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July – December 2022

South Africa’s carbon tax rate: pressure on emitters is mounting

By Dr Lee-Ann Steenkamp

  • OCT 2022
12 minutes to read

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Carbon tax – nudging polluters towards newer technologies

Carbon tax is a tax levied on carbon emissions associated with the production of goods and services. This new tax is aimed at reducing greenhouse gas emissions. It is based on the ‘polluter pays’ principle and is aimed at nudging large emitters to change their behaviour and transition from fossil fuels to sustainable energy.

After a decade of preparation, South Africa introduced its carbon tax in June 2019. Energy-intensive businesses pushed back strongly as the tax increased their production costs. But the country endorsed the Paris Climate Agreement in November 2016 to confirm its commitment to respond to climate change. This means there is no turning around as climate change is associated with increased carbon emissions and costly weather events.

This carbon tax is based on the ‘polluter pays’ principle and is aimed at nudging large emitters to … transition from fossil fuels to sustainable energy.

What does South Africa’s carbon footprint look like?

The largest share of South Africa’s carbon emissions comes from burning fossil fuels for electricity production. (Coal makes up 75% of the country’s primary energy supply.) This is followed by transport, and the industrial production of materials such as cement. That is why this coal-rich country is among the top 15 largest per capita emitters in the world.

there is no turning around as climate change is associated with increased carbon emissions and costly weather events.

Enter carbon tax

South Africa needs to reduce it carbon footprint significantly as the country is a signatory to the Paris Climate Agreement and it is being watched by the world as the European Union, France, the UK, the US and Germany pledged R131 billion at COP26 to help us phase out fossil fuels and take up renewable energy.

The largest share of South Africa’s carbon emissions comes from burning fossil fuels for electricity production.

Various models were used to determine the appropriate carbon tax rate, which started at a base rate of R120 (currently less than US$8) per ton carbon dioxide equivalent (tCO₂e) emissions. This compares poorly with international standards of US$40 to US$80 a ton by 2020. And as a result of all the tax-free allowances built into the carbon tax calculation, the effective rate could be as little as R6 (US$0.4) per tCO₂e emissions.

this coal-rich country is among the top 15 largest per capita emitters in the world.

Treasury acknowledged that this rate was low but wanted to allow large emitters time to transition to cleaner technologies. The rate was increased annually by inflation plus 2% and reached R134 per tCO₂e by the end of 2021.

Then Covid-19 happened and the climate crisis was put on the back burner. Now, there is a renewed focus on carbon tax and the switch to sustainable energy. The Presidential Climate Commission was established to help create a climate-resilient economy by 2050, and the National Climate Change Bill was tabled in parliament. Just before the 26th international climate change conference (COP26) was hosted in Glasgow in November 2021, South Africa raised its targets for greenhouse gas emissions reductions.

South Africa needs to reduce it carbon footprint significantly as the country is a signatory to the Paris Climate Agreement and it is being watched by the world

Two key policies show the way

Two important policies are putting pressure on emitters to comply with carbon tax regulations. The first is the Climate Change Bill introduced in parliament on 18 February 2022. The second, the National Budget Speech of 23 February 2022, provided clarity on issues that affect carbon taxpayers. Here are the main points:

Two important policies are putting pressure on emitters to comply with carbon tax regulations.

  • Carbon tax rate increase: On 1 January 2022, the carbon tax rate was increased to R144 (about US$9). To uphold South Africa’s COP26 commitments, the rate will increase each year by at least US$1 until it reaches US$20. From 2026, government intends to escalate the carbon price more rapidly.
  • Delaying the roll-out of the second phase: The carbon tax is being implemented in three phases, with the second phase originally scheduled to start in January 2023. Now the first phase has been extended by three years until 31 December 2025. Until then, taxpayers will continue to enjoy sizeable tax-free allowances, which reduces their carbon tax liability and gives them more time navigate the complex carbon tax regime. Some sectors will remain beyond the reach of the carbon tax as a result of the rescheduled second phase. These sectors include agriculture, forestry and other land use and waste sectors, as well as Eskom. Eskom had factored in the projected cost of carbon tax in its proposed 21% increase in electricity prices. It remains to be seen if Eskom will reduce prices accordingly.
  • Carbon budgets: The Climate Change Bill will make it compulsory for taxpayers to participate in the carbon budget system. Greenhouse gas emissions allowances are allocated to emitters, and emitters should stay within these budgeted allowances, else they could face a sizable carbon tax penalty.

Eskom had factored in the projected cost of carbon tax in its proposed 21% increase in electricity prices. It remains to be seen if Eskom will reduce prices accordingly.

Industries or companies whose international competitiveness could be hampered by carbon tax, especially when it comes to exports (the mining sector, for example), get a trade exposure allowance that can reduce their liability by up to 10%.

The Climate Change Bill will make it compulsory for taxpayers to participate in the carbon budget system.

What does the future hold for emitters?

  • Companies that fail to put in place plans to reduce their emissions will encounter ‘steep taxes’. They have a window of about 10 years in which to change.
  • The postponed deployment of the carbon tax only provides temporary relief for emitters.
  • Carbon tax has the potential to become a significant contributor to the fiscus, especially when the second phase launches.

South Africa’s revised Nationally Determined Contribution targets are still insufficient to limit global warming to 2°C, not to mention the Paris Climate Agreement target of 1.5°C. Carbon tax can play a critical role in achieving this. The Climate Change Bill needs to be enacted soon to put pressure on emitters to switch to cleaner energies.

  • Find the original article here: L.-A. Steenkamp. (2022, 25 Feb). South Africa’s carbon tax rate goes up but emitters get more time to clean up. The Conversation
  • Dr Lee-Ann Steenkamp is a senior lecturer in Taxation at Stellenbosch Business School. She is also head of the Postgraduate Diploma in Financial Planning at the Business School.

Companies that fail to put in place plans to reduce their emissions will encounter ‘steep taxes’.
The postponed deployment of the carbon tax only provides temporary relief for emitters.
Carbon tax has the potential to become a significant contributor to the fiscus.

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