SA is not ready for a carbon tax
19 February 2016
Posted by: Authors: Duane Newman and Joslin Lydall
Authors: Duane Newman and Joslin Lydall (IOL)
Finance Minister Pravin Gordhan is expected to give an update on the planned carbon tax in next week’s Budget (February 24). However, we already see one big problem with this new green tax: we are not ready for it.
Measurement, verification and reporting systems will first need to be set up to calculate each firm’s tax liability, and this will take time. We also need a more holistic approach to meeting South Africa’s international obligations to combat global warming, and the carbon tax is just one piece of a very incomplete jigsaw.
Read: Mission impossible? Gordhan's budget bind
We are concerned that there needs to be a fuller and more effective range of energy-efficiency measures before the stick of the tax is waved around without matching carrots of a comprehensive and effective set of incentives to support the greening of a business. So the carbon tax cart is accelerating way ahead of the horse.
The carbon tax will not be introduced into a green vacuum. There is currently a tax incentive for energy efficiency, known as 12L, as well as various other green measures, such as recycling regulations for tyres and plastic bags. The 12L incentive provides a tax deduction of 95 cents per kilowatt-hour – but is 95c enough for certain technologies?
Meanwhile, this incentive should be better structured. The listed property sector, for example, is investing a fortune in the greening of buildings but cannot claim 12L because of the real estate investment trusts (Reits), which already give tax benefits. Distributions to shareholders are tax deductible, so they are unable to derive any additional benefit from 12L. We suggest that the benefits of 12L be monetised to the entity spending the capital on the initiative, or to the tenant.
Wrong way round
If, as currently planned, the carbon tax kicks in from January 2017, there will not be enough time for companies to get familiar with the reporting requirements. It all seems to be happening the wrong way round, in a topsy-turvy Alice-in-Wonderland way.
Of course, we do have draft regulations on reporting, but there will be too little time for companies to set up proper reporting systems, and to work out how to best manage their emissions. Another major concern is what will happen to the cash collected from the carbon tax? We strongly believe it should be used to promote a greener economy, but more detail of how this will happen is needed. Maybe there will be some clarification in the Budget?
If our government is really serious about recycling the revenue from carbon tax into environmental support, as has been suggested, it surely needs to start scaling up its grant programmes to channel the cash. When we talk to companies, there is a clear concern that there is a shortage of finance for green initiatives.
The government has arguably shown the way forward in the manner through which it is supporting black industrialists (BIs), combining the efforts of the Department of Trade and Industry and other government departments with funding institutions such as the Industrial Development Corporation, the Development Bank and other smaller institutions. Having set up a central financing arm for BIs, there is now a one-stop shop for a whole range of support measures.
Surely there should also be a similar process for companies seeking green support? We have recently conducted research on the current array of green financial support measures and incentives in South Africa, and have found it is quite opaque, making it hard to understand the full landscape. With the increasing cost of energy, companies are more and more looking at how they can cut these costs.
With external reporting pressure, such as consumer pressure, companies need to carefully think about how they finance their future projects, whether they are seen to be green or otherwise. We need to watch global trends, where a lot of large organisations are spending a lot of time and money on energy management, carbon management and cost reduction.
Little black box
Executives need to be working out how they should integrate the green energy theme into the mainstream of business decision-making. That is a big danger with the carbon tax – that it will be positioned by management teams in a little black box in the corner, as opposed to being mainstream through the business.
There are important lessons from the 12L green tax incentive. While there are potential benefits in 12L, we already see it is hard for companies to unpack the rules, align the capital projects and to work out if there is a real benefit – given all internal administration costs and external compliance costs, such as verification by a South African National Accreditation System (Sanas)-accredited body. In the real business world, there can be quite a long cycle from the initial identification of a project to a decision to seek a tax incentive.
The more complex the organisation and the more projects it has, the longer it takes for a company to understand what its 12L journey should be.
In our experience, the 12L benefit really is not generous enough to justify all the extra administration on small energy projects – so companies with such projects are being scared away from claiming 12L because of the compliance costs.
As 12L is a tax incentive, it is self-funding, in the sense that a company’s tax liabilities will be reduced without the need for any actual payout from the state. We are not convinced that the proceeds from a carbon tax can be earmarked for 12L, as has been suggested, because 12L is a tax saving, not an outflow from the fiscus.
And are companies really spending enough time understanding the complexity of the carbon tax? It has been promoted as being simple, but in practice they could not make it more complex if they tried.
Given this inherent complexity in the carbon tax, the main danger is that companies can’t then mainstream it across their business and can’t build it into their business plans.
This failure to co-ordinate the reporting side of the tax with its planned collection explains why we strongly suggest the National Treasury must reconsider the scheduled implementation of a carbon tax in January 2017. South Africa is just not ready.
* Duane Newman is a founding partner of Cova Advisory and Associates, which advises firms on green issues and on government incentives. Joslin Lydall is a carbon and energy specialist at Cova Advisory.
This article first appeared on iol.co.za.