On Monday, 2 November 2015, the South African National Treasury published a Draft Carbon Tax Bill (the "Bill") for public comment, with the comment period commencing immediately and continuing until 15 December 2015. At first glance, the Bill does not stray too far from the carbon tax design that Treasury has been proposing since 2010 in various discussion papers, national budget speeches and their associated explanatory memoranda and responses to stakeholder commentary on the design. The Bill does not change the essentials, but it does progress certain of the detail while providing only a tantalising glimpse of some of the more interesting aspects of the design. While the proposed tax is vaunted as the carbon tax, this is not the only or the first carbon tax imposed in South Africa. Emissions on new vehicles are subject to emissions taxation and approximately five years ago, the fossil fuel electricity levy was introduced. These are both taxes on greenhouse gas emissions, as is the proposed carbon tax.
The following high-level points are important to note in relation to the Bill:
- The essential carbon tax design that
has been discussed since 2010 is unchanged, although the Bill
provides greater detail on particular architectural elements while
providing only glimpses of others, e.g. the proposed use of carbon
offsets against a carbon tax liability, the detail of which will be
provided in regulation that is expected to be published for comment
in early 2016.
- The Bill proposes that carbon tax be
paid in respect of every "tax period" and that the first
tax period will commence on 1 January 2017 and end on 31 December
2017. Note the distinction between "tax period" and the
"phase" of carbon tax implementation, discussed
- In an evolution of Treasury's
previous stance that carbon tax revenues will simply go into the
general revenue pool, the Bill proposes that revenues will be spent
on a range of sustainable interventions, e.g. providing tax relief
for rooftop solar power, a reduction in the fossil fuel electricity
levy or providing support for free basic electricity. While this
represents a welcome softening of Treasury's position, it is
unlikely that Treasury will irrevocably commit itself to these
applications of carbon tax revenue due to the need to retain fiscal
flexibility in the national budgeting process.
- While the Bill provides some insight
into the proposed design up to 2020, including emissions thresholds
and exemption, it is silent on the post-2020 period, which is
unhelpful for predicting the longer-term implications of the carbon
tax. It is probably safe to assume that the tax will gradually be
ramped-up after 2020, including the lowering of thresholds and the
removal of exemptions.
- The carbon tax will be introduced in
a phased manner. The first phase of the tax will run from the
commencement of the regime until 2020, during which time the tax is
intended to be neutral to revenue and to electricity prices (once
revenue recycling measures are taken into account), although a press statement accompanying the Bill states
rather obliquely, that while "the tax and revenue recycling
measures are designed to be revenue neutral from a macroeconomic
perspective [they] will not necessarily be neutral for companies
with significant emissions". This is a warning to large
emitters of scope one emissions that the carbon tax will have
financial consequences for them from its commencement.
- The six greenhouse gasses originally
targeted in the Kyoto Protocol (carbon dioxide, methane, nitrous
oxide, perfluorocarbons, hydrofluorocarbons and sulphur
hexafluoride) will be the focus of the carbon tax, but the seventh
Kyoto gas (nitrogen trifluoride) is excluded due to the absence of
this gas from South African industrial emissions.
- The Bill includes the following
thresholds and exemptions (which are more numerous and complex than
before, particularly their inter-relationship):
- A basic 60% tax-free threshold during the first phase.
- An additional 10% tax-free allowance for process emissions.
- An additional tax-free allowance for trade exposed sectors of up to 10%.
- An additional tax-free allowance of up to 5% as recognition for early actions and/or efforts to reduce emissions that beat the industry average.
- A carbon offsets tax-free allowance of between 5% and 10%.
- A phase one-specific additional 5% tax-free allowance for companies participating in the Department of Environmental Affairs carbon budgeting system in recognition of their participation and of the role of carbon budgets in the overall tax design.
- Phase one tax-free exemptions will range between 60% and 95% of total emissions, implying that the carbon tax will be imposed on 5% to 40% of actual emissions during the period.
- In phase one, an initial marginal carbon tax rate of R120 will be imposed per tonne of carbon dioxide equivalent ("tCO2e"), but the effective carbon tax rate will vary between R6 and R48/tCO2e with a comprehensive application of the system of tax-free allowances.
In relation to the potential economic consequences of the carbon tax, the accompanying explanatory memorandum indicates that a 2012 economic modelling exercise initiated by the National Treasury found that "...a carbon tax with broad sector coverage implemented gradually and complemented by effective and efficient revenue recycling will contribute towards significant greenhouse gas emission reductions, and have only a marginal negative impact on economic growth over the short-term". There are at least two considerations that arise from this statement:
- Firstly, the idea that the carbon tax
will have only a marginal negative economic effect over the
short-term is unlikely to be of any comfort to those industries and
their customer bases that will feel the negative impact. In any
event, the economic modelling that has been released to date on the
carbon tax is relatively superficial and the conclusions have been
challenged. One of the imperatives going forward must be a
comprehensive economic modelling of the anticipated impact of the
carbon tax as input to public and private sector strategic
decision-making around the tax.
- Secondly, by its reference to the carbon tax's potential to contribute to greenhouse gas emissions reduction, the statement locates the carbon tax within the national and international political landscape of the climate change negotiations and the explanatory memorandum describes the carbon tax as "integral" to domestic climate change policy. In fact, the carbon tax is relevant to a number of macro-economic concerns, not least of which is power generation and the future energy mix. For example, the explanatory memorandum indicates that the carbon tax aims to change the behaviour of firms, incentivising them to shift towards cleaner technology when replacing/renewing machinery, technology or processes. While the carbon tax may drive the market in this direction, it is also true that, in the absence of a systemic change in our power sector, the carbon tax will not drive the significant opportunity for greenhouse gas emissions reduction, namely a shift to less emissions-intensive forms of electricity generation. This is because the energy mix is not determined by market forces, but by the Integrated Resources Plan, 2030 ("IRP") which does not offer energy-sources alternatives for energy-consumers other than Eskom's emissions-abundant power. The pending revision of the IRP might introduce some flexibility which would tend to support the effectiveness of the carbon tax as a driver towards a less emissions-intensive electricity sector, but this remains to be seen.
It is only with an appreciation of where and how it fits into broader macro-economic concerns that a proper understanding of the carbon tax can be formulated. Due to the complexity of the proposed tax design and the myriad of strategic and operational implications that the imposition of the tax will have for industry, this article is the first of a series that will examine the context for and various features of the proposed carbon tax. Future articles in this series will explore the policy, legal and strategic positioning of the carbon tax, with a view to inform this understanding.
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.