Govt slows carbon tax rollout that Eskom feared - but carbon taxes will be heftier from 2026

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The carbon tax is integral to lowering emissions, says Treasury.
The carbon tax is integral to lowering emissions, says Treasury.
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  • The National Budget indicates that increases in carbon taxes will become more substantial from 2026.
  • The tax policy signals compatibility with the country's climate change objectives, says Minister Barbara Creecy.
  • But an environmental activist says that the tax needs to be balanced with other measures to ensure that the poor don't bear the brunt.

South Africa will extend the first phase of its carbon tax plan by three years, which could delay an increase in rates for companies including coal-reliant state power utility Eskom.

Eskom has estimated an annual carbon-tax bill of around R11.5 billion when exemptions run out at what was supposed to be the start of the programme's planned second phase in 2023. The initial period will now be extended to the end of 2025, according to the budget review presented by Finance Minister Enoch Godongwana on Wednesday.

"The transitional support measures afforded to companies in the first phase, such as significant tax-free allowances" will continue, the National Treasury said in the budget document. Those will be gradually reduced through the four years from 2026.

South Africa adopted a significantly lower carbon emission target ahead of last year’s COP26 climate conference and is aiming to reach net-zero status by 2050. But a delay in implementing higher charges may lead to a reduction in Eskom’s proposed increase in power prices, which could curb inflation.

The projected cost of the carbon tax accounted for a significant share of Eskom’s proposed 21% tariff increase for 2022-2023, according to a recent presentation by the company. The company didn’t immediately respond to a request for comment.

Eskom accounts for about two-fifths of South Africa’s emissions of climate-warming gases and the country is the world’s 12th biggest emitter.

According to the Budget Review, the carbon tax increased from R134 to R144 per ton of carbon, effective from 1 January 2022. During the first phase of the carbon tax- which includes tax-free allowances and does not impact the electricity price - the rate will be increased progressively (at about R15) every year to eventually reach $20 (or R300) per ton by 2026.

This phase has been extended by three years to 31 December 2025.

From 2026 - when the second phase of the tax will be implemented - the rate will be increased with larger annual hikes to reach at least $30 (about R450) per ton by 2030. Allowances will also fall away during the second phase.

Beyond 2030 carbon tax hikes will be even higher to reach $120 (or R1 800) per ton, beyond 2050.

Forestry, Fisheries and Environmental Affairs Minister Barbara Creecy said the larger hikes to carbon taxes are expected from 2026, and this signalled compatibility with the  country's climate change objectives. 

Creecy was speaking after the tabling of the national budget on Wednesday. 

"Last year at the COP26, we submitted a very ambitious, revised increase in our Nationally Determined Contribution [NDC] to reducing greenhouse gas emissions.

"The signals that have been sent about increases in carbon tax from 2026 through 2030, are compatible with the revised NDC," said Creecy.

The NDC is within a target range of between 350 and 420 megatons (MT) of carbon dioxide equivalent by 2030. The goal is to reach net-zero emissions by 2050.

The tax policy approach is aligned to global institutions, Treasury indicated in the budget document. The World Bank, for example, recommends carbon prices of $40 (~R600) to $80 (~R1 200) per ton by 2025 and $50 (~R750) to $100 (~R1 500) per ton by 2030. The International Monetary Fund recommends "lower minimum" carbon prices for developing countries of $25 (~R370) to $50 (~R750) per ton by 2030.

Treasury has encouraged companies to develop plans to reduce their emissions over the next 10 years, or they will face "steep" hikes.

The national budget also indicates that the carbon fuel levy will increase by 1c to 9c per litre for petrol and 10c per litre for diesel from 6 April.

The Minerals Council of South Africa welcomed the extension of the first phase of the carbon tax. Mining companies have a pipeline of 3.9 GW of renewable energy projects. Government needs to approve these to reduce their exposure to Eskom and its carbon-heavy electricity generation, noted the council's chief economist Henk Langenhoven.

Hohm Energy - which serves as a marketplace for solar and battery systems - believes that despite the increase in carbon taxes, there was a missed opportunity to incentivise rooftop solar systems that could contribute to reducing emissions.

"Eskom is one of the country's largest polluters. By incentivising rooftop solar, especially at the home level, South Africa could dramatically reduce its dependency on dirty power and build a greener, stronger economy," said Ryan Steytler of Hohm Energy.

Alex Lenferna, a campaigner with 350 Africa - a movement against the use of fossil fuels in favour of community-led renewable energy - raised concerns that the carbon tax could be harshly felt by the poor if it is not complemented with other measures to ensure a just transition.

A carbon tax by its nature is quite punitive, and a lot of the costs can fall on lower-income folks if there are no measures to offset the regressive nature of a carbon tax.

Lenferna said that the carbon tax should be coupled with large-scale investments in renewable energy and public transport - to offset the negative impacts of the carbon tax on things like petrol and other energy costs.

"In addition to driving forward the carbon tax, we also need stronger measures to invest in a just transition, particularly one that shields low-income families and the middle-class from the more aggressive impacts of a carbon tax," he added. The carbon tax must be coupled with transformative policies that support a just transition to a low carbon economy, he emphasised.

Subsidies for renewable energy are also useful in supporting climate objectives. "Not just leading with the stick [taxes], but also the carrot [subsidies]. We have massive subsidies for fossil fuels, and the tiny carbon tax is not enough to level the playing field.

"We need subsidies for renewables and particularly subsidies that encourage more socially owned renewables and help low-income families to be able to be part of the transition too," said Lenferna.

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