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11 Key issues raised on Carbon Tax Policy and Design

This is the second in a series of articles written by Jeremy Grist from Herbert & Liebisch on Carbon Tax regulations in South Africa.


The National Treasury released the first Draft of the Carbon Tax Bill, for public comment, on the 2nd of November 2015.  The draft was open for comments until the 15th of November 2015.  A number of comments were received from various stakeholders during this period.  On the 14th of December 2017 the National Treasury released the Carbon Tax Bill for public comment before its submission to Parliament for approval.

The Carbon Tax Bill is to the culmination of the publication of the Carbon Tax Discussion Paper in 2010, the Carbon Tax Policy Paper in 2013, the Carbon Offsets Paper in 2014, the Draft Carbon Tax Bill in 2015 and the draft regulation on the Carbon Offset in 2016.

Summary of the comments raised on the Draft Carbon Tax Bill

The comments received covered two main categories.  These included:

  • Carbon tax policy and design issues;
  • Technical comments on the legal and administrative aspects of the Bill.

These comments are important to understand as they provide some insights into how the proposed carbon tax will operate when implemented.

The issues on the tax policy and design

There were eight issues raised.  For each of the issues the National Treasury summarised them and have provided a response as to their acceptance or why the issue could not be incorporated into the revised Bill.  The availability of the revised Bill for further comment does allow for the debate of the responses and the potential to further amend the Bill before submission toP arliament for approval.  The eight issues raised included:

1. Revenue recycling

The comments raised here related to the fact there is no stated commitment to revenue recycling of the carbon tax revenue raised.  The stated intention of National Treasury (NT) includes applying the revenue generated by the carbon tax is that it will be used in the reduction of the electricity generation levy and the credit rebate for the renewable energy premium.

The comments suggested that a statement to the effect that this commitment is made and that the carbon tax will be revenue neutral.

The NT response is that there will be no rigid earmarking of carbon tax revenues to specific areas.  However, there are three categories of revenue recycling.  These include tax shifting, which is basically the reduction or not increasing of other taxes (credit for the electricity generation levy), the use of tax incentives, which is the introduction of incentives such as the energy efficiency saving allowance, and “soft earmarking on budget allocations such as enhanced free basic energy and improved public transport.  For example, currently the revenues from the electricity generation levy are being used to assist in the roll out of solar water heaters/geysers and in the rehabilitation of roads damaged by the hauling of large volumes of coal in one of the provinces.

2. Electricity price and electricity levy

The issues raised included that while the reduction of the electricity generation levy, which applies to non-renewable, fossil based electricity generation is 3.5c/kWh, there needs to be clarity on the amount by which the levy will be reduced as the levy charged by Eskom is 4.1 c/kWh.  This is necessary for business to compute the impact of the reduction on their energy costs.  In addition, Eskom would be paying a carbon tax of 4.8c/kWh, assuming a 60 percent allowance. This would not be revenue neutral due to the difference in the levy and the allowance.

The response of the NT is that while real electricity tariffs have been stagnant or declining in the past, they have not included the real cost of the full economic costs of generating electricity including the environmental damage costs associated with local air pollution and GHG emissions.  This resulted in the electricity generation levy being introduced as a demand side management tool to deal with supply challenges and act as a proxy carbon tax.  It is also necessary to transition to a situation where the tariffs are more cost reflective to include environmental costs where necessary.

3. Pass through of the carbon tax for the liquid fuel sector, non-stationary transport emissions and taxation of aviation fuels

