In 2019, South Africa became the first African country to implement a carbon tax. Carbon tax is one of the Government’s policy instruments to combat global warming and stimulate a lower carbon economy by placing a price on emissions.
With South Africa ranking among the top 15 largest per capita fossil fuel carbon dioxide (CO2) emitters in the world, the country is hoping that cleaner practices will be encouraged by imposing a ‘polluter pays’ principle.
Who is liable for carbon tax?
Carbon tax will apply to any entity that meets the threshold for emissions, including municipalities. Combustion emissions, process emissions and fugitive emissions could now potentially incur a tax depending on the applicable thresholds.
Combustion emissions:
- Treasury has imposed a threshold of 10 MW on installed thermal input capacity for combustion activities that result in emissions.
- Therefore, regardless of utilisation or fuel type, you will be subject to carbon tax if you have the capacity to combust 10 MW using the sum of all input capacities across all your facilities.
Process and fugitive emissions:
- Many process and fugitive emissions have no threshold, and you will be taxed thereon regardless of how small your operation is.
Other activities:
- Some other activities such as domestic aviation and CO2transport have unique thresholds.
- Emissions from road transportation and some other mobile equipment is not included in the direct carbon tax, however taxation of diesel and petrol was initiated under the fuel levy system on 5 June 2019.
How is the cost of carbon tax calculated?
According to The South African Institute of Taxation (SAIT), the Carbon Tax Act recognises six main greenhouse gases emitted from industrial activities. Here are the gasses along with their Global Warming Potential:
| Greenhouse Gases | Global Warming Potential |
|---|---|
| 1. Carbon dioxide (CO2) | 1 |
| 2. Methane (CH4) | 23 |
| 3. Nitrous oxide (N2O) | 296 |
| 4. Perfluorocarbons (PFCs) | 5,700 |
| 5. Hydrofluorocarbons (HFCs) | 11,900 |
| 6. Sulphur hexafluoride (SF6) | 22,200 |
Some of these gases, such as Sulphur hexafluoride, result in more global warming than others.
To calculate total greenhouse gas emissions, the quantity of each greenhouse gas (kg/year) is multiplied by its global warming potential figure. These six numbers are then added to create a total known as the ‘carbon dioxide equivalent’ or CO2e. The amount of carbon tax is then calculated by multiplying the CO2e by the current rate of tax.
How is carbon tax being rolled out?
South Africa’s carbon tax is set to roll out in stages, with the first phase having commenced on 1 June 2019.
The first tax period commenced on 1 June 2019 and ended on 31 December 2019, with subsequent tax periods commencing on 1 January and ending on 31 December of each year.
In the first phase, carbon tax rates will remain relatively low (compared with global standards) and sizable allowances have been granted to reduce carbon tax liability and afford large emitters the opportunity to put plans into place to reduce their emissions.
Effective from 1 January 2022, carbon tax increased from R134 to R144 per ton of carbon. Government intends to escalate this more rapidly every year to reach at least R300 by 2026.
Carbon tax will commence its second phase of rollout in 2026 when the rate will be subject to larger annual hikes to reach about R450 per ton by 2030. During the second phase allowances will also fall away.
Leveraging solar energy to reduce carbon tax
To address the severe generation shortfall, Government has completely removed the licencing threshold for embedded generation projects.
This has a two-fold benefit for private entities, the first of which is the ability to generate their own supply of electricity without requiring a NERSA licence to do so. They will only be required to register and comply with the technical and environmental requirements
The second benefit is that large emitters can leverage renewable energy to reduce their carbon tax liability – and given the abundance of sunshine in South Africa and the relativity low-cost associated with the technology, Solar Photovoltaic (PV) systems are a popular choice for businesses.
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