carbon tax
The Institute for Energy Research

On 1 June 2019, South Africa joined numerous countries around the world in implementing a Carbon Tax, following years of delays and postponements.

At its heart, the Carbon Tax adopts a ‘polluter-pays principle’ to reduce greenhouse gas (GHG) emissions.

AUTHOR: Malcolm Roods, Environmental Services Knowledge Group Leader at Royal HaskoningDHV

The tax will target all companies that are liable to report their GHG emissions to government. GHG emitting activities include emissions from the likes of coal or biomass fueled boilers, fluorochemical production or the flaring of mine methane.

The introduction of the tax comes at a time when South Africa is obliged to meet its commitments under the 2015 Paris Agreement to reduce its GHG emissions.

Despite being a developing country, South Africa is the world’s 14th largest emitter of GHGs, according to climate science experts at Carbon Brief. South Africa’s high level of CO2 emissions are principally linked to its heavy reliance on coal.

In a bid to reduce its greenhouse gas levels, the first phase of the Carbon Tax will be implemented from June 2019 to December 2022 with a tax rate of R120 per tonne of CO2 equivalent (CO2e).

The tax rate is subject to a number of breaks in the form of allowances and performance incentives. The initial tax-free allowance provides a baseline tax break of 60%, and a maximum tax break of 95% during phase one. This equates to an effective initial tax rate of only R6 to R48 per tonne.

While the Carbon Tax in South Africa has sparked debate, it includes several mechanisms with which local businesses and industry can reduce their tax liability.

Companies which are not liable to pay Carbon Tax can even create revenue generating opportunities from the sale of carbon offsets.

To start reducing Carbon Tax exposure and to start realising the benefits of Carbon Tax, there are three key ways that local businesses and industry can start to address their Carbon Tax liability.

1. Find out your tax liability; identify your energy sources

The first step involves determining what your tax liability is by establishing your facilities’ carbon footprint.

This further entails identifying your major energy sources and products that are at risk of high GHG emissions. Energy sources would include significant on-site fuel combustion such as coal-fired boilers, or industrial products that are associated with the release of fugitive GHG emissions.

It’s important to bear in mind that the tax is designed to trickle-down through the economy as marginally hiked product or service costs, putting pressure on primary suppliers to clean up their offering. This could mean that even if your energy sources or source products are not directly taxable, their prices could start to rise.

2. Reduce your tax liability

If your business is not exempt from Carbon Tax and you’ve identified the biggest carbon footprint sources, you can then move on to actively reducing your tax liability.

You can do this by, for example, switching to fuels that are not taxed directly or products with lower carbon footprints. You can also use the likes of renewable energy projects to lower your tax liability.

It is in our experience that energy efficiency measures can significantly reduce fuel use and the resultant carbon footprint. These energy efficiency measures are usually very cost effective and don’t take much downtime in production facilities. Upgrading to more modern technologies will also go a long way in helping in this regard. 

Another way to reduce exposure to Carbon Tax is through the use of renewable energies, such as biomass in coal boilers, biodiesel in diesel generators and solar electricity to reduce exposure to Carbon Tax passed on through Eskom.

It’s clear, then, that investing in cleaner production will save you on Carbon Tax. Carbon tax is also improving the pay-back period of energy efficiency and renewable energy technologies.

3. Start to earn from Carbon Tax

If you’re not liable to pay Carbon Tax, you can actually financially benefit under the tax regime if you invest in products and processes with lower carbon footprints.

This is because National Treasury’s carbon credit system allows for the selling of carbon credits to help fund projects that reduce GHG emissions.

The carbon savings would need to be certified by an internationally recognised accreditation scheme, but they can then be used locally for carbon trading.

Eligibility criteria include that projects must be located in South Africa. In addition, renewable energy projects - such as solar farms - have been excluded from the carbon offset scheme.

This is to avoid the risk of double counting benefits where these projects have already been incentivised through the renewable energy independent power producer programme (REIPPP).