  • Pass through of the cost associated with the carbon tax – the concern raised is that the petroleum sector is unable to recover the cost of the carbon tax, due to the regulated nature of the sector. The suggestion is to allow for this cost to be included in the cost of liquid fuels. The response from the NT is that this would be considered on a basis whereby the sector is engaged to determine a benchmark, based on the technologies for the oil industry. The sector has been advised to develop such a benchmark and the revised proposal will be considered in 2018.
  • Taxation of non-stationary emissions – further clarity was sought on the application of the carbon tax to non-stationary emissions.  The current taxes on fuels (petrol and diesel) currently are taxed at about 40% for petrol and 50% for diesel.  These taxes are used to cover the costs associated with local air pollution, congestion, accidents and negative externalities associated with is the use of roads.  The response by the NT estimates that additional costs associated with the introduction of the carbon tax will increase the price of petrol by a maximum of 11c/litre and 13c/litre for diesel.
  • Aviation fuels –  the aviation industry does not support the implementation of a carbon tax on its fuel consumption as the global aviation industry is currently developing a global standard for implementation.  In addition, it is argued that as fuel comprises 30% of the cost an airline ticket, the implementation of a carbon tax would negatively affect the tourism market.  It has recommended that the South African Government waits for this outcome before implementing a carbon tax on this industry.  IATA has argued that the use of carbon offsets by the industry will be a more effective approach to the sustained reduction of carbon emissions by the industry.  This is because they would be more cost effective and have a greater environmental impact.  There however needs to be guarantees that the carbon offsets used have a high degree of environmental integrity and that limiting these carbon offsets to 10% is unreasonable.

The NT response is that the carbon tax will be applied to the local airline industry.  They further state that this domestic policy could be incorporated into an international approach at a later stage.  There is currently work being done to ensure that this incorporation into an international Carbon Offsetting and Reduction Scheme (CORSIA) will be seamless.

4.  Trade allowances focusing on the trade exposure, offsets and performance allowance

There is general support for the trade allowance that takes into account the nature and the energy intensity of industry, as it will assist local industry in being globally competitive when competing against countries where there is no carbon tax in place.

It was suggested that the trade allowance of 10% should be reviewed to take into account seasonal fluctuations in production and demand as certain companies may qualify for higher allowances in certain times of the year.  It was also suggested that there should be the consideration of qualitive factors such the homogeneity of goods traded, market share of the domestic industry in global trade, the exposure to competitors’ carbon pricing and the magnitude of transport costs.

A specific suggestion was that the revenue recycling should compensate the EITI sectors so that they are tax neutral.  In addition, it was suggested that the SADC region should be considered for the trade allowance.

A comment raised was that there should be the consideration of border carbon adjustments (effectively an import duty), to compensate for the import where there is no associated carbon tax.  This would ensure that the competitive impacts are neutralised.  This is believed to apply specifically to the chemicals, glass, and cement sectors.   It was also suggested that all companies should be eligible for support and that the thresholds for trade exposed sectors should be removed.  It was also noted that certain sectors will benefit more than others as they face less competition.

The response of the NT includes the redesign of the trade allowance to include imports and exports, as well as the consideration of the trade intensity of the sector.  This trade intensity will be used to determine the percentage of the trade allowance that a sector/subsector/industrial activity would qualify for.  The trade intensity is to be calculated according to the following formula:

Trade Intensity = (X + M)/P

X is the Exports of final products only

M is the Imports of final products only

P is the total production

This will allow for the graduated relief of sectors depending on the magnitude of their deemed trade exposure.  The trade intensity will be determined for each sector as high, medium or low.  The following table sets out the trade exposure allowance:

  Trade Intensity


Trade exposure allowance
Low trade intensity


< 10% 0 percent
Medium trade intensity


≥ 10% to < 30% 3 to 9 percent
High trade intensity


≥ 30% 10 percent


Companies that have activities in different sectors will apply the allowance according to that sector.  The qualifying activities by sector will be published in a regulation to the carbon tax act.  It is anticipated that distressed sectors, such as mining and iron and steel, will qualify for the full trade allowance but at the same time the introduction of the carbon tax will allow for the implementation of new, low carbon activities over the medium to long term.

5. Carbon offset allowance

This allowance was widely supported by companies as an efficient and cost-effective way of reducing carbon emissions.  The draft carbon offset regulation provides the basis for the determination of what would qualify as a carbon offset project.  The regulation was the result of the coordinated efforts of the National Treasury (NT), the Department of Environmental Affairs (DEA) and the Department of Energy (DoE).  The approval of carbon offset projects will be performed by the DoE.

