The Carbon Tax Act Explained

Author: Rumbidzai Damita Zireva

What are the building blocks of the carbon tax and to whom and to what extent does it apply? Our article provides a few answers.

The Carbon Tax Act was gazetted on 23 May 2019 and is a vessel through which South Africa can contribute to the global effort to stabilise greenhouse gas concentrations in the atmosphere and drive sustainable economic growth. Through the Carbon Tax Act, the South African National Treasury is imposing taxes on local activities that release significant amounts of greenhouse gases. These gases trap heat in the earth’s atmosphere, which leads to global warming.

The legislation is built on the “polluter pays” principle where the cost of environmental damage must be borne by those who are responsible for harming the environment. The Carbon Tax Act is applicable to industries that conduct activities above a given threshold, as stipulated in Schedule 2 of the Act, where these activities release significant quantities of greenhouse gases.

What causes greenhouse gases?
The most common activity that results in the emission of greenhouse gases is fuel combustion. For example, companies that have boilers of a certain size fall under the fuel combustion category and have to comply with the Carbon Tax Act. It is important to note that greenhouse gases are also emitted from other processes apart from fuel combustion. For example, the process of making cement (i.e., the chemical reaction) results in the release of CO2 which is the most well-known greenhouse gas. Furthermore, some activities inadvertently release greenhouse gases as fugitive emissions.

The Carbon Tax Act lists a broad range of industrial activities that release greenhouse gases, and it classifies these activities as causing either combustion, process or fugitive emissions. The sum of a taxpayer’s combustion, process and fugitive emissions, less any tax allowances, yields the carbon tax obligation of the taxpayer:

Which pollutants are called greenhouse gases?
The Carbon Tax Act recognises six main greenhouse gases that are emitted from industrial activities. These are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). Some of these gases cause more global warming than others.

Each greenhouse gas causes a varying degree of harm to the atmosphere when compared to CO2. This degree of harm is referred to as the global warming potential of a greenhouse gas. Every greenhouse gas has its own global warming potential that was developed by the Intergovernmental Panel on Climate Change (IPCC).

For example, 1kg of methane causes 23 times more global warming than 1kg of CO2,and 1kg of sulphur hexafluoride causes 22 200 times more global warming than 1kg of CO2.

The carbon tax regulates six pollutants and the table beneath shows how detrimental each of these is.

To calculate a factory’s total greenhouse gas emissions, the quantity of each greenhouse gas (kg/year) is multiplied by its global warming potential figure and these six numbers are summed. This total is called the “carbon dioxide equivalent” or CO2e.

What is the cost of carbon tax?
The amount of carbon tax is calculated by multiplying the carbon dioxide equivalent (CO2e) by the current rate of tax, which is R120 per tonne of CO2e. It is not yet necessary to physically measure the amount of greenhouse gas emissions that are released. The Carbon Tax Act specifies emissions factors for each industrial process that is regulated. The emissions factors were determined by the IPCC and are specified in schedule 2 to the Carbon Tax Act.

The tax rate is set to increase by the consumer price inflation (CPI) index plus 2% each tax year until 31 December 2022. Thereafter, the tax rate is set to increase by CPI each tax year.

Taxpayers can leverage tax-free allowances that will reduce their tax obligation. These allowances will be given as rebates or refunds when the allowances being applied for are verified. The following allowances are permitted:

• Allowance for fossil fuel combustion – 60%
• Trade exposure allowance – 10%
• Performance allowance – 5%
• Carbon budget allowance – 5 %
• Offset allowance – 5%
• Allowance for industrial process emissions
• Allowance in respect of fugitive emissions

Multiple allowances can be granted to the same taxpayer. However, the total may not exceed 95%. Regulations regarding the trade exposure and performance allowances are still to be promulgated by National Treasury. These regulations will stipulate what activities will qualify taxpayers to obtain the allowances and to what extent the allowance will be applied (e.g., qualifying for a full 10% for trade exposure or just 3%). It is anticipated that these regulations will be promulgated before the first tax payments are due.

What are the timeframes?
The first tax period commenced on 1 June 2019 and ended on 31 December 2019. Subsequent tax periods will commence on 1 January and end on 31 December of each year. Taxpayers will be expected to submit payments to SARS annually by the end of July, for the preceding tax period. The Department of Environment, Forestry and Fisheries will be tasked with verifying the emissions reports that are submitted by taxpayers.

Is the Carbon Tax Act fi t for purpose?
The main purpose of the Carbon Tax Act is to impose a tax on greenhouse gases that are emitted within South Africa. Many reasons are given in support of this legislation, such as the proof of the role of greenhouse gases in climate change. The Act itself states that government aims to use a “package of measures” to combat the issues that are associated with climate change and carbon tax is, of course, one of them.

The common outcry from industry is the affordability of carbon tax. There are concerns that carbon tax may lead to increased unemployment and a reduction in economic growth. These concerns are valid and the fact that the tax will be fed into the general fiscus and will not be earmarked for environmental purposes, such as research into upscaling renewable energy, adds further frustration.

However, there are numerous case studies showing how carbon tax has worked as an effective tool to bring about environmental awareness and behavioural change in industry, for the benefit of both the environment and the economy. For example, Denmark was able to reduce their greenhouse gas emissions by an average of 10% between 1992 and 2000 (Nadel, 2016) because of the implementation of a carbon tax. Sweden managed to reduce their greenhouse gas emissions by 26% and still grew their economy by 78% between 1990 and 2017. France decreased their emissions by 13% and grew their economy by 51% during that same period (Criqui, Jaccard, & Sterner, 2019).

Because South Africa is a developing nation, it may be more difficult to bear a carbon tax than it has been for other more developed nations. However, the environment is crucial to our existence and our faithful stewardship of the environment is essential for future generations. It is said that we do not inherit the earth from our ancestors, but that we borrow it from our children.

We as South Africans therefore need to make meaningful changes in order to join with an international community in stabilising emissions. The environment is a globally shared resource, and it is insufficient to look at more advanced nations and encumber them alone with financing solutions. It will take a globally unified approach to stem the tide of environmental degradation and to preserve the planet for our children and our grandchildren.

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This article first appeared on the March/April 2020 edition of Taxtalk Magazine.