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Draft Carbon Tax Bill – legalese meets science speak

26 January 2016   (0 Comments)
Posted by: Authors: Betsie Strydom and Graham Crocker
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Authors: Betsie Strydom and Graham Crocker (Bowman Gilfillan)

What the carbon tax is and how it will affect you

The Draft Carbon Tax Bill (the "Draft Bill”) proposes a pollution tax, known as a carbon tax, which is set to come into operation on 1 January 2017. Carbon tax will be imposed on persons who conduct various activities in the manufacturing, construction, mining and transport sectors. This tax will come into effect in a phased manner, with the first phase commencing on 1 January 2017 and running to 1 January 2020.

Carbon tax is part of the implementation of government policy on climate change and according to a Media Relea by National Treasury it, "seeks to price carbon by obliging the polluter to internalise the external costs of emitting carbon”, in other words, the polluter pays.  

Who will be affected? 

It is proposed that the carbon tax will apply to all sectors, but the agriculture forestry and other land use (AFOLU) and waste sectors will be excluded due to measurement difficulties during the first phase i.e. 1 January 2017 to 1 January 2020.

Section 3 of the Draft Bill provides that the persons who are subject to the carbon tax are those persons who conduct the targeted activities listed in the Government Notice issued in terms of section 29(1) of the National Environment Management: Air Quality Act, 2004.  

This will include persons active in: 

  • Energy industries, such as electricity and heat production, and petroleum refineries;
  • Manufacturing industries and construction (particularly chemicals);
  • Road transport, railways and waterborne navigation;
  • Coal mining, and processing and storage of coal;
  • Processing of solid fuels;
  • Leakage of natural gas and emissions of methane during coal mining;
  • Flaring during oil/gas extraction and refining;
  • Mineral production (cement, lime and glass); and
  • Chemical production (ammonia, Nitic acid, carbide and titanium dioxide).

The levying of the carbon tax will be linked to the reporting obligations imposed in terms of the National Atmospheric Emissions Inventory System (or NAEIS) in terms of the National Environment Management: Air Quality Act.

The Draft Explanatory Memorandum to the Draft Bill explains that, "The calculation of the tax base is closely linked to the DEA mandatory reporting requirements of emissions for all economic sectors in South Africa which is expected to become effective in the first half of 2016.”

The Explanatory Memorandum refers to a minimum (de minimis) threshold by stating that, "Only entities with a thermal capacity of around 10MW will be subject to the tax in the first phase. This threshold is in line with the proposed DEA [Department of Environmental Affairs] GHG emissions reporting regulation requirements and the Department of Energy (DoE) energy management plan reporting.”  

However, the proposed de minimis threshold does not appear in the Draft Bill. As stated above, a person will be subject to carbon tax in terms of the Draft Bill if that person carries on an activity listed in Annexure 1, and there is currently no provision  in the act that excludes entities with a thermal capacity of less than 10MW from the tax. This appears to have been an oversight that will need to be corrected.

Calculation of carbon tax 

The Draft Bill is riddled with formulae.  It looks as if the formulae are aimed at establishing the tax base with reference to the reporting obligations imposed by NAEIS.

The rate of tax is, "R120 per tonne carbon dioxide equivalent of the greenhouse gas emissions” of a taxpayer.  The liability for carbon tax is determined by adjusting the tax base with certain allowable tax-free allowances, and then multiplying it with by the carbon tax rate. While the Draft Bill does not currently propose an express de minimis threshold, it grants various allowances and then limits the maximum tax-free allowance to 95 per cent.

The Draft Bill provides for a number of transitional tax-free allowances which will reduce a tax payer’s carbon tax liability. These include:

  • A basic tax-free allowance of 60 per cent for fossil fuel combustion;
  • an additional tax-free allowance of 10 per cent for process emissions;
  • a variable tax-free allowance for trade-exposed sectors (maximum 10 per cent);
  • a maximum tax-free allowance of 5 per cent for above average performance (i.e. early actions and /or efforts to reduce emissions that beat the industry average);
  • a 5 per cent tax-free allowance for companies with a Carbon Budget; and
  • a carbon offsetting allowance of either 5 per cent or 10  per cent.

These tax-free allowances will range from between 60 and 95 per cent of total emissions. In other words, the carbon tax that will be imposed will equate to between 5 to 40 per cent of the actual emissions during the tax period. Taking into account all of the above tax-free thresholds, the effective carbon tax rate will vary from between R6 and R48 per ton CO2-e.

The National Treasury will issue Regulations to give effect to the carbon offset scheme and is engaging the DOE and the DEA on the administration of the offset scheme. These draft regulations will be published for public comment in early 2016.

Revenue recycling 

The revenue received from carbon tax will not be ring-fenced, but will nonetheless be "recycled”. These revenue recycling measures will include:

  • funding for the energy efficiency tax incentive already being implemented;
  • a reduction in the electricity levy, additional tax relief for roof top (embedded) solar photovoltaic (PV) energy as already provided for the in 2015 taxlegislation;
  • a credit for the premium charged for renewable energy (wind, hydro and solar, as per the Integrated Resource Plan);
  • additional support for free basic electricity to low income households; and
  • additional allocations for public transport.

Liability and enforcement

The carbon tax will be administered by the Commissioner for the South African Revenue Service as if it were an environmental levy contemplated in the Customs and Excise Act, 1964. The DEA will assist SARS in auditing an entity’s self-reported tax liability by collecting greenhouse gas emissions data.

Taxpayers who are subject to the carbon tax will have to submit six monthly environmental levy accounts for tax periods commencing on 1 January and 1 July of every year.

Anti-avoidance provisions are included in the Draft Bill and if SARS is satisfied that an arrangement is an impermissible tax avoidance arrangement, it may determine the liability for the carbon tax and the amount thereof as if the arrangement had not been entered into or carried out, or in such manner that SARS deems appropriate for the prevention or diminution of that tax benefit.

The Draft Bill is set to come into operation on 1 January 2017 despite recommendations from the Davis Committee that it should only be implemented at a later date. This means that the parliamentary process must be concluded and assent to the Bill given within one year.

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This article first appeared on the January/February 2016 edition on Tax Talk.


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