Under the Carbon Tax Act, domestic carbon offsets can be used to help carbon tax liable companies pay less carbon tax. And these savings can be considerable. Many companies, including the large emitters most impacted by the tax, are not aware that by making use of carbon offsets can result in a tax reduction of up to 10% or more, while at the same time boosting their Corporate Social Investment mandate and contributing to sustainable development in South Africa.
MARGINAL VS EFFECTIVE TAX RATE
The Act will apply a marginal tax of R120/tonne of CO2e in 2019 (and R127/t in 2020) on virtually all areas of South Africa’s economy, covering greenhouse gases sources from fossil fuel combustion, fugitive emissions, and industrial processes.
The levy will rise annually by CPI + 2% until the end of the first phase in 2022, and then align with inflation after that.
However, emitters will initially face an effective tax rate of R6 – R48/tonne based on the suite of tax allowances available and the admissibility of offsets, with some companies able to reduce their tax burdens by as much as 95%.
Seeing that the effective tax rate is only R6 – R48 per tonne, many people are under the false impression that offsets need to be priced under this rate in order to pay less carbon tax and therefore using offsets will hardly make a difference in reducing a company’s carbon tax.
But this is not the case, as I will explain below.
CARBON TAX OFFSETS
Carbon offsets, or carbon 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 and Carbon Capture and Storage (CCS).
The regulations also stipulate that projects can only be eligible if they do not benefit from other government incentive programmes such as the Energy Efficiency Savings Tax Incentive (12L) or the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP). However, REIPPPP projects from Round 3 onwards will be eligible, provided the tariff as per signed PPA is above R1.09/kwh
Carbon offsets generated by activities that are covered under the carbon tax are also not eligible, unless these offsets were generated prior to 1 June 2019. For example, if a company implements a project that reduces the coal use in their boilers the project activity cannot be registered as a carbon offset project for use under the carbon tax as this project will result in a company paying less carbon tax (i.e. to avoid double counting).
SAVINGS FROM USING CARBON TAX OFFSETS
As mentioned above, the marginal tax rate is R120 / tonne CO2e, which means that for those emissions you are taxed on, your company pays R120 / tonne. The effective tax rate is calculated if you divide the R120/t by the % allowances.
For example, if your company has 1000tCO2 of fuel combustion emissions you do not have to pay tax on the first 60% (basic tax-free allowance) and therefore you only pay tax on 400t (these are your “taxable emissions”). This means you have to pay R48,000 in carbon tax (400t X 120/tCO2e).
The effective tax rate is then calculated as follows:
(R120 / 100) X 40 = R48/tCO2e.
This means you are paying R48/tCO2e on the full 1000 tCO2e (and R120/tCO2e on the 400 tCO2e). From 2022 the basic tax-free allowance of 60% falls away, then you will be paying the full rate on 1000 tCO2e.
In terms of offsets, using the above example, a company would be allowed to use 10% of the total 1000 tCO2e in offsets. This would be 100 tCO2e. If this company buys offsets for, say R80, then they would save R40 / tCO2e (R120/t tax rate less R80/t offset price). Their carbon tax saving would be calculated as 100 tCO2e X R40/tCO2e = R4000.
So if this company does not make use of offsets they would pay R48,000 in carbon tax. If they use offsets they only pay R44,000 (R48,000 – R4,000). This is a saving of 8,33%.
As such it can be clearly seen that even though the company paid R80/ tCO2e for the offset (much higher than the R36/ tCO2e effective tax rate) they still saved on their carbon tax liability.
To conclude, as long as a company purchases offsets for less than the price of the marginal tax rate it will still pay less carbon tax.
Generally, how much carbon tax a company can save by utilizing offsets will depend on:
- price of the offsets – the lower the price, the higher the savings (offsets are not free and are currently in high demand!)
- percentage offset allowance – fuel combustion emissions allow for 10% offset allowance – hence higher the savings compared to using 5% offset allowance for process and fugitive emissions
- emissions profile – a company with mostly combustion emissions will save more carbon tax when using offsets compared to a company that has mostly process and/or fugitive emissions (this is due to the fact that combustion emissions have a 60% tax free allowance compared to 70% tax free allowance for process and fugitive emissions).
Due to the considerable tax savings to be realised, and the fact that there will be more at least 5 times more offset demand than supply, carbon tax liable companies are advised to develop a carbon offset strategy that addresses the following crucial questions:
- To purchase offsets, and save tax, or not? It is not an additional amount that you need to budget for, you will have to pay the tax anyway
- Linking offsets to broader company objectives?
- Linking offsets to CSI or social development programmes?
- Purchasing a function of price and / or project type?
- Who will manage this process (internally or outsourced?)
- When to act?
Climate Neutral Group can help your company lower its carbon tax liability through a robust carbon tax offsetting strategy. We also have a large portfolio of eligible South African carbon offsets thereby maximising your carbon tax savings.
Franz Rentel | Country Director SA
Franz works with organisations to help them understand and furthermore minimise their climate impact.