The South African carbon tax and how it relates to agriculture

The proposed South African carbon tax is outlined in the summary below, followed by a more in-depth breakdown of the tax mechanism and how it relates to agriculture, derived from the Carbon Tax Policy Paper (2013).

 

Summary

 

  • Under basic economic theory, the pricing mechanism associated with a carbon tax will cause firms to internalise the environmental and social costs of emissions, and, as a result, firms will shift towards the use of low-carbon and more energy-efficient technologies in order to mitigate these costs
  • In line with international conventions, the Department of Environmental Affairs has broken emissions down into Scope 1, Scope 2 and Scope 3 emissions, where Scope 1 emissions include those emissions that result directly from fuel combustion and gasification, and from non-energy industrial processes.
  • A proposed carbon tax of R120 per ton of CO2-eq emissions will be levied on just Scope 1 emissions for Phase 1. This rate will be increased at 10% per annum. This tax will be implemented from beginning 2016.
  • The Carbon Tax Policy Paper also proposes sector-specific tax-free thresholds. If these thresholds are taken into account, the effective tax rate will be considerably lower than R120 per ton CO2-eq.
  • Due to the administrative difficulties in measuring and verifying emissions, the agriculture, forestry and land-use and waste sectors will be excluded from the first five-year period (as per table 1), but the intention is to include these sectors after the initial five year period.
  • While it is clear that the South African agricultural sector will not be subject to direct taxes imposed on activities at least within the foreseeable future (up to perhaps 2021), it will likely be indirectly affected through the imposition of taxes on Scope 1 GHG sources from 2016 (fuel and electricity)

 

Background

 

The Carbon Tax Policy Paper was published in May 2013, its key objective being to facilitate a transition within the South African economy to one that follows an environmentally sustainable growth path, through the development of a low-carbon economy. The South African government has committed to curbing greenhouse gas (GHG) emissions by 34% by 2020 and 42% by 2025 below the business as usual (BAU) trajectory, and has opted for the implementation of a carbon tax in order to achieve these targets.

 

The basic premise under economic theory is that carbon emissions are a negative externality (i.e. the production of emissions is not governed by a market, but negatively impacts society). However, it is possible to create a market for these emissions through a price mechanism. A price can be leveraged on emissions through either an emissions trading system (ETS) or a carbon tax. Once a price has evolved through market mechanisms (as in an ETS) or has been set directly (as in a carbon tax), firms will internalise this cost into their production models, where  the hope is that firms will shift towards the use of low-carbon and more energy-efficient technologies in order to mitigate these emissions costs. “Ideally, a carbon price should reflect the marginal external damage costs” to society (Carbon Tax Policy Paper, 2013).

 

According to the Carbon Tax Policy Paper (2013), in the South African context, “a carbon tax is more appropriate than a cap-and-trade scheme (ETS) because of the oligopolistic nature of the energy sector”, where an ETS would “need a sufficient number of entities participating in the scheme, as well as adequate trading volumes in order to generate an appropriate carbon price” (Carbon Tax Policy Paper, 2013).

 

South Africa’s Carbon Tax

 

Of a number of options, the South African government has decided to impose a tax on fuel inputs, where the tax would be “based either on appropriate emissions factors (CO2-eq) or a transparent and verified measuring and monitoring procedure”, where these will be in line with the standards published by the Intergovernmental Panel on Climate Change (IPCC). The Department of Environmental Affairs (DEA) has broken down the sources of GHG emissions into Scope 1, Scope 2 and Scope 3 sources:

 

  • Scope 1: direct GHG emissions from sources that are owned or controlled by the entity (i.e. emissions that result directly from fuel combustion and gasification, and from non-energy industrial processes).
  • Scope 2: indirect GHG emissions resulting from the generation of electricity, heating and cooling, or steam generated off site but purchased by the entity (i.e. indirect emissions resulting from a firm’s use of purchased electricity, heat or steam)
  • Scope 3: indirect GHG emissions (not included in scope 2) from sources not owned or directly controlled by the entity but related to the entity’s activities.

