Energy in Industry
Tuesday, 04 June 2013 12:28

A taxing thought: SA Treasury releases second carbon tax proposal paper

The South African National Treasury released its final carbon tax paper on 2 May.

Industry feedback

The South African National Treasury recently tabled its latest carbon tax proposals and invited industry stakeholders to comment before 2 August 2013. The policy paper lays out the details of a proposed carbon tax for South Africa that is expected to be implemented on 1 January 2015.

In the policy paper, a tax of R120 per ton of CO2 equivalent is proposed, with a 60% tax-free emissions threshold and some exemptions for specified industries. The country aims to decrease its greenhouse gas (GHG) emissions by 34% by 2020 and by 42% by 2025.

The second and final comment paper titled Reducing greenhouse gas emissions and facilitating the transition to a green economy, followed the 2010 discussion paper and was supposed to take into account all comments received, as well as the 2006 Environmental Fiscal Reform policy paper.

Stakeholders in the manufacturing and mining industries have voiced their anxieties about the potentially negative impact that such a tax could have on the economy, fearing it could increase the cost of doing business in South Africa.

According to Mike Rossouw, chairman of the Energy Intensive Users Group (EIUG), the organisation’s biggest concerns are that the tax-free allowances stipulated in the policy document are much lower than international norms. “The level of tax must consider the total tax burden being carried by business and industry, particularly in the light of the European Union’s carbon price collapse,” says Rossouw.

Industry decision-makers have also proven to be less than impressed with the fact that the tax would also apply to Eskom. During the first five years, from the date of implementation until 31 December 2019, the agricultural and waste sectors would be exempt from paying the tax, while the electricity sector and other selected sectors would qualify for a tax-free threshold of up to 70% and 90% respectively.

The paper stated: “The primary objective of implementing carbon taxes is to change future behaviour, rather than to raise revenue.” The policy suggested basing the new tax on “revenue recycling” and “tax shifting”, wherein taxes were reduced on positive contributors such as income and payroll, while the tax on negative products, such as these that produce GHGs or pollution, were increased to balance the impact and generate both environmental and employment benefits.

The paper also noted that the tax was expected to “create dynamic incentives for research, development and technology innovation in low-carbon alternatives”, and reduce the price gap between conventional, carbon-intensive technologies and new low-carbon alternatives.

The good, the bad and the not-so-certain

Promethium Carbon’s initial comments included an overview of the positive and negative aspects of carbon tax, as well as emphasising some points which remained somewhat uncertain.

According to Robbie Louw, a director of Promethium Carbon, a carbon advisory firm, the good news includes:

•    The paper’s consistency with previous communications from the National Treasury with respect to the basic structure of the tax.
•    The low effective tax rate of between R12 and R48 per ton of CO2.
•    The National Treasury’s position on revenue recycling and tax shifting.
•    The paper’s alignment with international practices.
•    The use of offsets to reduce tax liabilities.
•    The capping of impacts of efficiency.
•    Relief of exposure to international trade.
•    The exemptions granted to certain industry sectors.
•    The exemption of fuels for international shipping and aviation.

Apart from the positive aspects of the paper, Louw noted that there is also some bad news in the mix. The bad news items on the paper include the softening of the comments on the phasing out of the 3,5 cents per kWhr non-renewable levy on electricity that was made in the Budget Speech of February. According to Louw,
carbon taxes can only achieve its purpose of stimulating behaviour change towards a low-carbon economy if they are made visible as policy instruments.

Other bad news items include:

•    The policy paper does not specify a limit below which companies will not be liable to pay the carbon tax.  This means that the smallest of companies will have to carry the administrative burden imposed by the carbon tax.  It is international practice to not make companies below a certain size liable for carbon tax.  Some countries do it on the basis of people employed or turnover, while others do it on the basis of emissions.
•    The taxing of Scope 2 emissions in the hands of Eskom isolates the users of electricity from the relief mechanisms created to mitigate certain sectors’ carbon tax risk.
•    There are significant challenges in the setting sector benchmarks that will be used to adjust a company’s tax free threshold.  The structure of certain of the emission intensive industries is such that practical benchmarks for these industries are almost impossible to set.
•    The analysis seems to be based on emission data from the year 2000.  The use of such old data raises questions about the integrity of the analysis.
•    Failing to explain how the proposed tax is aligned with other regulatory measures such as Desired Emission Reduction Outcomes (DERO’s).

Promethium continued to explain that, besides these positive and negative items, there were a few uncertainties in the carbon tax paper, which led to some confusion amongst public participants. These items include:

•    The document does not explicitly state who is included in the proposed tax base.
•    The paper refers to South Africa’s international commitments to reduce greenhouse gasses. It does, however, not refer to the fact that the commitment is conditional upon the provision of funding from the international community, and more importantly, what such funding will be applied for.
•    The tax liability of companies will be dictated by which sector they are classified in. The classifications of the sectors are however not clear as different sectoral classifications are used in different parts of the document.
•    The tax design is specified as being based on fuel inputs, yet mention is made about relief for process and fugitive emissions.  This implies inconsistencies in the design base.
•    No guidance is given on the accounting or the auditing requirements for the quanitification of the emissions on which the tax will be payable.  There is also no guidance on the standards that may be used.
•    The Eskom emission factor is specified as being 0,91 t CO2e per MWh for the first five years and that it will be reduced to 0,8 t CO2e per MWh thereafter, which differs significantly from the current emission factor reported by Eskom of 0,99 t CO2e per MWh. It also moves away from the principle stated in the tax design section that tax will be calculated on actual fuel combusted.

An unsettled case

Business Unity SA (Busa) has since set up a task team to analyse the Carbon Tax Policy Paper and find a “definitive business view” to submit to the National Treasury.

In a media release, the organisation stated: “While Busa has consistently supported the need to move to a lower carbon-intensive economy, it believes that the carbon tax proposal needs to be further critically interrogated.”

According to Busa, great caution was needed in the carbon tax implementation, not only because external and internal economic circumstances had changed, but because there were a number of challenges that needed to be taken into account.

Although the implementation of carbon tax seems like an obvious step towards a green economy, despite other entities like the European Union (EU) deciding against such policies in their own economies, reaction and comments from industry will continue to drive and influence the final decision-making on the implementation of the tax.

Be sure not to miss updates regarding the policy proposal on

Full thanks and acknowledgement are given to Promethium Carbon, Busa and for the information given to write this article.

Promethium Carbon
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