Carbon tax in a nutshell

The South African government is looking to introduce a carbon tax on 1 January 2019 with the objective to meet its nationally-determined contribution (NDC) commitments in terms of the 2015 Paris Climate Agreement, and to reduce its greenhouse gas emissions in line with the National Climate Change Response Policy and National Development Plan. Since the Paris Agreement comes into effect in 2020, South Africa’s efforts to reduce its greenhouse gas emissions and meet its commitments cannot be further delayed.

What is a carbon tax?

A carbon tax is a fee imposed on the burning of carbon-based fuels (coal, oil, gas) and is globally recognized as a core policy-instrument for reducing and eventually eliminating the use of fossil fuels whose combustion is destabilizing and destroying our climate.

Under the South African carbon tax, the carbon emissions from industrial processes (such as cement production) and fugitive emissions (from various industrial activities, including mining) will also attract carbon tax.

A carbon tax is a way to make users of carbon fuels pay for the climate damage caused by releasing carbon dioxide into the atmosphere. If set high enough, it becomes a powerful monetary disincentive that motivates switches to clean energy across the economy, simply by making it more economically rewarding to move to non-carbon fuels and energy efficiency.

Who will have to pay the carbon tax?

All companies that are liable to report their greenhouse gas (GHG) emissions to government (Department of Environmental Affairs) have to pay carbon tax. So who has to report their emissions then? These are companies in control of certain ‘GHG emitting activities’ and with an associated capacity exceeding a predetermined threshold. These ‘GHG emitting activities’ make up the carbon tax base and include:
• emissions from stationary combustion of fossil fuels (e.g. diesel generators, boilers)
• fugitive emissions (e.g. emissions from venting and/or flaring of mine methane)
• emissions from industrial processes and product use (e.g. cement-, lime-, or glass-production)

Which emissions will be taxed?

All six GHGs are covered:

1. CO2 (carbon dioxide): typically from fuel combustion activities;
2. CH4 (methane): typically from waste and mining activities;
3. N2O (nitrous oxide): predominantly from agricultural activities;
4. HFCs (hydrofluorocarbons): used as refrigerants to replace the ozone damaging CFCs;
5. PFCs (perfluorocarbons); and
6. SF6 (sulphur hexa fluoride) which both are associated with the electronics industry.

What will the carbon tax rate be?

The tax rate will be set at R120 per tonne of CO2e (carbon dioxide equivalent) produced, with an annual increase of CPI + 2%. To allow businesses time for transition, a basic percentage-based threshold of 60% will apply for all sectors, below which tax is not payable. Over and above the basic 60% tax-free threshold, there are additional allowances that apply to various sectors and businesses, such as trade-exposed sectors and companies that have a better carbon performance than their peers. There will also be an offset allowance of 5 or 10% (depending on sector) which can also significantly reduce how much carbon tax is paid. The total tax-free allowances during the first phase (up to end 2022) can be as high as 95 per cent.

When will it come into effect?

The implementation date of the carbon tax is set for 1 January 2019. This means that from this date, companies will have to measure, report and pay carbon tax. The first phase of the carbon tax regime will be from 2019 – 2022. In the second phase of the carbon tax (from 2023) several changes are expected (such as removal of allowance, revision of the carbon tax rate etc). making this phase much “harsher” for companies.

But the tax has been delayed so often?

That is indeed true. The carbon tax has been in development since 2015 with a draft and final carbon tax bill published, with several rounds of comments from industry, NGOs and civil society. What makes it different this time round is that the carbon tax is scheduled to be tabled in Parliament in October 2018. Finance Minister Nene will likely confirm the implementation date in October’s mid-term budget speech. The implementation date is likely to be moved by a few months, but not more given South Africa’s international climate commitments.

How will the carbon tax affect my company’s bottom line?

That depends on how high your stationary, process and fugitive greenhouse gas emissions of your operations are and how you make use of the various tax allowances, including offsetting.It is important for all businesses to assess the likelihood and extent of risk exposure to the carbon tax, understand where they may be exposed to tax, to what extent they will be exposed and start planning to reduce their carbon emissions. A full review of your business’ supply chain will also provide information on a supplier’s exposure which may trigger price hikes. As time is running out, those businesses who use this window now to review their risk exposures and start the necessary process of evolving their business practices will be ready for the carbon tax.

For more information on the proposed carbon tax and whether it will impact your business please take a look at our carbon tax advisory services or call us on +27 21 202 6066.