What the new carbon tax means for SA industry

After almost a decade in the works, South Africa’s new carbon tax was earlier this year signed into law. In a bid to mitigate the impacts of climate change, government will now be taxing greenhouse gas-emissions. This tax will apply to anyone, including municipalities, with emissions.

Climate change is one of the most pressing issues of our time and as the 14th largest greenhouse gas emitter in the world, South Africa has an important role to play in trying to resolve it. Ultimately, the carbon tax places a price on emissions and intends to encourage cleaner practices.

Becoming liable

But how does it work? Combustion emissions, process emissions and fugitive emissions could now potentially incur a tax depending on the threshold that is applicable.

Treasury has set a 10 MW installed thermal input capacity threshold for combustion activities that result in emissions. This means that regardless of utilisation or fuel type, if you have the capacity to combust 10 MW(th) then your emissions will be subject to carbon tax. Input capacity is difficult to determine, however, and additional complexity is added by having to use the sum of all input capacities across all your facilities.

Many process and fugitive emissions have no threshold, and you will be taxed thereon regardless of how small your operation is. Some other activities have unique thresholds, such as domestic aviation and CO2 transport, and a number of activities are not subject to the tax at all (e.g. the threshold for Stationary Air Conditioning is “Not Applicable”).

Emissions from road transportation and some other mobile equipment is not included in the direct carbon tax. Instead, a carbon tax on certain liquid fuels was introduced from 5 June 2019 as part of the fuel levy system.

Measuring emissions

While having a combined capacity over the threshold means your activities are subject to carbon tax, you will only pay the tax on your actual emissions. However, these are both difficult and expensive to accurately measure.

South African emitters will instead have the option to use the ‘emission factors’ established by the Intergovernmental Panel on Climate Change. These are factors that give an approximation of greenhouse gasses emitted depending on how much fuel was combusted, or product was produced. Over time, more accurate domestic emission factors will be developed for use in South Africa.

Allowances

The new carbon tax does, initially at least, include a number of mechanisms aimed at reducing its burden. The most significant are a 60 percent allowance for all emissions and an additional 10 percent allowance for process and fugitive emissions.
There are four additional allowances which taxpayers can access depending on whether they meet the necessary requirements. The first is the trade exposure allowance of up to 10 percent, which is dependent on how trade exposed the sector is in which a company operates.

The second additional allowance is the performance allowance, in terms of which you can claim a 5 percent allowance if your processes are less emission intensive than a benchmark that has been submitted to and Gazetted by National Treasury.

The third, the carbon budget allowance, similarly provides for an allowance for those who have voluntarily participated in the development a carbon budget with the Department of Environment, Forestry and Fisheries (DEFF). DEFF is in the process of developing a carbon budget system and intends to make it mandatory for large emitters to have a carbon budget under the National Climate Change Bill. Alignment between these two mechanisms is still under review to avoid a double penalty.

Finally, the carbon offsets allowance makes provision for an allowance for those that invest in emission reducing projects. Projects that reduce emissions in South Africa, but are not directly subject to carbon tax, may be able to register the emissions reductions as carbon offsets. These can then be purchased by carbon taxpayers and retired to reduce the amount of emissions they are liable to pay tax on.

These allowances will, initially at least, offer some respite from the carbon tax. But it is not clear at this stage how long they will remain in place. Government has indicated that the impact of the carbon tax will be reviewed before the next phase is implemented (2023) and changes to rates, thresholds and allowances made thereafter.

What this means is that while the new carbon tax is going to start off relatively low, the intention is for it to escalate over time and so it could ultimately prove to be burdensome.

Additionally, the allowances, as well as a rebate for the Environmental Levy for fossil fuel electricity generation and a renewable energy premium is intended to neutralise the impact of the carbon tax on Eskom. However, once these allowances are phased out, electricity prices could potentially be significantly impacted by carbon tax.

Regardless, it is clear that environmental accountability is the new normal, and companies must begin looking for innovative new ways to reduce their emissions footprint now or risk suffering the consequences in the future.