The Draft Carbon Tax Bill was released for comment during November 2015. The Confronting Climate Change (CCC) Initiative has received many questions with regards to the bill and has, in response, developed this summary document based on the information at our disposal at the time of writing. This is a high-level document that outlines the carbon tax processes and should by no means be read as conclusive, as it is likely that there will be refinements to the Bill after public comment has been received.
What is a carbon tax and why is it being implemented?
South Africa has committed to reducing greenhouse gas (GHG) emissions to below business-as-usual levels, and has selected the taxation of greenhouse gas emissions, referred to as a “Carbon Tax”, as the primary mechanism to stimulate the economic changes necessary to achieve these targets. The committed reductions targets are substantial, at 34% by 2020 and 42% by 2025 below business-as-usual emissions.
The carbon tax seeks to impose a cost on the emission of greenhouse gases, forcing polluters to internalize the associated costs to the environment. The aim of the carbon tax is to stimulate a steep reduction in GHG emissions, ensuring that South Africa is ready to deal with future climate risks and challenges, and in a position to take advantage of new investment opportunities associated with the move to a low-carbon, “green“ economy. The Carbon Tax is a direct economic instrument aimed at rapidly changing business behaviour, providing a significant financial incentive to shift towards cleaner technologies, products and processes.
When will it be introduced?
It is anticipated that phase 1 will be implemented from January 2017. The primary agricultural sector will be exempt from phase 1, and only be taxed directly from phase 2, estimated to start in 2020/2021. Although primary agriculture will be exempt from phase 1, there will be indirect impacts translated through input costs.
Not only does the bill need to be written into law, but Treasury still has to finalise regulations around the generation and claiming of offsets. At this stage the Carbon Tax relates to Scope 1 emissions only, where Scope 1 emissions refer to direct emissions from owned or controlled sources.
As a matter of interest, although fuel is currently subject to the General Fuel Levy (R 2.55 per litre for petrol, and R 2.40 per litre for diesel), it is not an “environmental” levy. Electricity consumption is currently subject to an Environmental Levy of 3.5 cents per kWh.
How will it work?
The nominal “price” of greenhouse gas emissions will be set at R 120 for the equivalent of a ton of carbon dioxide (CO2) emitted.
A number of tax-free allowances have been provided, which reduces the effective cost to business:
- A basic tax-free allowance of 60% ;
- An additional tax-free allowance of 10 per cent for process emissions;
- A variable tax-free allowance for trade-exposed sectors (maximum 10 per cent);
- A maximum tax-free allowance of 5 per cent for above-average performance;
- A 5 per cent tax-free allowance for companies with a Carbon Budget;
- A carbon offsetting allowance of either 5 per cent or 10 per cent;
Therefore, the total tax-free allowance during the first phase (up to 2020) can be as high as 95 % (i.e. for a business that qualifies for all the discounts, it will be taxed at an effective rate of R6.00 per ton of CO2e emitted). Up to the end of Phase 1, the cost of CO2 emissions could therefore range from R6 to R48 per ton of CO2e emitted. After phase 1, it is anticipated that these tax-free allowances could be reduced and phased down.
Implementation of the carbon tax requires an accurate system for monitoring, reporting and verifying emissions (MRV). The CCC carbon calculator provides a mechanism for monitoring and reporting in the agricultural sector. The South African Revenue Service (SARS) will be the main implementing administrative authority on tax liability assessments, and the Carbon Tax will be collected in the same way as other taxes. In order to audit the self-reported tax liability by entities, SARS will be assisted by the Department of Environmental Affairs (DEA).
What are the implications for agriculture?
While agriculture is exempt from direct taxation during phase 1, the Carbon Tax legislation has other important implications for farms, packhouses, wineries and other entities involved in primary agriculture:
- Farms can potentially become an important source of carbon offsets during phase 1 and there may be opportunities for selling carbon offsets to entities that are looking to reduce their carbon tax bill. What will qualify as an offset project is not yet clear, but could include carbon sequestration projects (for example restoring soil carbon) and/or emissions reduction technology projects (for example, solar PV, biogas digesters, etc.).
- The cost of carbon taxes will be felt throughout the economy as prices are increased by businesses to help them offset their increased tax bills. Agriculture can expect to experience cost pressure on all key material and energy inputs, including electricity, fuel, fertilizers and agrochemicals.
- Once phase 2 is reached, then all scope 1 emissions from agriculture will be taxable. There are important scope 1 emissions applicable to farms, packhouses, wineries, etc.:
- Mobile Combustion: All emissions from the consumption of fossil-fuels for owned vehicles, including owned tractors, trucks, farm bakkies etc.
- Stationary Combusion: Any emissions from the consumption of fossil-fuels for equipment owned by businesses used for industrial applications such as heating, electricity generators etc.
- Fugitive Emissions: Any unintended release of greenhouse gasses from other sources owned by businesses, such as refrigerant leakages from cooling systems, Nitrous Oxide from agricultural soils, and Methane from waste treatment infrastructure.
What should I do to prepare for the Carbon Tax, and how can the CCC Initiative assist you?
Until now, the motives to measure, report and reduce carbon emissions have come from a combination of market pressures, economic self-interest (improve efficiency and reduce costs) and a desire “to do the right thing”. The introduction of the Carbon Tax scheme adds a further, and perhaps the strongest, motivation for businesses to proactively understand and manage where, how and at what scale greenhouse gases are emitted, and to understand, evaluate and implement the required strategies to reduce these emissions. The primary motive of the Carbon Tax is to bring emissions reduction to the center-stage of business management.
The most fundamental element of an emissions management strategy is the ability to accurately and reliably measure emissions at a level of detail that enables good decision-making and credible reporting. The annual measurement of the business’s “carbon footprint” using the CCC tools provides the solution for this.
Once measurement has been undertaken, then opportunities to improve efficiencies and/or to introduce new technologies can be evaluated and implemented.
The CCC Initiative is also being enhanced in response to the impeding Carbon Tax
- adding a Carbon Sequestration Calculator for the calculation of carbon offset values and opportunities.
- Incorporating a carbon tax calculator in the Carbon Footprinting tool to calculate the tax impact of the business’s emissions and to help in the identification of emissions and tax “hot spots”
- To proactively inform the industry of the carbon Tax legislation and its implementation and implications are finalized.
 CO2 equivalent emissions