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The danger of complacency in light of the delay in the carbon tax

05 March 2014   (0 Comments)
Posted by: Author: Mansoor Parker and Andrew Gilder
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Author: Mansoor Parker and Andrew Gilder (ENS)

Executive summary

The recent announcement of a postponement in the implementation of the carbon tax should be understood against the relevant national and international legal background and should not be taken at face-value.

In addition to the postponement, the announcement indicates a better defined, more rigorous and multi-layered set of carbon tax obligations, the implementation of which will require industry to develop a range of systems and expertise.

In addition to these carbon tax design elements, government’s potential to postpone implementation of the carbon tax indefinitely is limited.

The combination of this complexity of design and the time-squeeze on government means that there is a greater urgency for industry to self-assess its carbon tax liability, the reporting obligations that will be imposed and the strategic and other measures that can be taken to manage and mitigate exposure to the carbon tax.

Introduction

Minister Pravin Gordhan, in his 2014 Budget Speech to Parliament on 26 February 2014, rather cryptically indicated that the implementation of the proposed carbon tax, initially pegged for January 2015, will be postponed by a year to 2016. Here is what the Minister said in his speech: "Following public consultation, the National Treasury and the Department of Environmental Affairs have agreed that a package of measures is needed to address climate change and to reduce emissions. This will include the proposed carbon tax, environmental regulations, renewable energy projects and other targeted support programmes. To allow for further consultation, implementation of the carbon tax is postponed by a year to 2016.”

The context of this bald announcement delaying the implementation of the tax is provided in the 2014 Budget Review and the nuances that this context brings are essential to understanding the implications of the postponement for business. In particular, to hear only the headline that the carbon tax is delayed without considering the reasons for and implications of the delay is to ignore an important message from government about the near-term consequences for the economy of climate change policy and carbon pricing. This article seeks to interpret the message from government.

Messaging around the carbon tax

There are two main aspects to the message, namely:

  • The outcome of the public participation process that Treasury ran on the May 2013 Carbon Tax Policy Paper is that 94% of the 115 participants support the notion of pricing carbon in the South African economy, while more than 50% of the respondents support the carbon tax (as the means of pricing carbon).
  • Design of the carbon tax continues to evolve, including the following:

- Government intends to implement the carbon tax and reduce the electricity levy at the same time, with the net tax burden being low in the first five years of implementation, rising slowly thereafter and more steeply after 10 years. That government intends reducing the electricity levy commencing with the introduction of the carbon tax provides a response to queries relating to rising costs of electricity generation and the concern that the carbon tax would, effectively, be a further levy on power generation notwithstanding that the electricity levy can already be seen as a tax on carbon. The Minister’s statement in the 2014 Budget Speech will go some way to dealing with these concerns.

- Using some of the revenue generated from the carbon tax to fund the energy-efficiency tax incentive, which began operating on 1 November 2013. Application of a portion of carbon tax revenue to funding the renewable energy allowance provided for in section 12L of the Income Tax Act No. 58 of 1962 is confirmation of a similar point made by the Minister in the 2013 Budget Speech and is a theme that has carried through discussion of the carbon tax since then. Utilisation of carbon tax revenue to realise an environmental/sustainable development objective (soft ear-marking of a portion of the carbon tax revenue) is an important concession by Treasury given that the usual fiscal policy is to avoid ear-marking of funds in the fiscus

- Using firms’ carbon offsets to reduce their carbon tax liability by between 5 and 10% of actual emissions, as outlined in the soon-to-be-published carbon offsets policy paper, confirms Treasury’s understanding that the utilisation of carbon offsets against a carbon tax liability can be a significant support to the South African carbon market which is currently being affected by temporary weakness in the international market. 

- Reporting and classifying of greenhouse gas emissions for tax purposes will be aligned with mandatory emissions reporting to the Department of Environmental Affairs ("DEA”). This inter alia confirms the position of the carbon tax as a significant component of national climate change policy – a role that was articulated in the DEA’s National Climate Change Response Policy Paper (November 2011) and has been increasingly clarified since.

Analysing the linkage between the carbon tax and national climate change policy provides insight into the immediate consequences, for emitting industries, of postponing the carbon tax. Such consequences include a better defined, more rigorous and multi-layered set of obligations, the implementation of which will require industry to develop a range of systems and expertise. A further consequence is that government’s potential to postpone implementation of the carbon tax indefinitely is limited. The combination of this complexity of design and time-squeeze on government means that there is a greater urgency for industry to self-assess its carbon tax liability, the reporting obligations that will be imposed and the strategic and other measures that can be taken to manage and mitigate exposure to the carbon tax.

