The corporate taxation of green and brown firms in South Africa

Carbon taxes are expanding in developing countries, but rates remain low. In contrast, the corporate income tax is already pervasive at rates that create meaningful incentives to firms’ production decisions. Linking emissions to tax records for South Africa’s 300 largest emitters, we study how corporate income tax burdens vary with carbon intensity. We show that carbon-intensive (‘brown’) firms face lower tax burdens than less carbon-intensive (‘green’) firms. Our observational estimates are consistent with an emission subsidy embedded in the corporate income tax that is an order of magnitude larger than the effective carbon tax rate of USD 2.4 per tonne of carbon-dioxide-equivalent emissions. This gap reflects the tax deductibility of debt, profit shifting via tax havens, and the take-up of tax incentives—green incentives in particular. Note: The order of the author names was randomized using the American Economic Association's author randomization tool.