Written by Mike Szabo, originally published on Carbon Pulse on February 19, 2019
South Africa’s parliament on Tuesday approved the country’s long-awaited carbon tax bill, clearing a key hurdle in keeping the measure on track to enter into force this spring.
The margin of approval by lawmakers was unclear, but observers said the legislation was supported by a clear majority, despite some pushback from the opposition Democratic Alliance (DA).
DA lawmakers cited conflicting arguments including high unemployment and the tax being ineffective due to the price being set too low. They also contended that the levy was an inappropriate approach, and that the government should consider implementing an emissions trading system instead.
The bill will now be submitted to the Council of Provinces before it is sent to South African President Cyril Ramaphosa to be signed into law.
“The time has really come for companies to start preparing for the carbon tax, which is now all but certain to become operational and effective in little over three months’ time on June 1,” said consultancy EcoMetrix Africa.
South Africa’s national carbon tax was first floated in 2010, a year before the country hosted the annual UN climate talks. But progress has been slow since then, with the government only publishing the first draft in Nov. 2015 and big emitters including state-owned utility Eskom lobbying to further delay or completely scrap the plan.
After a number of delays, the government had intended to implement the tax in Jan. 2019, but late last year it postponed it by a further five months.
If approved in its current form, the bill will apply a tax of 120 rand ($8.49) per tonne on virtually all areas of South Africa’s economy, covering most stationary and non-stationary greenhouse gas sources and applying to fossil fuel combustion, fugitive emissions, and industrial processes.
The levy will rise annually by 2% plus inflation until the end of the first phase in 2022, and then align with inflation after that.
However, emitters will initially face an effective rate of R6-48/tonne based on the suite of exemptions available and the admissibility of offsets, with some companies able to reduce their tax burdens by as much as 95%.
GHGs from purchased electricity, known as Scope 2 emissions, are also excluded.
Credits from projects certified under the CDM, Gold Standard, and Verified Carbon Standard (Verra) will be allowed providing they meet certain criteria.
Some project types have been branded ineligible including HFC-23, N2O adipic acid, nuclear, CCS, and installations that have renewable energy generation capacity in excess of 50 MW.
The regulations also stipulate that projects can only be eligible if they don’t benefit from other government incentive programmes such as the Energy Efficiency Savings Tax Incentive or the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP).
EcoMetrix said its modelling estimates there will be a “considerable” shortage of usable carbon credits in the short-to-medium term.
This, it added, could trigger a revival of South Africa’s project-based offset market, which along with the wider CDM programme under the Kyoto Protocol has not yet recovered from the crash in CER prices that came following the global economic downturn.
South Africa’s Treasury will hold a review of the tax after three years of implementation, evaluating the headline rate and exemption thresholds while assessing the levy’s effectiveness in reducing greenhouse gas emissions.
The review will also consider how to better align the tax with other environmental initiatives – including South Africa’s carbon budget programme – and whether to expand its reach to other sectors.
The budgets will feed into sectoral targets that will help South Africa meet its Paris Agreement pledge to peak its GHGs in 2020-2025, plateau for a 10-year period from 2025 to 2035, and then cut them from 2036 onwards.
Emitters that exceed their company-level limits will be forced to pay steep penalties.
- South Africa’s waste, agriculture, forestry, and other land-use sectors are exempt from paying the tax or performing MRV until 2022 due to the difficulty in accurately measuring emissions from those sources.
- A basic tax-free allowance of 60% is offered to all emitters, with an additional 10% for having process or fugitive emissions.
- Another variable allowance of up to 10% is available for trade-exposed sectors, with an additional 5% available for above-average performance relating to sectoral benchmarks.
- Beyond that, a further 5% can be applied by companies that have developed an annual carbon budget and report it to the government.
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