The intention of the regulation is to allow for investment in projects, by companies, that are not typically in the scope of their business and have a focus on the creation of economic development and job creation.  A number of specific suggestions were made, which included:

  • The cap on the allowance should be removed;
  • That eligible projects under the offset scheme are expanded to include projects that reduce indirect emissions (Scope 2 emissions) for example, energy efficiency, fuel switch and cogeneration projects;
  • That renewable energy projects under the renewable energy independent power producers’ procurement programme (REIPPP) be included and that other renewable energy projects be allowed to participate;
  • That the geographical scope is expanded to include the SADC region; and
  • A positive or a negative list should be prescribed to make is easier to identify eligibility criteria for a potential carbon offset project.

The NT has accepted a number of these suggestions.  The first is that the standards used to determine what qualifies as a carbon offset project will be based on the Clean Development Mechanism (CDM), the Verified Carbon Standard (VCS) and the Gold Standard (GS).  However, the draft carbon offset regulation allows for the use of local standards/methodologies provided that they are appropriate and independently verifiable.

The revised regulation also allows for certain other small and medium renewable energy projects.  The allowance will be strictly for South Africa and will remain at 10%.  The revised regulations on carbon offsets will be released in early 2018 for comments.

6. Performance allowance (Z-factor)

There is general support for this allowance which will enable a company to obtain an allowance where their carbon reduction performance is better than the sector/industry average.  However, there were a number of comments raised. These included that the thresholds should be based on product benchmarks rather than at an installation level as this would promote the best technology use.  There was a request for greater clarity on how this allowance would be calculated as there are concerns about the inclusion of Scope 2 emissions over which a company has no control.  The NT responses included that there has been an agreement that industry would be responsible for the process of determining the appropriate benchmarks.

This have been several sectors that have initiated processes to address this, including petroleum refining, cement, ferrochrome, iron and steel, nitric acid, pulp and paper clay brick making, ilmenite, platinum and gold to develop benchmarks to ensure that these industries/sectors/firms can qualify for the performance allowance.  The NT will assess these benchmarks and consider them for inclusion in the regulations supporting the carbon tax bill.

7.  Tax deductibility of the carbon tax

A concern was raised as to the deductibility of the carbon tax for income tax purposes.  This has been confirmed that it is deductible as a company expense incurred in the generation of income.

8. GHG emissions trajectory

South Africa has submitted its Intended Nationally Determined Contribution (INDC) on Adaption and Mitigation, as well as its finance and investment requirements.  The INDC state that the country has moved away from a “business as usual” approach to an absolute “peak, plateau and decline” GHG trajectory.  This means that between 2025 and 2035 emissions are expected to be in the range of between 398 and 614 CO2e in that period.  In ratifying the Paris Agreement, South Africa endorsed its INDC which means that our GHG will peak in 2020 to 2025 and then plateau for the next ten years and thereafter decline from 2036 onwards.  The carbon tax bill provides a least cost option to achieve this goal and also supports the polluter-pays-principle.

The primary goal of the introduction of a carbon tax is to determine a cost associated with the environmental and economic damages of excessive carbon emissions. A second goal is to drive the change in behaviour of firms to encourage them to move to cleaner technologies.

9. Carbon tax modeling and socio-economic impact

A number of questions were raised on the modelling undertaken to determine the potential impact of the carbon tax.  The NT response states that several studies have been undertaken which have indicated that the carbon tax will make a significant contribution to the reduction of GHG emissions and that the economic impact of the carbon tax depends on how the revenues raised will be used, currently planned to be revenue recycling measures.

These studies have assisted in providing a reasonable understanding of the environmental and economic impact of a carbon tax and the helped with the decision-making processes of government in the determination of how to implement a carbon tax policy.

The economic modelling conducted based on the current policy design has indicated that the carbon tax would led to an estimated decrease in carbon emissions of 13% to 14.5% by 2025 and by 26% to 33% by 2035.  It is also anticipated that the introduction of the carbon tax will have a marginal impact on the economies annual growth rate of between 0.05% and 0.15%.  The NT has also engaged with the Department of Planning, Monitoring and Evaluation on the Socioeconomic Impact Assessment (SEIAS).  The DPE has issued a report on the carbon tax bill and issued a SEIAS certificate in this regard.

