax2. Reduction of company and household income and revenue taxes3. Lumpsum transfer to all households4. Scheme 1 + partial recycling into investment in education/skills

Results for Refererence Projection and 3 scenarios for recycling Ctax 100 ZAR

0.0%

7.5%

15.0%

22.5%

30.0%

37.5%

45.0%

0

50

100

150

200

250

300

38.8%

31.9% 32.5%34.6% 34.4% Series1

Series2

Series3

Average broad unemployment

GDP/capita index (right axis)

CO2 emission index (rigth axis)

Table: Average unemployment (numbers in italics), and indices for GDP per capita and CO2 emissions (both: right axis), for Base Year 2005 (BY), Reference Projection (RP), and 3 scenarios with a CO2 tax of ZAR 100/tonne CO2 and different recycling schemes

Results for Refererence Projection and 3 scenarios for recycling Ctax 100 ZAR

0.0%

7.5%

15.0%

22.5%

30.0%

37.5%

45.0%

0

50

100

150

200

250

300

38.8%

31.9% 32.5%34.6% 34.4% Unempl. skill 1

Unempl. skill 2

Unempl. skill 3

Average broad unemployment

GDP/capita index (right axis)

CO2 emission index (rigth axis)

Table: Unemployment by skill level, avg. unemployment, and indices for GDP per capita and CO2 emissions (both: right axis), for Base Year 2005 (BY), Reference Projection (RP), and 3 scenarios with a CO2 tax of ZAR 100/tonne CO2 and different recycling schemes

Subtle dynamics of skill-segmentated labour in a CGE

1. Definition: What is labour by skill level? Is it the skilledness of the worker, and can be represented by e.g. the level of

education: Constant Qualifications Definition (cqd) Is skill a characteristic of a certain job type in production, regardless of the

supply: Constant Shares of labour population Definition (csd) Or a combination: Supply of high-skilled labour goes up with degree, but

requirements of skill level job types go up too: Upgraded Qualifications Definition (uqd)

2. Drivers for change of skill-intensity of production: Changing productivity; Relative factor prices; Other drivers?

3. Consumption’s role in demand for skills: Are high-skill intensive goods in higher demand when people get richer? Do

they have a higher income-elasticity than other goods?

Subtle dynamics of skill-segmentated labour in a CGE

1. Definition: What is labour by skill level? Is it the skilledness of the worker, and can be represented by e.g. the level

of education: Constant Qualifications Definition (cqd) Is skill a characteristic of a certain job type in production, regardless of the

supply: Constant Shares of labour population Definition (csd) Or a combination: Supply of high-skilled labour goes up with degree, but

requirements of skill level job types go up too: Upgraded Qualifications Definition (uqd)

2. Drivers for change of skill-intensity of production: Changing productivity; Relative factor prices; Other drivers?

3. Consumption’s role in demand for skills: Are high-skill intensive goods in higher demand when people get richer? Do

they have a higher income-elasticity than other goods?

Recycling of Ctax in sales tax + investment in education

Education investment leads to a higher supply of skill 3 labour, leading to relatively lower skill 3 labour costs.

0.0%

7.5%

15.0%

22.5%

30.0%

37.5%

45.0%

0

50

100

150

200

250

300

38.8%

31.9% 32.5% 32.9% Unempl. skill 1

Unempl. skill 2

Unempl. skill 3

Average broad unemployment

Real GDP/cap index (right axis)

CO2 index (rigth axis)

Subtle dynamics of skill-segmentated labour in a CGE

1. Definition: What is labour by skill level? Is it the skilledness of the worker, and can be represented by e.g. the level of

education: Constant Qualifications Definition (cqd) Is skill a characteristic of a certain job type in production, regardless of the

supply: Constant Shares of labour population Definition (csd) Or a combination: Supply of high-skilled labour goes up with degree, but

requirements of skill level job types go up too: Upgraded Qualifications Definition (uqd)

2. Drivers for change of skill-intensity of production: Changing productivity; Relative factor prices; Other drivers?

3. Consumption’s role in demand for skills: Are high-skill intensive goods in higher demand when people get richer? Do

they have a higher income-elasticity than other goods?

Recycling of Ctax in sales tax + investment in education, under Constant Shares Definition (csd)

Base Year 2005 (BY) RP (Constant Shares Definition, csd)

2035

2035 Ct100 csd Re: Sales tax

2035 Ct 100 csd Re: Sales tax w add edu

inv

0.0%

7.5%

15.0%

22.5%

30.0%

37.5%

45.0%

0

50

100

150

200

250

300

38.8%

31.9% 32.5% 32.9% Unempl. skill 1

Unempl. skill 2

Unempl. skill 3

Average broad unemployment

Real GDP/cap index (right axis)

CO2 index (rigth axis)

Investments in education increase productivity of the 3 skill segments and of capital. The result is even more demand for high-skilled workers.

Conclusions

Methodological considerations: Analysing whether macro-economic impacts of investment in education or

skills spur growth and are inclusive requires labour market disaggregation The subtle dynamics of supply and demand of labour with skill differentiation

require a carefull investigation We consider constructing scenarios (with experts and stakeholders) a way to

overcome calibration issues in regard of the multiple dimensions of labour market dynamics

Preliminary policy implications: Under our CGE settings we find that with the right recycling scheme a carbon

tax in South Africa can achieve SA’s economic, social and environmental goals. Most likely by reducing sales taxes

We see potential for even better economic outcomes by investment in education/skills, but the inclusiveness of this measure depends on detailed labour market conditions and the design of the investment

Thank you for your attention!