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) 3 rd Annual GGKP conference Venice, 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 108 th worldwide (2013)  Low annual GDP growth ( : ~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 CO 2 emissions: 9 tCO 2 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 CO 2-eq by 2035  CO 2 tax (Ctax) proposal of 120 ZAR/tCO 2, to start in 2016 ( ~10 USD/tCO 2 )

Research Questions  What CO 2 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 Africa Tool 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  CO 2 tax (Ctax) scenarios for 2035:  Ctax: 100 ZAR (2005) /tCO 2 (18 USD (2012) /tCO 2 )  No border tax adjustment, no Ctax export rebates  No foreign or international Ctax  Recycling schemes: 1.Reduction of VAT/sales tax 2.Reduction of company and household income and revenue taxes 3.Lumpsum transfer to all households 4.Scheme 1 + partial recycling into investment in education/skills

Results for Refererence Projection and 3 scenarios for recycling Ctax 100 ZAR Table: Average unemployment (numbers in italics), and indices for GDP per capita and CO 2 emissions (both: right axis), for Base Year 2005 (BY), Reference Projection (RP), and 3 scenarios with a CO 2 tax of ZAR 100/tonne CO 2 and different recycling schemes

Results for Refererence Projection and 3 scenarios for recycling Ctax 100 ZAR Table: Unemployment by skill level, avg. unemployment, and indices for GDP per capita and CO 2 emissions (both: right axis), for Base Year 2005 (BY), Reference Projection (RP), and 3 scenarios with a CO 2 tax of ZAR 100/tonne CO 2 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.

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) 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!