Brief

Understanding the Role of Subsidies in South Africa's Coal-Based Liquid Fuel Sector

This policy brief analyzes the coal-to-liquid (CTL) fuel sector in South Africa, exploring the role of subsidies in driving the consumption of coal-derived fuels. It focuses on the various support measures that have and continue to benefit the CTL industry. The CTL industry is monopolized by Sasol, a company minority-owned by the South African government. Two subsidy estimates are presented: one based on the market price support to liquid fuels produced from coal and the second based on the carbon tax exemption for Sasol. The results highlight the impact of fossil fuel subsidies on the consumers in and the environment of South Africa.
By Richard Bridle, Mostafa Mostafa on October 13, 2020
  • Sasol received ZAR 1.552 billion through the Basic Fuel Price, the price paid to producers of petroleum and synthetic fuels. On top of that, the company received an indirect subsidy of over ZAR 6.5 billion due to an exemption from the Carbon Tax Act 15 of 2019 that permits Sasol to emit 302 Mt of carbon dioxide equivalent between 2016 and 2020.

  • Every time a motorist fills up their tank, about 5% of the bill is being paid as a subsidy to Sasol because of the way fuels are priced. This money could be better spent elsewhere or returned to consumers.

  • Sasol does not meet environmental standards under South Africa's Technical Guidelines for Monitoring, Reporting and Verifying of GHGs 2017; it is expected to under-report its emissions until at least 2025.

This study finds that, in 2019, the total value of market price support (MPS) and carbon tax exemptions to Sasol was ZAR 6.6 billion (USD 380 million). The majority of these savings are from the carbon tax exemption, but MPS is responsible for around 5% of the cost of each litre of CTL gasoline sold. These support measures contribute to the high-profile role of coal in South Africa’s transport sector. It is difficult to see compatibility between the continued consumption of coal-based fuels and South Africa’s commitments under the Paris Agreement. Pricing policies also subsidize domestic petroleum refining at a cost to consumers. Subsidy reforms in the sector should focus on aligning energy policy with social and environmental objectives and promoting a shift to cleaner energy sources while employing “just transition” policies to ensure that no one is left behind.

Brief details

Topic
Energy
Finance
Subsidies
Region
South Africa
Project
IISD Global Subsidies Initiative
Focus area
Climate
Economies
Publisher
IISD
Copyright
2020, 2020