Carbon Tax – Use, Reduce and Rebate

The Carbon Tax Act no. 15 of 2019 (“the Act”) was introduced with the intention of reducing the greenhouse gas emissions produced by industry in South Africa. The preamble of the Act acknowledges, amongst other things, that there is: scientific confirmation of the link between greenhouse gas emissions and climate change, necessity of interventions to manage the impact of climate change, and that the government believes taxation of greenhouse gas emissions will promote sustainability within the economy. The Act will, among other things, seek to reduce gas emissions by imposing tax on gas producers.

In South Africa law, the government bears a custodial responsibility towards the environment. In the Act, the government has acknowledged and adopted the principle that “the polluter [ultimately] pays”. The polluter pays principle acknowledges that the eventual cost of pollution (environmental decline, adverse health effects, costs of minimising pollution and treating adverse health effects) are paid by the polluter. It is the citizens who cause and suffer pollution in the end. The Act imposes taxation on producers of greenhouse gas emissions to discourage pollution and its adverse effects and encourages efficient emissions with tax incentives for those who produce less than the threshold. This environmental policy will have financial implications for up-and-coming businesses, as well as for existing ones.

Not all emissions are equally impactful on the environment, there are equations in the Act which calculate the impact of the six main greenhouse gases as recognized by the Act, which gases are: carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF₆). These gases are produced according to the particular fuel used. The equations set out in the Act convert the type of emissions into a carbon dioxide equivalent (CO₂e). According to this equation, one multiplies the mass of the greenhouse gas in question by the appropriate greenhouse gas emission factor for that gas. This will produce the CO₂e value and determines where an emission producer falls in terms of the applicable threshold and what tax they must pay on their emissions in a given period. By converting the mass of the greenhouse gas produced into the CO₂e, the Act provides one standard of measurement against which a carbon tax can be calculated.

The table hereunder shows how detrimental the six main gases are in relation to carbon dioxide (for example, methane is 23 times more detrimental than carbon dioxide).

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 the “carbon dioxide equivalent” or CO2e.

Carbon tax means a tax on the carbon dioxide equivalent (CO₂e) of greenhouse gas emissions. This tax will (luckily) not apply to all carbon emissions and is primarily aimed at curtailing excessive emission rates of the main greenhouse gases. The Act applies to individuals or companies producing greenhouse gases which are in excess of the applicable threshold and who do so within a particular industry as set out in Schedule 2 of the Act. Production in excess of the applicable threshold renders the producer a taxpayer in terms of the Act and liable to pay an annual carbon tax based on their emission rates.

For example, if an aviation company uses more than 100 000 liters of fossil fuel per year, emitting greenhouse gases in terms of the CO₂e calculation, they exceed the threshold allotted to that activity/sector. This means that they would be classified as a taxpayer in terms of the Act and would therefore be liable to pay tax on their CO₂e emissions. The Act details the applicable schedules and can be found here. The rate of tax according to the Act is currently at R120 per ton CO₂e of the greenhouse gas emissions of a taxpayer in terms of the Act but is set to increase after 31 December 2022. This date will signify the beginning of the next phase of the Carbon Tax Act and a more progressive realisation of its goals.

The Act does however come with incentives for those companies which are doing their part to reduce the environmental impact of greenhouse gases on the planet. The Act provides an allowance percentage (deduction) for emissions based on the activity, for example it allows a 60% tax-free allowance for fossil-fuel combustion emissions for petroleum refining.

Different emission-producing activities will be subject to different allowances in terms of the Act. For example, fugitive emissions (“emissions that are released into the atmosphere by any other means than through intentional release….”) will have separate tax allowances than those companies intentionally emitting fossil-fuel based emissions. The Act also provides allowances for companies which have implemented measures to reduce greenhouse gas emissions, or those which participate in the carbon budget system. The allowances work as a percentage. The more allowances you qualify for, the higher your percentage becomes and the less carbon tax you pay. If the aviation company in our example above were to calculate its percentages, it would be entitled to a 75% allowance on its fossil fuel usage. If the company had developed a carbon budget (method to reduce carbon usage) then it would be entitled up to an additional 5% allowance. Accordingly, our aviation company would end up only have to pay 20% of their carbon tax, as they have acquired an 80% offset allowance in that tax period. Note that the maximum allowances which may be applied may not exceed 95% of the CO₂e applicable.

The Carbon Tax Act is only one of many acts and policies which will become more and more relevant over the upcoming years. In February of 2020, government released “South Africa’s Low-Emission Development Strategy 2050” which sets out the country’s goals regarding energy consumption, mining, agriculture and many other vital environmental factors. These goals and principles are set to become increasingly stricter by the year 2050 in order to reach a common national vision for the country to comply with the terms of the Paris Agreement, aligning South Africa with its international obligations.

Although it is a relatively new Act, it will no doubt influence how industries operate in South Africa. The Act forces producers of greenhouse gases to be held accountable for their emissions by paying an additional tax on goods produced. By extension, if producers behave as they usually do, it will force consumers to pay a higher price for goods which are environmentally unfriendly and which cause the emission of greenhouse gases. It is thus also important for consumers to consider the cost to the environment and to minimise their spending on environmentally unfriendly goods, and to seek better alternatives.

It is clear that it will become increasingly difficult for industry to persist in the modern era without adapting to the new standards of accountability imposed on it and considering the environmental impact of its activities. This means that companies who emit greenhouse gases on a large scale will need to consider the feasibility of renewable energy sources or alternative fuel sources. There will always exist the possibility of government implementing more stringent regulations in terms of the Act, and it is important for businesses in industries to be aware of any inherent disadvantages or advantages contained therein, and to use such advantages as available.

Contact us today if you are worried about how your business may be affected by these new laws.