Businesses take note: The Carbon Tax Act is coming into effect

• South Africa

• Environment
• Tax planning and consultancy - Briefings

28-05-2019

The Carbon Tax Act No. 15 of 2019 | Effective as of 1 June 2019

“Reducing the impacts of climate change through facilitating a viable and fair transition to a low-carbon economy is essential to ensure an environmentally sustainable economic growth path for South Africa”. (Explanatory Memorandum on The Carbon Tax Bill, 2018)

Historically, the environmental costs associated with pollution and climate change have not been reflected in the final price of goods and services. To address this, the State has intervened by implementing a carbon tax that aligns with the “Polluter Pays Principle” which means that the costs of remedying pollution and of preventing, controlling or minimising further pollution must be paid for by those responsible for harming the environment.

Considering the devastating effects of climate change, the transition to a low-carbon economy is vital to ensure progress toward a sustainable future.

For several reasons, including complexity and lack of capacity, an emissions trading system was deemed to be unsuitable for South Africa. It was decided that a carbon tax would be easier to administer, and it would provide the appropriate price signals and policy certainty to nudge the economy towards a more sustainable growth path and drive behaviour change over the short, medium and long term.

The implementation of a carbon tax policy has been under consideration for roughly nine years since the publication of the Carbon Tax Discussion Paper in 2010, and subsequently the 2013 Carbon Tax Policy Paper and the 2014 Carbon Offsets Paper.

The carbon tax policy has gone through extensive stakeholder engagement, including a public consultation process for each iteration of the draft Carbon Tax Bill, finally resulting in the publication of the Carbon Tax Bill No. 46 of 2018 (the “Bill”) which was tabled in Parliament in November 2018.

The Carbon Tax Act No. 15 of 2019 (the “Act”) was assented to on 22 May 2019 and the implementation of the first phase of the carbon tax will commence on the 1 June 2019.

The intention of the Act is not primarily to raise tax revenue, but rather to implement the objectives to reduce greenhouse gas (“GHG”) emissions as set out in the National Climate Change Response Policy of 2011, to comply with the 2015 Paris Agreement on climate change and to encourage industry to find alternatives to carbon-intensive business practices.

Who is subject to the carbon tax?

Every entity that conducts an activity that results in GHG emissions that are above the threshold listed in Schedule 2 of the Act will be liable to pay an amount of carbon tax.

The threshold is determined by matching the activity listed in the column labelled “Activity/Sector” in Schedule 2 with the corresponding number in the column labelled “Threshold”. Please see a snapshot showing the Schedule 2 columns below.

The activities resulting in GHG emissions relate to stationary and non-stationary sources and includes, inter alia, fuel combustion activities, manufacturing and construction, transport, industrial processes and product use, agriculture, forestry and waste (treatment and disposal).

For example, some of the current thresholds include 10 MW (thermal) for fuel combustion activities, 4 million bricks manufactured a month for brick manufacturing and 2 million litres of wastewater treated and discharged per day for domestic wastewater treatment and discharge facilities.

Snapshot of Schedule 2 of the Carbon Tax Act, 2019

It is important to note that the thresholds listed in Schedule 2 of the Act align with the thresholds provided for in Annexure 1 of the National Greenhouse Gas Emission Reporting Regulations (“NGGER Regulations”) published by the Department of Environmental Affairs (“DEA”) in 2017. Annexure 1 provides a “List of Activities for Which GHG Emissions Must Be Reported to the Competent Authority”.

In terms of the NGGER Regulations a data provider is, inter alia, any person in control of or conducting an activity that is listed in Annexure 1 if the activity results in GHG emissions above the capacity given in the threshold column of the table.

Consequently, those entities classified as data providers and who are required to report on their GHG emissions in terms of the NGGER Regulations will be liable to pay a carbon tax.

The tax liability calculation and allowances

The carbon tax will be implemented in a phased manner. The first phase will be from 1 June 2019 to 31 December 2022. The initial rate of the carbon tax on GHG emissions is an amount of R120 per ton of carbon dioxide equivalent (“CO2e”) of the GHG emissions of a taxpayer.

The tax period is from 1 June 2019 and ending on 31 December 2019, and subsequently each tax period will commence on 1 January of each year and ending on 31 December of that year.

From 1 June 2019 until 31 December 2022, the annual rate of tax must be increased by the amount of the consumer price inflation plus two per cent for the preceding tax period as determined by Statistics South Africa. After 31 December 2022 the rate of tax must be increased by the amount of the consumer price inflation for the preceding tax year as determined by Statistics South Africa.

[‘‘Carbon dioxide (CO2) equivalent’’ means the concentration of carbon dioxide that would cause the same amount of radiative forcing (the difference of sunlight absorbed by the Earth and energy radiated back to space) as a given mixture of carbon dioxide and other greenhouse gases”.]

To ensure a smooth transition to a low carbon economy and to provide organisations with enough time and flexibility to adapt to and/or improve their use of renewables and other low carbon measures, the design of the carbon tax provides significant tax-free emissions allowances ranging from 60 per cent to 95 per cent for the first phase. These include:

• A basic tax-free allowance of 60 per cent for all activities;
• An additional tax-free allowance of 10 per cent for process emissions;
• An additional tax-free allowance of 10 per cent for fugitive emissions;
• A variable tax-free allowance for trade-exposed sectors (up to a maximum of 10 per cent);
• A maximum tax-free allowance of 5 per cent for above average performance;
• A 5 per cent tax-free allowance for companies with a Carbon Budget; and
• A carbon offset allowance of either 5 or 10 per cent.

Schedule 2 provides a maximum total allowance of 100 per cent for certain taxpayers, however all other taxpayers must only receive an allowance that does not exceed 95 per cent of the total GHG emissions of that taxpayer in respect of that tax period.

In summary, the carbon tax liability is calculated as the tax base [total quantity of GHG emissions from combustion, fugitive and industrial processes proportionately reduced by the tax-free allowances] multiplied by the rate of the carbon tax.

Carbon tax administration

The provisions of this Act will be administered by the Commissioner for the South African Revenue Service as if the carbon tax were an environmental levy as contemplated in section 54A of the Customs and Excise Act No. 91 of 1964. The carbon tax must be collected and paid in terms of the provisions of that Act.

The South African Revenue Service (SARS) will be the main implementing administrative authority on tax liability assessment and will have access to the Department of Environmental Affairs’ (“DEA”) National Atmospheric Emission Inventory System.

The DEA will be responsible for the monitoring, reporting and verification of emissions and for collecting the GHG emissions data which will form the tax base. The Department of Energy will be responsible for administering the carbon offsets.

How will the Carbon Tax effect consumers?

While consumers may not experience the direct and indirect effects of the new carbon tax immediately, they will be affected by the increase in the fuel price which will kick in on 5 June 2019. The new carbon tax will add 9 cents per litre on petrol and 10 cents per litre on diesel.

Consumers will most certainly begin to feel the effects in the coming months as the price of goods and services rise.

What steps can your organisation take now?

We recommend taking steps to determine which activities and/or processes within your operations fall within Schedule 2 of the Act and are liable to a carbon tax. Thereafter you can calculate your tax liability and implement a carbon offset strategy.

Should you require our environmental team to assess your legal requirements further, we are able to do so.