Dr Marilyn Govender and Sam Maphumulo
Government has indicated that the forthcoming carbon tax aims to play a role in achieving the objectives set out in the NCCRP of 2011 contributing towards meeting South Africa’s commitments to reduce greenhouse gas (GHG) emissions by encouraging companies to gradually change their fuel inputs, production techniques and processes through investments in energy efficient, low carbon technologies to lower their GHG emissions.
Policy Process and Timeline
The carbon tax policy process originated after the Tax Policy Unit of the National Treasury initiated a study on the potential for environmental fiscal reform in South Africa in 2002, resulting in the Environmental Fiscal Reform Policy Paper in 2006. This study then triggered a series of discussion and policy papers which has framed the approach taken in the Revised Draft Carbon Tax Bill published in December 2017. This included the Carbon Tax Discussion Paper (Dec 2010), National Climate Change Response White Paper (2011), the Carbon Tax Policy Paper (May 2013), the Carbon Offsets Paper (April 2014), and Draft Carbon Tax Bill and Draft Regulations on Carbon Offset (2015-16).
The carbon tax has been designed to allow for transitional tax-free allowances provided to entities for a smoother transition to a lower carbon economy and to take into account potential international competitiveness and carbon leakage concerns. The total tax-free allowances during the first phase (up to 2022) can be as high as 95%. These transitional tax free allowances include:
Basic tax-free allowance for fuel combustion emissions
All entities that generate emissions from energy combustion will qualify for a basic, tax-free allowance of 60%.
Basic tax-free allowance for industrial process emissions
GHG emissions from chemical processes that occur in fixed stoichiometric ratios (e.g. coal gasification, crude oil cracking and the production of cement, iron, steel, glass, ceramic and certain chemicals, such as calcium carbide and titanium dioxide) have limited potential for mitigation over the short term. An additional tax-free allowance of 10% for process emissions.
Allowance in respect of fugitive emissions
An additional tax-free allowance of 10% for fugitive emissions.
Trade exposure allowance
Potential adverse impacts on industry competitiveness are addressed by providing an additional maximum 10% tax-free trade exposure allowance. The design of the allowance has been adjusted from a company to a sector-based trade exposed allowance and will include exports and imports. The tax-free allowance will be structured as graduated relief with sectors qualifying for the allowance depending on the magnitude of their deemed trade exposure, determined according to the trade intensity. The qualifying activities and their respective trade exposure allowance will be published in a regulation.
Performance Allowance (Z-factor)
A tax-free allowance has been included for those entities that have proactively implemented GHG mitigation measures. This will be calculated with reference to the agreed GHG emissions intensity benchmark (including both direct and indirect emissions) for the sector or sub-sector. A maximum tax-free allowance of 5% is allowed for above average performance. GHG emissions intensity benchmarks for different industrial sectors or sub-sectors will be specified in a regulation to be released during 2018. This regulation will be developed based on inputs received from the different industry associations or companies.
Carbon budget system allowance
In recognition of the carbon budgets process being developed by DEA, an additional 5% tax-free allowance will be provided to companies participating in phase 1 of the carbon budget system. Written consent of the approval of the carbon budget by the DEA is required for a company to qualify for the tax-free allowance. During the first phase, this provides an incentive for entities to participate in the carbon budget system and voluntarily declare their emissions.
Carbon offsets are proposed to provide entities with additional flexibility to reduce their GHG emissions and therefore reduce their tax liability. Carbon offsets can be used by firms to reduce their carbon tax liability by a maximum of 10% of their combustion emissions and 5% of their total fugitive emissions or 5% of their total process emissions. The Draft Regulation on the Carbon Offset has been revised to allow for certain types of renewable energy projects including some projects under REIPPPP, and small and medium scale renewable energy projects. A revised Carbon Offset Regulation will be published for public consultation during 2018.
Over time, these percentage based tax free allowances could be replaced with an absolute tax-free threshold which could be in line with the proposed carbon budgets. Government has indicated that the mandatory carbon budgets regime post 2020 will be introduced in a way that is fully-aligned with the carbon tax.
The carbon tax liability is calculated as the tax base (total quantity of GHG emissions from combustion, fugitive and industrial processes proportionately reduced by tax free allowances, multiplied by the rate of the carbon tax. The carbon tax covers GHG emissions according to the Intergovernmental Panel on Climate Change guidelines which includes carbon dioxide, methane, nitrous oxide, perfluoro-carbons, hydrofluoro-carbons and sulphur hexafluoride.
The carbon tax applies to all the sectors and activities except the Agriculture Forestry and Other Land Use (AFOLU) and waste sectors, which will be exempt during the first implementation phase (up to 2022), due to measurement difficulties. The activities in the AFOLU and waste sectors qualify for 100% allowance and therefore a zero rate of tax.
A taxpayer that conducts an activity in respect of fuel combustion emissions may receive an allowance in respect of its GHG emissions. Under fuel combustion activities the Agriculture / Forestry / Fishing / Fish Farms activities and sectors have been provided with a a threshold of 10MW(th) with 60% basic tax-free allowance for fossil fuel combustion emissions, 10% trade exposure allowance, 5% performance allowance, 5% carbon budget allowance, and 10% offsets allowance resulting in the maximum total allowances of 90%.
However, National Treasury has responded positively to SASA’s appeal that carbon emissions from biomass should not be taxed, therefore the remaining inclusion of emissions from methane and nitrous oxide for biomass results in a reduced tax exposure. A remaining challenge though is the alignment very much needed between the South African National Atmospheric Emissions Inventory System and the Draft Carbon Tax reporting.
Dr Marilyn Govender is Natural Resources Manager at SASA & Sam Maphumulo is Natural Resources Intern at SASA.