Carbon tax, 12 years in the making

The 2006 Draft Environmental Fiscal Reform Policy Paper (DEFRPP) published by National Treasury provided a framework to ensure the consistent development and assessment of environmentally regulated tax proposals. The DEFRPP specified the environmental related taxes and charges available at the time, such as the levies placed on transport and aviation fuel, electricity, water supply and waste water. 

Following the DEFRPP, National Treasury published the Carbon Tax Discussion Paper, Reducing Greenhouse Gas (GHG) emissions during December 2010 for public comment (2010 Discussion Paper), where it was indicated that 80% of South Africa’s carbon dioxide (CO2) emissions were produced from the electricity sector, the metals industry and the transport sector. One of the main causes of South Africa’s carbon intensive economy is due to the electricity sector’s reliance on low-cost fossil fuel based electricity generation.

Carbon tax (which seeks to reduce emissions through the price mechanism directly) and emissions trading (which targets specific levels of emissions through trade-in allowances) were highlighted as the two main economic policy instruments for putting a price on carbon and curbing GHG emissions. Although carbon tax does not set a fixed quantitative limit to GHG emissions over the short term, at appropriate levels and phased in over a period, will provide a strong price signal to both producers and consumers to change their behaviour over the medium to long-term. 

In May 2013, National Treasury published an updated Carbon Tax Policy Paper for public comment (2013 Policy Paper), which considered the comments received in respect of the 2010 Discussion Paper. The 2013 Policy Paper elaborated on and contextualised the specific carbon tax design features briefly discussed in the 2013 Budget Review, such as carbon tax, energy-efficiency savings and the electricity levy, the increase in vehicle CO2 emissions tax and the certified emission reductions tax incentive.

The imposition of tax applied directly to actual GHG emissions or CO2 equivalents was noted as the best option for carbon tax at a proposed tax rate of R120 per ton of CO2 equivalents above the thresholds. In terms of the Draft Carbon Tax Bill 2015 and the Draft Carbon Tax Bill 2017, the proposed rate of tax of R120 per ton of CO2 equivalents has remained unchanged. 

National Treasury’s recent carbon tax briefing 

On 13 February 2018, the Standing Committee on Finance (SCoF) held a meeting to clarify South Africa’s GHG emissions reduction system, as well as provide details in respect of the Draft Carbon Tax Bill 2017.  

In this meeting the need to fast track the finalisation of carbon tax legislation was emphasised by the SCoF, in order for binding legislation to facilitate the necessary transition in 2020 when the Paris Agreement on Climate Change (Paris Agreement) comes into operation. The Paris Agreement was ratified by South Africa on 2 November 2016 and aims to collectively address the threat of climate change within the context of sustainable development and includes efforts to eradicate poverty. The Paris Agreement further seeks to reduce carbon emissions globally by ensuring that the globe’s temperature does not exceed a 2-degrees Celsius increase.

The main issues discussed at the meeting are as follows:  

1. South Africa’s GHG emissions reduction system

In terms of South Africa’s National Determined Contribution (NDC) required by Article 4(9) of the Paris Agreement, three key elements have been identified to reduce GHG emissions:  

1. a long-term goal in the form of a national emissions trajectory range to 2050;
2. a medium-term goal in the range of 398 – 614 metric ton CO2 equivalents in the year 2025 until 2030; and
3. provide flexibility in the form of a range which will require a periodic review in the medium/long term, taking into account science and natural circumstances.

To meet the 2-degree Celsius target, countries will have to submit more ambitious goals going forward, as the current NDCs are not sufficient to reach the proposed target.

South Africa’s Mitigation System and the carbon tax phased in approach

In 2015, Cabinet approved the following key elements in respect of the climate change mitigation system framework (Mitigation System); a carbon tax, GHG inventory, national emissions trajectory, a carbon budget for each company, pollution prevention plans for companies with carbon budgets and a reporting system to gather information regarding the emissions of users, amongst others. 

Regarding the introduction of a carbon tax, a phased approach has been suggested which allows for developmental challenges faced by South Africa, encourages investment in more energy efficient technology, and ensures that South Africa’s competitiveness is not compromised. The Mitigation System is to be introduced in two phases:

• Phase one (2016 – 2020)

Phase one will be voluntary as there is no legal basis to set emission limits for sectors or companies, however during phase one, the chief director of climate change indicated that particular attention to the 2010 Integrated Resource Plan, setting of carbon budgets, calls for pollution plans and annual reporting must take place.

