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Carbon Tax in South Africa, what is the Status Quo?

1. Background and current legislative developments

On 14 December 2017, the National Treasury released the second Draft Carbon Tax Bill for public comment before submission to Parliament. This is subsequent to the statement made in the Medium-Term Budget Policy Speech by the Minister of Finance on 25 October 2017 and giving effect to the announcement made in the 2017 Budget in February 2017.

Among the mix of measures that were put forward in South Africa’s Nationally Determined Contribution (NDC) to combat the global fight against climate change, the carbon tax stands out in terms of its expected effectiveness. It is estimated that the introduction of a carbon tax can decrease carbon emissions by between 13 to 14.5 percent by 2025, and by 26 to 33 percent by 2035 compared to business as usual. Upon South Africa ratified the Paris Agreement in November 2016, the NDC became an internationally binding commitment.

In the frame of the commitments stated in South Africa’s NDC and measures implemented in nearly all countries around the world, e.g. carbon taxes, carbon trading schemes, clean energy incentives, etc. to mitigate the negative effects of climate change, South Africa can no longer delay the introduction of an extensively debated, however considered cost-effective measure: the carbon tax.

The discussion on whether to introduce a carbon tax in South Africa started in 2010 with the publication of the Carbon Tax Discussion Paper. Followed by the 2013 Carbon Tax Policy Paper and the complementary 2014 Carbon Offsets Paper. These papers and extensive debates between government and affected stakeholders such as companies operating in the carbon-intensive mining – and heavy industry-sectors, culminated in the publication of the first Draft Carbon Tax Bill in November 2015 for the public to comment on. The comments that were received by National Treasury (NT) through this public participation process, have been carefully considered, responded to and incorporated in the revised Draft Carbon Tax Bill where appropriate. As a result, the second Draft Carbon Tax Bill was published on 14 December 2017 together with a number of annexures to this bill among which a summary of the comments received and responses drafted.

The carbon tax bill is a money bill according to section 77 of South Africa’s Constitution. This means that the draft bill is subject to an extensive stakeholder consultation process before the Minister of Finance tables the draft bill to the National Assembly. In other words, it is expected that the actual Act will not come into effect before 2019 with a first financial impact for companies only by June the same year when tax is payable for greenhouse gases emitted during the first six-monthly tax period, yearly commencing at 1 January and ending on 30 June (with the next six-monthly tax period commencing on 1 July and ending on 31 December). It is not likely that the implementation will be delayed much more if South Africa wants to keep its competitiveness from a global perspective.

2. Principle of the Carbon Tax

The background to the introduction of a carbon tax is that it is firstly intended to encourage companies to change their behavior towards carbon emissions, by taking steps now to gradually change their fuel demand, production techniques and processes, by investing in energy efficient, low carbon technologies to lower their carbon emissions. Secondly, the tax is designed around the “Polluter Pays Principle”: by ensuring that the real cost of greenhouse gas emissions to the environment and society are explicitly incorporated into the prices of carbon-intensive activities.

3. Key Aspects to the Carbon Tax Bill

The implementation is characterized by phases and allowances to facilitate companies to progressively adapt to the implications of the regulations and to minimize any negative impact that a sudden penalty on formerly “free” processes can have on the national economy (especially given South Africa’s currently substantial dependency on fossil fuelled energy-supply).

On top of these characteristics, the second Draft Carbon Tax Bill has been revised in respect to a number of topics that were found to be concerning according to the public as reflected by the comments submitted in response to the publication of the first Draft Carbon Tax Bill in 2015. The most important of these concerns are outlined below:

  • Revenue neutrality – the concern has been raised that the effect of a carbon tax is not reaching its full potential if not complemented with incentives such as putting in place a rebate for the current electricity generation levy and the renewable energy premium
  • Alignment of carbon tax and carbon budget regulations – a concern, applicable to subsequent phases of the proposed carbon tax’ implementation, that ineffective alignment of the two legislative instruments could result in double penalty for companies that have to comply to both legal requirements – National Treasury has responded that “a study on the options for alignment and integration of the carbon tax and carbon budget policy instruments post 2020 has been completed by the Department of Environmental Affairs and the National Treasury. The mandatory carbon budgets regime will be introduced in a way that is fully aligned with the carbon tax and designed to ensure no double penalty”.

Other comments and issues raised by the public included:

  • Competitiveness and the design of the trade exposure allowance;
  • The tax rate and thresholds for phase one and two of the carbon tax;
  • Carbon offset and performance allowances; and
  • Technical, legal and administrative aspects.

Detailed information on how these issues have been dealt with by National Treasury is contained in Annexure 3 to the Draft Carbon Tax Bill, published on 14 December 2017: “Annexure 3 Response Document to 2015 Draft Carbon Tax Bill”.

4. Conclusion

The ultimate goal of the carbon tax is aid the decarbonization of South Africa’s economy. For some industries, the carbon tax as a measure to achieve this goal is not embraced with enthusiasm. However, there comes a time that further prolonging the implementation of sometimes unpopular measures, is inevitable to achieve the goal for which the measure has been designed.

The fact is that the process and required infrastructure for the implementation of a carbon tax in South Africa is developing progressively and simultaneously the Department of Environmental Affairs, the Department of Energy and the National Treasury are combining efforts to ensure that the implementation of the carbon tax is achieved in a coordinated manner.

Businesses should anticipate on these developments by implementing a business-infrastructure that allows for efficient reporting and stock-taking of the carbon emissions associated with their processes to enable compliance with reporting regulations as well as tax liabilities but also to be able to maximize benefits from allowance-mechanisms and cost-reductions through reducing one’s carbon footprint. When executive management and the board of directors of a company have a clear understanding of the potential impact of the proposed carbon tax on their business, measures can be identified and implemented to manage and minimize risk and to capitalize on the opportunities that may arise.


For more information please contact Jeremy Grist on 082 468 1718 or 011 894 4400 or email at jeremy@hl.co.za.

Read more: Emissions and Omissions – Ensuring compliance in the age of the carbon tax event summary