Carbon tax, integrated environmental management and the climate negotiations

Over the near- to medium-term the DEA will require the commencement of mandatory measurement, evaluation and reporting of the greenhouse gas emissions of industries that emit in excess of 100 000 tonnes of carbon dioxide equivalent ("tCO2e”) or which use electricity the generation of which results in emissions in excess of 100 000 tCO2e. The legislative mechanism that the DEA will use is to declare greenhouse gas a priority pollutant in terms of section 29 of the National Environmental Management: Air Quality Act No. 39 of 2004 ("NEMAQA”). Such declaration triggers the legal requirement for the development of a Priority Pollutant Management Plan which, when finalised, will be gazetted as a regulation under NEMAQA and will impose an obligation upon emitters of the priority pollutants to measure, evaluate and report on their emissions of the priority pollutant. This is the above mentioned DEA’s "mandatory emissions reporting” that will link to the carbon tax.

One can identify at least two drivers for the DEA’s legislating in this manner:

  • the requirement for integrated environmental management which flows from the environmental right in the Bill of Rights into the suite of environmental statutes that the DEA administers; and,
  • the role that South Africa plays in the international climate change negotiations.

In relation to the former, namely the requirement for integrated environmental management: NEMAQA is widely considered as essential to realising the environmental right which is articulated in section 24 of the Constitution as the right "to an environment that is not harmful to health or well-being”. NEMAQA section 2 provides for a direct link between this Constitutional right and the objectives of NEMAQA which include protecting and enhancing air quality, and giving effect to the Constitutional right in order to "…enhance the air quality of ambient air for the sake of securing an environment that is not harmful to the health and well-being of people” (NEMAQA section 2(b)). The specific referencing of health considerations in NEMAQA was much fought-over in the lengthy Parliamentary and stakeholder participation processes (in the early 2000s) which led to NEMAQA’s present formulation. South Africa’s activist green civil society was adamant that the reference to health should be retained. Various organisations made very robust representations in this regard when a near-final draft of the Act was circulated by government and was found to be deficient in this respect. Civil society’s view has not altered in the time since NEMAQA was promulgated and the need for the Act to be used to protect air quality and health is a prominent part of current submissions from civil society opposing Eskom’s application to delay the implementation of certain air quality management measures. The DEA is acutely aware of the standards to which civil society seeks to hold government and industry, including standards relating to air quality, health and the reduction in national greenhouse gas emissions. Delayed implementation of long-anticipated obligations on emitting industries to quantify and report on greenhouse gas emissions is likely to receive adverse attention. The net effect is heightened pressure on government, DEA and Treasury, to establish an operational carbon tax linked to the DEA’s mandatory emissions reporting within the NEMAQA legal framework.

In relation to the latter, namely South Africa’s role in the international climate change negotiations: South Africa presents itself as a leader in the international climate change negotiations and as a lynch-pin country that can bridge the divide between developing and developed countries. The country Parties to the United Nations Framework Convention on Climate Change ("UNFCCC") and the Kyoto Protocol have set themselves until the end of 2015 to agree upon the form and content of the international legal regime providing for the global response to climate change from 2020. With some eighteen months left in the negotiation process, various country Parties and negotiating blocs have begun to manoeuvre for position at the table. For example, the European Union ("EU”) has recently announced that, in future, access to the EU Emissions Trading Scheme ("ETS”) as a market for carbon credits generated, by developed countries, according to the rules of the Kyoto Protocol will be restricted to 5% of the ETS total of emissions and only to those developed countries that make significant concessions in the climate negotiations. This is by contrast to the former EU position which, until recently, anticipated unlimited access to the EU ETS for carbon credits generated in Least Developed Countries. It is worth mentioning that an essential element of the negotiation-stance of developed countries, including the EU, is that developing countries need to make a greater contribution to the global response to climate change. In this light, the EU’s announcement can be understood as the first salvo in a negotiation battle that will rage until the Twenty-First Conference of the Parties to the UNFCCC ("COP21”), scheduled to be held in Paris, France, in November 2015. In order for South Africa to defend its perceived position as a developing country leader in the negotiations, it will need to demonstrate that it is taking domestic significant action to respond to climate change. The carbon tax is among the country’s most evident mitigation greenhouse gas mitigation measures and it would strengthen our negotiation position to be able to place a fully operational carbon tax on the negotiation table as we progress towards COP21.

Conclusion

Minister Gordhan’s announcement that the carbon tax is postponed to 2016, while confirming the linkage between the DEA’s greenhouse measurement and reporting regime and the carbon tax regime, does not amount to an easing of pressure on industry to prepare for implementation of the carbon tax. Rather, the apparent extra time must be considered in light of the announcement’s confirmation of greater complexity in the tax regime (one that must operate between two government departments, namely Treasury and the DEA) and the imperatives on government to have an operational carbon tax system as a contribution to national integrated environmental management and South Africa’s prestige and climate change negotiation position. Industry is encouraged to consider this bigger picture and to investigate the actions required as preparation for medium-term implementation of the carbon tax.

This article first appeared on ensafrica.com. 


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