The carbon tax to be introduced on 1 January 2015 is the biggest change to the South African tax landscape since the introduction of capital gains tax in 2001. Households and businesses will all be affected to some extent. The time from now until January 2015 is when businesses have to come to terms with, and devise a strategy for, the impact that a carbon tax may have on their operations. South African companies of all types and sizes and across all industry sectors will need to act decisively to manage the broad commercial implications of the carbon tax. While many businesses will not face direct liabilities, they will need to factor in the effect of the carbon tax that will be embedded in their supply chain, as well as the extent of their electricity usage, in order to manage changes to their business’s cost base.
Basic facts: the carbon tax’s key design features
The key design features of the new carbon tax are that it starts on 1 January 2015 at R120 per tonne of CO2e (carbon dioxide equivalent), rising 10% a year (R12 in year two; R13.20 in year three; etc). See the article by Parker and Gilder: 'The Design of the Carbon Tax' in the May 2013 ENS TaxEnsight for a summary of the key design features of the carbon tax.
Is your business liable for the carbon tax?
Although the Department of Environmental Affairs (“DEA”) is currently working on the legal and practical details of a reporting obligation for businesses that operate a facility that emits more than 100,000 tonnes of greenhouse gas (effectively: CO2e) per year or that consumes electricity which results in more than 100,000 tonnes from the electricity sector, and notwithstanding that Treasury regularly links this set of large emitters with the carbon tax, it should be noted that the there is no indication currently that the fiscal legislation will impose such a floor. Thus, businesses should operate on the assumption that the carbon tax will apply from the first tonne of carbon dioxide. While the legal architecture of this reporting obligation is still unclear, the DEA will probably have the authority to audit a business’s emissions if it believes emissions have been under reported and / or to impose penalties on non-complying businesses which may include civil and criminal penalties and directors’ liability in some circumstances.
The carbon tax will be applied to industry on a sectoral basis with different variables applicable to the various sectors. The significance of this scheme is that certain industries will enjoy more exemptions than others. For example, a sector that uses fuel with greater carbon intensity than the fuel used in another sector might enjoy a greater exemption in its carbon tax liability based on the carbon intensity of the fuel. The sectors to which the carbon tax will apply include electricity, petroleum (coal to liquid, gas to liquid), petroleum (oil refinery), iron and steel, cement, glass & ceramics, chemicals, pulp & paper, sugar, agriculture, forestry and land use, waste, fugitive emissions: coal mining and a final category labelled ‘other’.
Can you reduce your exposure to the carbon tax?
It will be possible to reduce the emissions on which the carbon tax is payable, for example, by utilising the available reliefs, implementing emissions and / or energy savings (by implementing more efficient practices) or selling an emitting facility. South African emissions-intensive businesses will qualify for the following relief (during the first phase of the carbon tax implementation, namely between 1 January 2015 and 31 December 2020):
- 60% tax free threshold;
- tax relief for emissions-intensive businesses exposed to international competition;
- tax relief for emissions-intensive businesses which have structural or technical difficulties in reducing their emissions intensity (also referred to as relief for “process emissions”); and
- carbon tax relief where carbon credits are purchased to offset their carbon tax liability.
At present there are no tax incentives for emissions-intensive businesses to invest in carbon capture and sequestration machinery or technology. The policy paper states that to the extent that the carbon tax will apply to gross emissions as opposed to net emissions, a tax rebate for approved sequestration activities will be considered.
Managing your business’ cost base
Even if your business is not directly subject to the new carbon tax, it may have an impact on your costs. For example, electricity prices or other inputs may increase in price due to a supplier being subject to the carbon tax. Businesses may respond to this challenge in several ways: retrofit their operations to reduce their energy consumption thereby qualifying for the soon to be introduced energy efficiency savings tax allowance in section 12L of the Income Tax Act, No 58 of 1962, or adjust their prices to deal with the impact of the carbon tax. Section 12L will introduce a deduction of 45c per kilowatt hour on proven energy efficiency savings.
Acting on opportunities to pass through costs: long-term agreements
In certain long-term agreements, prices may be locked-in for the period of the agreement and will likely continue to apply well after the introduction of the carbon tax. This has potentially disadvantageous results, e.g., a manufacturer of goods subject to carbon taxation (from 1 January 2015) on the emissions associated with the manufacturing process might be constrained from passing-on this cost increase to clients as a result of a long-term sales agreement which locks-in the price of the goods. Those who will be adversely impacted may wish to seek legal advice as to whether their current long term contracts do or do not provide for the variation of prices on account of the carbon tax. Future long-term contracts should have clauses that properly deal with adjustments to price on account of the carbon tax.
Every business will need to have a strategy to factor in the costs (direct or indirect) of the carbon tax. In addition, attention should be given to managing financial impacts such as a changing cost base, acting on opportunities to pass through costs and identifying and responding to tax implications.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.