 

Although, for the time being, South Africa’s carbon tax will only cover Scope 1 emissions, complementary measures and incentives will be introduced further down the line to encourage businesses to reduce their Scope 2 emissions. Sectors across the board, and consumers, will be impacted either directly or indirectly by the carbon tax as it filters through the economy. In addition, “the DEA will introduce mandatory reporting of GHG emissions for entities, companies and installations that emit in excess of 100 000 tons of GHG emissions annually, or consume electricity that results in more than 100 000 tons of emissions from the electricity sector”.

 

In order to account for the competitiveness concerns of “locally based and trade-exposed carbon-intensive sectors and businesses, as well as distributional concerns, such as the impact on low-income households”, the DEA has proposed the allowance of tax-free thresholds according to specific industries, where a “percentage-based threshold on actual emissions will be applied, below which the tax will not be payable for the first five years”. Emissions offsets will also be introduced through which firms can reduce their carbon tax liability, up to a limit. “Variable offset limits are proposed according to the mitigation potential of the sector”. Table 1 below summarises the proposed tax-free thresholds for the CO2-eq emissions tax and the maximum allowable percentage offsets that are proposed for the first five years (2015-20) of the implementation of the carbon tax, after which these thresholds will be reduced during the second phase (2020-25), and may be replaced with absolute emissions thresholds thereafter.

 

As highlighted above, the carbon tax should be set at a level that reflects the marginal damage to society of emissions, to “correct the existing prices of goods and services that generate excessive levels of GHG emissions”. According to the Carbon Tax Policy Paper, the DEA proposes a tax rate of R120 per ton CO2-eq above the tax-free thresholds on 1 January 2015. However, if the tax-free thresholds are taken into account, the effective tax rate will be considerably lower than R120 per ton CO2-eq. It is further proposed in the Carbon Tax Policy Paper that that the tax rate of “R120 per ton CO2-eq be increased at a rate of 10% per annum until 31 December 2019. A revised tax regime with lower tax-free thresholds and a revised tax rate” will commence on the 1st of January 2020.

 

Relevance to agricultural activities

 

Due to the administrative difficulties in measuring and verifying emissions, the agriculture, forestry and land-use and waste sectors will be excluded from the first five-year period (as per table 1), but the intention is to include these sectors after the initial five year period. So, as yet, there will not be any direct carbon taxes levied on agricultural activities, but taxes levied on Scope 1 sources (mainly fuel and electricity) will filter through the economy, and will be expected to have an indirect effect on agricultural activities. In addition, it is highly unlikely that a South African agricultural entity (grower or packhouse) will have high enough carbon emissions to be subject to the mandatory reporting outlined above (if in excess of 100 00 tons of GHG emissions annually or consume electricity that results in more than 100 000 tons of emissions from the electricity sector).

 

Table 1: Proposed emissions thresholds and offset allowances (Carbon Tax Policy Paper, 2013)

Table 1: Proposed emissions thresholds and offset allowances (Carbon Tax Policy Paper, 2013)

Update

 

According to a number of sources (Business Day Live, 2014; Mail and Guardian, 2014; Bloomberg, 2014), the implementation of the carbon tax will be delayed to 2016, in order to further adjust policies to better protect industry, announced by the Finance Minister, Pravin Gordhan, on February 26, 2014. This postponement was welcomed by mining and other carbon-intensive companies, amidst fears of eroding profit margins “against a backdrop of rising electricity tariffs and sluggish economic growth” (Business Day Live, 2014). It is assumed that this will also push the Phase 1 and Phase 2 timelines out by a year.

 

Conclusion

 

While it is clear that the South African agricultural sector will not be subject to direct taxes imposed on activities at least within the foreseeable future (up to perhaps 2021), it will likely be indirectly affected through the imposition of taxes on Scope 1 GHG sources from 2016 (fuel and electricity). However, it is important for the agricultural sector to take cognisance of this and begin to adjust before Phase 2 commences.

 

 

 

References

 

Bloomberg [online], 2014. South Africa Delays Carbon Tax, Plans Levies on Acid Mine Water.

 

Business Day Live [online], 2014. SA’s carbon tax delayed by one year to 2016.

 

Mail and Guardian [online], 2014. Relief at delay of carbon tax in 2014 budget.

 

National Treasury, Republic of South Africa, 2013. Carbon Tax Policy Paper. Reducing greenhouse gas emissions and facilitating the transition to a green economy.