Will SA’s carbon tax lighten the load?

Image: Shutterstock
Image: Shutterstock

South Africa’s carbon tax bill has been nearly a decade in the making but still caught many South Africans by surprise when it was signed into law by President Cyril Ramaphosa on 26 May, in a clear indication that he is willing to forge ahead with unpopular economic reforms.

Critics have argued that the country cannot afford a tax on carbon emissions at a time when the economy is stuttering, unemployment is at a 15-year peak and business is already burdened by electricity prices that have nearly tripled in real terms in the past decade.

The tax, effective 1 June, is intended to compel companies and individuals to change their behaviour in order to support a transition to a less carbon-intensive economy, as evidence of climate change – and the threat which it poses to humanity as well as the global environment – mounts. 

Supporters argue that the case is particularly compelling for South Africa as the country is the 14th-largest emitter of greenhouse gases in the world, and heavily reliant on fossil fuels. 

This makes it vulnerable to a global shift into investments that mitigate climate change risk and support low-carbon economies, industries and companies.

“The winners in the future will be the countries which decouple economic growth from carbon intensity,” says Jon Duncan, head of responsible investment at Old Mutual Investment Group. 

“The risk for our economy is that we continue to invest in fossil fuel infrastructure which ultimately becomes stranded – we are not isolated, and we are dependent on what happens in the global economy. The carbon tax is an important and symbolic step in the right direction.”

As of November last year, 46 countries and 24 cities, states and provinces worldwide were using carbon pricing mechanisms. 

SA’s carbon tax was first mooted in 2010 and an initial draft bill was published in November 2015, in line with the country’s global commitment to help fight climate change.

But it has been revised and postponed several times since then, after extensive consultations with business and industry and the formulation of other climate change policies to accompany the legislation. 

The delays created false perceptions that the tax would not happen, and as a result, many companies are inadequately prepared to deal with the implications, says Kyle Mandy, head of National Tax Technical at PwC SA.

“Business needs to get to grips with the carbon tax quickly and understand the impact on their business. But government has to ensure that the revenues it receives from the tax are recycled back into the economy, to moderate the negative impact,” he says.

Because the proceeds of the carbon tax are not ring-fenced for specific climate change initiatives, there are widespread perceptions it has merely become another money-spinning initiative which will inflict pain and generate income for National Treasury’s depleted coffers.  

But in its first phase running from 1 June 2019 to 31 December 2022, the tax will only be levied on what is being described as “scope 1” or direct emitters, meaning companies that own the assets burning fuel. 

The headline tax rate is R120 per tonne of carbon dioxide equivalent but, after a number of tax breaks, allowances and performance incentives, this can be reduced by up to 95% and will amount to an effective rate of between R6 and R48.

The carbon tax will initially be neutral for electricity prices due to the fact that emissions from Eskom are being offset by its electricity levy and the cost of the renewable energy which it purchases from independent power producers at prices above the current market rate.       

These measures will significantly cushion the impact of the tax on so-called intensive energy users, which are the only companies that have both been actively preparing for the legislation and lobbying to influence it.

But what has been largely overlooked is the fuel component of the tax – petrol prices will rise by an additional 9c/litre and diesel by 10c/litre from its date of implementation. 

That cost will be borne by the entire economy, and both companies and consumers need to factor that into their finances.

Teresa Legg, director of carbon consulting firm Carbon Report, says companies also need to look at the implications that the carbon tax will have for their entire supply chain, which could include direct emitters. 

“I think that a lot of people believed that the tax wouldn’t directly affect them, so they weren’t concerned about it,” she says. 

“What we’re trying to say is to look at it with a wider view in terms of your entire supply chain because there might be a lot of emissions there with a knock-on effect coming down to you in terms of prices.”

Initially companies that would be most affected by the carbon tax would be manufacturing, mining and industrial companies, but heavy fuel consumers in the transport and logistics sectors would also see a spike in costs. 

Share prices are likely to respond, though not significantly.

The impact of the carbon tax is likely to increase in phase 2 of its implementation, although much will depend on the outcome of a review, which Treasury has said will begin after at least three years of its implementation.

In the South African context this does not leave much time for refining decisions – phase 2 is scheduled to begin at the start of 2023 – but business leaders say it is feasible. 

The main sticking point at present is that SA also plans to introduce a mandatory carbon budget which will cap the amount of emissions that a company can make without stiff penalties.

What this means is that business will be paying a tax on carbon emissions both below and above the budget limit, which is not the global norm, says Jarredine Morris, environment and energy policy manager for Business Unity SA (BUSA).

“Part of the review process will be to see how all of the instruments intended to reduce our greenhouse gas emissions are working and to ensure that there is alignment so that there is no double penalty. We have argued that carbon budgets are a carbon price on the economy in and of themselves,” she says.

BUSA is also taking the position that the carbon budget becomes the tax-free threshold and that any emissions exceeding it could be taxed at a higher rate than the current tax rate, making it a proper deterrent, she adds.

Calculating the revenue which will be raised by the fuel component of the existing carbon tax is relatively simple – Treasury has estimated it at R1.8bn. 

But at present it is difficult to know what the scope 1 emitters will have to pay, as details of the allowances and regulations which will reduce their costs have yet to be published.

In an emailed response to questions from finweek, Treasury said on 28 May that carbon offset regulations would be gazetted in July, while trade exposure allowance and sector benchmarking regulations would be published in June. 

Meanwhile, industry sources say that estimates for the revenues likely to be raised through the emissions component of the carbon tax during phase 1 range from between R6bn to R15bn. 

Nedbank chief economist Dennis Dykes says that, in his opinion, the carbon tax in its current form is illogical as government is not doing enough to encourage the use of renewable energy, which would be a far more effective way of reducing the country’s greenhouse gas emissions.

“If we’re really serious about carbon – as we should be – there are much simpler ways of doing it.” 

He says government could change the mix of energy in favour of low-carbon intensity in its new Integrated Resources Plan (IRP), which is expected over the next few months. 

“There could be severe international penalties for not moving towards a much lower carbon footprint in the form of export taxes. The whole global environment is going to become very much more aggressive against countries which are exceeding their carbon requirement,” he says.

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 6 June edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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