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Carbon Tax – What does this mean for South Africa?

carbon-tax-20394136The issue of carbon tax has been a hot topic of discussion not only globally, but locally as well. The reality is that South Africa should start preparing itself for carbon tax in the near future.

In November 2015, the National Treasury published the Draft Carbon Tax Bill for public comment, following on the announcement made by the Minister of Finance in the 2015 Budget Speech. The Carbon Tax Bill is a reflection of South Africa’s commitment to reduce greenhouse gas (GHG) emissions below business as usual by 34% by 2020 and 42% by 2025.

What is Carbon Tax?

Carbon tax is one of the mechanisms through which the government will control and ultimately mitigate GHG emissions. Simply put, the more carbon companies emit, the higher the penalty. The carbon tax seeks to price carbon by obliging the polluter to internalise the external costs of emitting carbon, and contribute towards the harm caused by their pollution.

The most common source of emissions is fuel combustion in transportation and electricity generation. The basic idea is that carbon tax will be designed in such a way as to create incentives for companies to change their behaviours and consumption patterns to reduce their reliance on fossil fuels.

How will it work?

Carbon tax is proposed to come into effect on 1 January 2017 and will run until 31 December 2017 at a marginal rate of R120 per tonne of CO2-e (carbon dioxide equivalent). The tax will be administered as an environmental levy as contemplated in the Customs and Excise Act 91 of 1964. However, if the proposed revenue recycling measures are taken into account, the effective tax rate will range between R6 and R48 per tonne of CO2-e.

The first phase will run from implementation in 2017 until 2020. The initial marginal carbon tax rate will be R120 per tonne of CO2-e. The effective tax rate will fortunately be much lower once the relevant thresholds are taken into account. Some companies may even escape up to 95% of their liability.

Calculation of the tax base is closely linked to the Department of Environmental Affair’s mandatory reporting requirements of emissions for all economic sectors in South Africa, which is expected to become effective in the first half of 2016. Entities will be liable for not only their fossil fuel combustion emissions, but for their industrial processes and product use emissions and fugitive emissions (e.g. fugitive emissions from coal mining) as well.

Entities affected by the tax will have to keep accurate records of their emissions, report this to the Department of Environmental Affairs and then account to the South African Revenue Service (SARS). Entities may start considering carbon offset mechanisms and other allowances in anticipation of the carbon tax. However, the system will largely involve a self-assessment process, whereby taxpayers will be responsible for measuring their own emissions and calculating their tax liability.

Mining, electricity generation, fuel production and process industries are likely to be most affected by the proposed carbon tax. Certain sectors, such as waste, forestry and agriculture, will be excluded until the implementation of the second phase in 2020.

The Bill imposes various reporting and accounting obligations that are integrated with various other regulations in the air quality legal regime. This could impose further obligations on taxpayers. To manage one’s carbon tax liability, one will need a thorough understanding of the air quality legal regime and accounting practices.

What does this mean for South Africa?

Firstly, implementation of the tax will harm economic growth and strategic sectors such as mining and manufacturing in the short term.

Secondly, companies are likely to pass on the additional cost to consumers, especially poor consumers, who would ultimately bear the brunt as companies such as Eskom increase tariffs to recoup costs incurred through the imposition of the carbon tax.

This is due to the fact that the electricity sector is mainly dependent on coal and is responsible for about 48% of coal emissions. This sector is also highly regulated and the price of electricity and energy mix is determined by the National Energy Regulator of South Africa (NERSA) and the Government. The Department of Energy regulates the energy mix by means of its own Integrated Resource Plan, so there is a disconnect between carbon tax and the reduction of emissions in this sector. A tax won’t have any impact and any excess costs will most likely be passed on to the consumers.

In fact, R100/tonne will increase a kWh of electricity by Eskom by 10c, which represents an increase of 15% over and above what we already pay per kWh.

Lastly, foreign direct investment could potentially be deterred. Foreign companies will be less likely to invest in a country that punishes investors with additional taxes when there are other African countries which do not have these taxes.

Where will the money go?

The Bill proposes that revenues will be spent on sustainable interventions. Examples of these are:

  • Providing tax relief for rooftop solar power;
  • A reduction in the fossil fuel electricity levy; and
  • Providing support for free basic electricity.

Critics are less optimistic, and believe it’s unlikely that Treasury will irrevocably commit itself to these applications of carbon tax revenue due to the need to retain fiscal flexibility in the national budgeting process.


Government must be careful to not place further strain on an already ailing economy. Efforts to reduce greenhouse gas emissions should definitely not injure South Africa’s already bleeding economy or get in the way of its economic growth plans.

Unfortunately, the draft Carbon Tax Bill has been introduced at a time when the South African economy, particularly the metals and engineering sector, is burdened with higher production costs, lack of demand and labour unrest.

On a more positive note, Government should be commended for taking environmental sustainability seriously and putting measures in place to reduce carbon emissions. Carbon tax is an effective way in which to curb climate change and has been more effective than any other proposed measure (such as the introduction of an emissions trading system). Within the South African context, carbon taxes align with and expand on existing environmental legislation and underpin the “polluter pays” principle. The introduction of carbon tax will furthermore play a crucial role in decreasing GHG emissions.

For legal assistance or more information, please contact:

Basil de Sousa and Amber Lotz  |  Abrahams & Gross Attorney

t    021 422 1323    |    e   info@abgross.co.za

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