National Treasury noted in the Explanatory Memorandum published with the Draft Carbon Tax Bill 2017, that the impact of phase one has been designed to be revenue-neutral, and revenues will be recycled by way of reducing the current electricity generation levy, credit rebate for the renewable energy premium, as well as a tax incentive for energy efficiency savings.

Phase one is said to last for a period between 4 to 5 years from the implementation date of the tax. During phase one, there will be no impact on electricity prices. In addition, carbon credits should be developed under the Clean Development Mechanism (CDM), Verified Carbon Standard (VCS) and the Gold Standard (GS). 

Companies that wish to reduce their carbon tax liability up to 5% or 10% can do so by subscribing to the carbon offset scheme as provided for in the Draft Carbon Offset Regulations. 

• Phase two (post 2020)

Phase two will only become mandatory when climate change response legislation is in place, and will include:

• new regulatory instruments to be included in future climate change legislation, such as DEA (Department of Environmental Affairs) Indirect Emissions Mandatory Reporting Requirements, Sector Mitigation and Low Carbon Development Plans and Climate Change Response Implementation Plans; 
• regulatory instruments based on existing regulations, such as the National GHG Reporting Regulations and Pollution Prevention Plans Regulations;
• DEA Monitoring and Evaluation (M&E), such as the National Climate Change Response M&E System; and
• DEA Inventory, such as the National GHG Emissions Inventory.

The DEA and National Treasury examined various options to align carbon tax and carbon budgets for phases one and two. Phase one provides companies who participate in the carbon budget system with an additional 5% allowance, providing for a maximum tax-free threshold of 95%. Phase two contains a “in-principle agreement” in respect of the alignment option where companies cannot be penalised twice by the alignment of carbon tax and the carbon budget. The Draft Carbon Tax Bill would require additional amendment in order to allow for the aforesaid two-phase interface.

2. Draft Carbon Tax Bill 2017

The Carbon Tax Bill will give effect to the Polluter-Pays-Principle and assist in ensuring that firms and consumers take these costs into account in their future consumption and investment decisions, and assist with the reduction of GHG emissions.

The carbon tax policy framework in South Africa

• Emissions above a certain level will be taxed.
• Who will be taxed? 
• electricity generation and fuel combustion;
• industrial processes;
• fugitive emissions;
• scope 1 (direct GHG emissions): stationery emissions. In terms of stationery emissions, reporting thresholds will be determined by source category as stipulated in the National Environmental Management: Air Quality Act, No 39 of 2004;
• scope 2 (energy indirect GHG emissions): non-stationary emissions (as an add on to fuel tax).
• Marginal rate of R120 per ton of CO2 equivalents taking into account allowance ranges from R6 to R48 per ton CO2 equivalents.
• Recycling measures and tax incentives, which are said to be included with the announcement of the implementation of carbon tax. 

Revenue recycling takes place where most of the revenue collected from the imposition of carbon tax is recycled to fund measures to assist with transition to a lower carbon economy, with the aim of mitigating short term negative impacts on the economy and employment. The recycling measures and tax incentives will include:

• energy efficiency savings tax incentive (s12L of
  the Act);
  
• credit against Eskom’s carbon tax liability for the renewable energy premium built into the electricity tariffs;
• credit for the electricity levy;
• support for the installation of solar water geysers;
• enhanced free basic electricity/energy for low income households; and
• improved public passenger transport and support for shift of freight from road to rail.
• A phased-in approach starting with a relatively modest carbon tax rate, coupled with generous tax-free allowances of 60 to 95% adjusted over time. The phased in approach will minimise potential adverse impacts on low-income households and industry competitiveness;

The implementation of a carbon tax is said to level the playing field between carbon intensive (fossil-fuel based firms) and low carbon emitting sectors (renewable energy and efficient energy technologies),

The topic of carbon tax implementation in South Africa has stirred up numerous emotions and financial fears for businesses and business owners alike who are conducting activities resulting in GHG emissions above the various thresholds. Following the proposal made in the Budget that carbon tax will be implemented from 1 January 2019, the carbon tax reality is fast approaching and businesses must be adequately prepared.