Tax Act, the latest in the South African government’s efforts to limit the impact of climate change. The aim of the tax is to incentivise companies to reduce carbon emissions as well as to shift consumer and investor behaviour towards supporting companies with lower carbon emissions.
There are many sources of carbon emissions, but the most common are those from fossil fuel combustion in transportation, heating, industry and electricity generation – roughly 1kg of carbon dioxide (CO2) is emitted for every kilowatt hour (kWh) of electricity generated in South Africa.
South Africa ratified the United Nations Framework Convention on Climate Change (UNFCC)’s Paris Agreement in 2016 and South Africa’s new carbon tax is seen as a way in which the country can ensure that it meets its objectives under the Paris Agreement. The act is in favour of the “polluter-pays-principle” and incentivises particularly large South African carbon-emitting companies to take into account the negative externalities of their productive activities.
How the tax works
Private and public sector entities surpassing a certain threshold of emissions (specified in the National GHG Emissions Reporting Regulations) will be taxed. A carbon tax of R120 will be charged for every tonne of carbon emissions released by those entities that exceed certain thresholds. The tax will be rolled out in phases, with the first phase being from 1 June 2019 to 31 December 2022 and the second phase from 2023 to 2030. The first phase of the tax will cover Scope 1 emissions (direct emissions from owned or controlled sources) only from stationary sources in certain sectors. Most land-use and agriculture emissions are excluded, as are emissions from residential use and the waste sector. Transport emissions will be covered by a levy on the price of fuel.
In addition to the tax, qualifying companies will be given a variety of tax-free emissions allowances in this first phase. Among these is a basic tax-free allowance of 60% for all activities; a 10% allowance for process and fugitive emissions (these are emissions that result from unintended releases of gas); a maximum 10% allowance for companies that use carbon offsets to reduce their tax liability; a 5% performance allowance for those entities that have an emissions intensity below a sector benchmark; and an additional allowance of 10% for trade-exposed sectors. A 5% carbon budget allowance is granted to qualifying entities that participate in the voluntary first phase of the Department of Environment, Forestry, and Fisheries (DEFF) carbon budgets.
Why a carbon tax?
It is generally accepted by economists that a carbon tax is a cost-effective and economically efficient means for reducing carbon emissions. A carbon tax allows the government to put a price on carbon emissions and to shift the cost of pollution from society to the companies that are producing it.
Investors, creditors and consumers will increasingly find low-carbon-intensive products and companies more attractive because they are subject to less carbon tax. Some companies will most likely attempt to pass on the cost of the new carbon tax to their customers which will, in turn, likely cause customers to switch to buying from companies with low(er) carbon emissions because such products will be cheaper. Innovative companies that are able to reduce their carbon emissions will most likely outperform their less innovative peers over time.
The rest of the world is fast moving towards a low-carbon economy. Due to the high carbon intensity of South Africa’s economy, given our reliance on Eskom and coal-fired power stations, our high-carbon produced merchandise will look less attractive – both for investment and export purposes. In future, some countries may put trade barriers in place against products made in countries where little to no effort is made to reduce carbon emissions, implying a greater need for these kinds of interventions in South Africa.
Lastly, the short-term costs associated with the carbon tax will be trumped by the long-term costs of inaction. The impact of climate change, like the changing rainfall patterns that adversely affect the agricultural sector, is already causing some commodity prices to rise – regardless of the imposition of the carbon tax. By taxing and reducing carbon emissions now, the future cost of climate change on society can be reduced.
The Paris Agreement seeks to:
- Combat climate change globally by keeping the global temperature rise since pre-industrial levels to well below 2˚C above pre-industrial levels before the turn of the century and;
- Pursue efforts to limit the temperature increase even further to 1.5°C.
- Strengthen the ability of countries to deal with the impacts of climate change.
- Each country that endorses the Paris Agreement must come forward with its best efforts to reduce carbon emissions through locally appropriate activities outlined in documents called Nationally Determined Contributions (NDCs). The newly introduced Carbon Tax is one activity mentioned in South Africa’s NDC.
Emissions
- Scope 1 emissions are those emissions that stem directly from the activities of an organisation or are under their control. These usually include emissions from company vehicles or company facilities.
- Scope 2, or indirect emissions, stem from the electricity purchased and used by the organisation. These emissions arise when the energy is produced and is eventually used by the organisation.
- Scope 3 emissions are all other indirect emissions that stem from an organisation’s activities that come from sources they neither own nor control. These include emissions associated with business travel, procurement, and waste and water, for example.
REFERENCES:
- The Carbon Report. The proposed South African carbon tax. Available: http://www.thecarbonreport.co.za/the-proposed-south-african-carbon-tax/.
- The Carbon Report. When will South Africa introduce Carbon tax? Available: http://www.thecarbonreport.co.za/carbon-tax/.
- South African Government. President Cyril Ramaphosa signs 2019 Carbon Tax Act into law. Available: https://www.gov.za/speeches/publication-2019-carbon-tax-act-26-may-2019-0000.
- Compare your footprint. What is the difference between scope 1, 2 & 3 emissions? Available: https://compareyourfootprint.com/difference-scope-1-2-3-emissions/.
- United Nations Climate Change. The Paris Agreement. Available: https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement.
- WWF. Everything you didn’t know you should ask about the carbon tax. Available: https://dtnac4dfluyw8.cloudfront.net/downloads/wwf_carbon_tax_qanda_final.pdf?24601/Everything-you-didnt-know-you-should-ask-about-the-carbon-tax.
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