 10. Policy alignment with the carbon budgets

The comments raised focused on the lack of alignment of the carbon tax with the carbon budget process.  The proposed carbon tax is envisaged as a broad-based carbon pricing mechanism that will be the least-cost option to incentivise GHG emissions reduction and provide clear signals for investment decision-making. The NT and the DEA have undertaken a study that provides the insights into the integration of the carbon tax and the preparation of the carbon budget process.  An integrated review process will be undertaken in the next three years to ensure that these two mechanisms are aligned.


11. Carbon tax pricing, emissions trading and timing of the introduction of the tax

  •  There is very good support of the carbon tax rate – A concern raised is that given the extent of the allowances there may be less of an incentive to encourage a shift to cleaner fuels and the adoption of carbon-saving technologies.  The approach of the NT in Phase 1, is to introduce the carbon tax gradually so as to ensure its adoption.  The annual increase of the carbon tax rate is inflation plus 2%.  There is the further potential, in Phase 2 of the implementation of the carbon tax, for the allowances to be reduced. Phase 2 comes into effect after the first five years of implementation.
  • An emissions trading scheme – The comments raised relating to the implementation of an emissions trading scheme as an alternative pricing mechanism need to be further explored.  The NT believes that there is the potential for such a scheme to be introduced in the medium to long term, but given the current oligopolistic nature of the South African carbon market where four companies are responsible for between 55% and 60% of carbon emissions this is not considered feasible at this stage. There is the potential for a domestic ETS to complement the carbon tax, but this should be considered in the context of linking with carbon pricing systems in other jurisdictions.  Article 6.2 of the Paris Agreement allows for “cooperative approaches” across jurisdictions.  These cooperative approaches would allow for “internationally transferred mitigation outcomes” as these allow for bi-lateral or multi-lateral crediting mechanisms and should be explored in South Africa.  It is suggested by NT that the carbon offsets system could be the first step to implementing a carbon trading system in South Africa.
  • Regulations – the electricity sector – the South African electricity sector accounts for approximately 45% of total emissions.  This is a state regulated sector and as a result functions under regulation and policy and not market incentives.  It is suggested that the Integrated Resource Plan 2010 and the carbon budget process are sufficient to drive down the carbon emissions in this sector.  The view of the NT is that this argument does not take into account the “polluter pays principle” and that it is essential that this sector takes responsibility for its negative externalities and should therefore be included in the determination of an economy wide carbon price.
  •   Timing of the introduction of the tax and long-term policy certainty – Comments were raised that the introduction of a carbon tax in the current economic climate is not appropriate and that it should be delayed until there is an improvement in the economy’s growth prospects.  The Davis Tax Committee recommended that the carbon tax should be introduced with a 100% allowance in the first year, while NGO’s believe that the tax should have already been implemented.  There was also comment on the need for clarity on the time frames for the various allowances and the likely impact of phase two of the carbon tax.  The NT’s response states that the time frames and the tax-free thresholds are included in the draft carbon tax bill, up to 2022.  In addition, the DEA has introduced the GHG Emissions Reporting Regulations meaning that companies already know what they are required to do in the reporting of their carbon emissions. As regards the potential for adjustments to the proposed carbon tax legislation, this will be done in consultation with all stakeholders and will be informed by the progress made in the first phase up to 2022.



Overall the comments raised and the responses by the National Treasury have provided significant clarity as to how the proposed carbon tax will work.  The release of the regulation on the Technical Guidelines on how to compute GHG emissions is a significant step and gives the market the details of how the DEA expects the reporting of the GHG emissions into the national inventory.  The accurate computation of GHG emissions is essential as this submission will be used to compute a carbon tax liability.

There remains a number of suggestions that, with discussion, will benefit the implementation of the tax. In our view these would include the alignment of the carbon tax with the carbon budget, the scope of the carbon offset projects, and the research into the emissions trading scheme and the international links that may be used.

In addition, the trade exposure and the performance allowances need to ensure that they effectively support those sectors who are at the most risk from international competition.

Read more: Carbon Tax Paper One: Carbon Tax in South Africa, what is the Status Quo? By Jeremy Grist