South African Reserve Bank working paper finds carbon tax with worker rebates cuts emissions and inequality but green capital discounts can raise coal demand

The South African Reserve Bank published a working paper analysing how climate-related fiscal and prudential tools could affect emissions, macro-financial outcomes and inequality in South Africa. Using a calibrated two-period computable general equilibrium model with heterogeneous households and a dual-tier banking system with endogenous default, it concludes that no single instrument dominates and that the best-performing approach combines a carbon tax with targeted prudential adjustments. In the model, downstream carbon taxes most sharply reduce emissions and, when revenues are rebated to workers, also narrow wealth and consumption inequality. Brown “penalising” risk-weighted capital surcharges restrain leverage but raise energy prices and widen wage inequality, with the paper also highlighting trade-offs between resilience, bank profitability and non-performing loans as borrowers face higher spreads. Green “supporting” capital discounts lower financing costs for renewables, but a Jevons-type rebound from lower overall energy costs can increase coal demand and undermine emissions objectives. Welfare decompositions point to a sequencing in which carbon taxation does the primary climate and distributional work, with prudential measures added to contain financial side-effects. The paper is published as part of the South African Reserve Bank’s Working Paper Series and is intended to elicit comments and stimulate debate; the views expressed are those of the authors and not necessarily those of the South African Reserve Bank.