Extension of the first phase
When the carbon tax came into effect in 2019, it was announced that the first phase of the tax would come to an end on 31 December 2022. In principle, it is contemplated that the transition from the first phase to the second phase would result in a broadening of the carbon tax base, increase in the annual carbon tax rate increase and a reduction in the allowances that taxpayers could qualify to reduce their carbon tax liability. Of course, all of this must be seen in the context of South Africa’s obligations under the Paris Agreement to reduce its carbon emissions read with its revised commitment made under its revised Nationally Determined Contribution, which was submitted to the UNFCCC in 2021.
In the 2022 Budget Speech, it was announced that the first phase of the carbon tax will be extended by three years from 1 January 2023 to 31 December 2025. As such, the transitional support measures afforded to companies in the first phase, such as significant tax-free allowances and revenue recycling measures, will continue over this period, alongside other adjustments. The main proposals in this regard include:
- Extending the energy-efficiency-
savings tax incentive from 1 January 2023 to 31 December 2025. This incentive is contained in section 12L of the Income Tax Act 58 of 1962.
- Extending the electricity price neutrality commitment until 31 December 2025. The electricity-related deduction will be limited to the carbon tax liability of fuel combustion emissions of electricity generators and will not be offset against the total carbon tax liability.
- Adjusting the threshold for the maximum trade exposure allowance upwards from 1 January 2023. Updated sectors and allowances will be published for public consultation.
- Penalising emissions exceeding mandatory carbon budgets. The mandatory carbon budgeting system comes into effect on 1 January 2023, at which time the carbon budget allowance of 5% will fall away. To address concerns about double penalties for companies subject to the carbon tax and carbon budgets, it is proposed that a higher carbon tax rate of R640 per tonne CO2e will apply to greenhouse gas emissions exceeding the carbon budget. These amendments will be legislated once the Climate Change Bill is enacted.
The revised Climate Change Bill was published on 18 February 2022. In anticipation of the bill coming into law in the near future, persons who may be liable for carbon tax should carefully consider the Climate Change Bill provisions dealing with the carbon budget and ensure that they comply with the carbon budget provisions once in effect. The proposed penalty rate of R640 per tonne CO2e for carbon budget offenders is substantially higher than the current rate of R144 per tonne CO2e and compliance with the carbon budget provisions is key, especially if the proposed penalty rate comes into effect.
Proposal regarding the renewable energy premium and carbon sequestration deductions
In terms of section 6(2) of the Carbon Tax Act 15 of 2019 (Carbon Tax Act), taxpayers generating electricity can claim a tax deduction for electricity generation levy payments and additional renewable electricity purchases. These provisions were amended in 2021 to allow taxpayers entering into power purchase agreements in certain contexts to also claim the premium and qualify for the benefit.
It is now proposed that section 6(2) of the Carbon Tax Act be amended to clarify that taxpayers would qualify for a deduction if they generate electricity from fossil fuel and conduct fuel combustion activities under IPCC code 1A1 (energy industries) and 1A2 (manufacturing industries and construction). Hopefully, the proposed amendment will result in more taxpayers being able to use the premium to reduce their carbon tax liability.
In relation to the issue of carbon sequestration, it is proposed to limit the deduction for forestry management and harvested wood product sequestration activities to only those activities within the operational control of the taxpayer conducting paper and pulp activities. This follows amendments made in 2021 to expand the scope of the carbon sequestration deduction to include emissions sequestered in harvested wood products for the paper and pulp activities under IPCC code 1A2D (referred to in the Schedule to the Carbon Tax Act).