South Africa: Carbon Tax – Accounting For It

Last Updated: 9 December 2015
Article by Mansoor Parker, Andrew Gilder and Olivia Rumble

Most Read Contributor in South Africa, September 2018

On 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.

Measurement, reporting and verification ("MRV") of emissions data arising from greenhouse gas related activities underpin the effective functioning of the proposed carbon tax. Defining a carbon tax liable entity's reporting boundary and identifying its emissions sources are important first steps for the collection and processing of emissions data on which its carbon tax liability will be calculated.

The South African MRV regulatory structure for greenhouse gases is evolving. As a result, in many companies, the governance and accountability for greenhouse gas emissions data collection and reporting may not yet be well defined or subject to effective controls. This could be problematic as reliable and verifiable greenhouse gas emissions data is necessary to ensure legal compliance with the carbon tax scheme.

While compliance with the carbon tax scheme will be an explicit statutory/legal requirement, there is at present little guidance on the recommended or best principles and practices that carbon tax liable entities should adopt to ensure that compliance is achieved. ENSafrica has accordingly collaborated with CarbEnviro Services, which provides carbon auditing and advisory services throughout South Africa, to provide preliminary insights into the steps that carbon tax liable entities should take to achieve compliance.

This is the third in a series of articles, which consider aspects of the draft Bill and liable entities.

Carbon emissions data collection and processing stages

Alignment of the carbon tax with other aspects of the evolving South African greenhouse gas regulatory environment, and obtaining clarity on the rules that apply to carbon tax liable entities, are key to implementing the carbon tax scheme.

The Explanatory Memorandum that accompanies the Bill paints a picture of near perfect alignment of the MRV process between the Department of Environmental Affairs ("DEA") and the South African Revenue Service ("SARS"). It states that the DEA will lead the MRV process by collecting the greenhouse gas emissions data that will form the carbon tax base, hence incorporating the carbon tax within the National Atmospheric Emissions Inventory System ("NAEIS"), which is part of the South African Air Quality Information System.

Step 1: set the reporting boundary

Carbon tax liable entities need to assess the definitions of the boundaries for collecting South African emissions data and understand the extent to which any definitions under the Bill are different to those used in greenhouse gas related regulations under the National Environment Management Act: Air Quality Act, 2004.

The Bill states that persons become subject to the carbon tax if they conduct activities that are set out in Annexure 1 to the Notice issued by the Minister responsible for environmental affairs, in respect of the declaration of greenhouse gases as priority air pollutants (General Notice 172 of 14 March 2014 – Declaration of Greenhouse Gases as Priority Air Pollutants, published under section 29(1) read with section 57(1) of the National Environmental Management: Air Quality Act). Consequently, Annexure 1 listed activities conducted by a person fall within its tax reporting boundaries. Likely areas of interest for carbon tax liable entities are joint venture arrangements and outsourcing arrangements. For example, where a carbon tax liable entity (Party A) enters into an unincorporated joint venture arrangement with another carbon tax liable entity (Party B), then the question becomes: "Which of the joint venture's activities falls within Party A's reporting boundary and which of the joint venture's activities falls within Party B's reporting boundary?" The Bill does not provide guidance on how carbon tax liable entities should allocate their carbon tax liabilities in these circumstances.

A possible complicating factor is that the draft greenhouse gas reporting regulations (General Notice 541 of 5 June 2015 – Draft National Greenhouse Gas Reporting Regulations, published under sections 12(b) and (c) and 53(aA), (o) and (p) read with section 57 of the National Environmental Management: Air Quality Act) classify any person conducting a greenhouse gas related activity listed in Annexure 1 to those regulations as a "data provider". A "data provider" includes, but is not limited to, joint ventures and partnerships where the data provider has a controlling interest or is nominated as the responsible entity for the purpose of reporting under these regulations. Thus, a carbon tax liable entity may have a carbon tax liability because it conducts Annexure 1 listed activities, but may not have a reporting liability under the greenhouse gas regulations as it may have nominated a joint venture partner to report greenhouse gas emissions to the DEA. Furthermore, the draft greenhouse gas reporting regulations require a data provider to report the total emission of all its facility level emissions at company level.

Step 2: Identify the emission sources

Carbon tax liable entities must check that the different emissions sources have been considered by those responsible for greenhouse gas data collection. The sources for scope 1 emissions are:

  • combustion emissions – engines, boilers, furnaces, etc.
  • industrial process and product use emissions – from physical or chemical processes.
  • fugitive emissions – from waste, coal mining, oil and gas extraction, etc.

The Bill defines a "taxpayer" as a person who conducts an activity as set out in Annexure 1 of the declaration of greenhouse gases as priority air pollutants. South African industry anticipated that the Bill would have referred to the activities listed in Annexure 1 of the draft greenhouse gas reporting regulations, which are more comprehensively worded than those listed in Annexure 1 of the priority air pollutant declaration. Certain activities that are explicitly referred to in the greenhouse gas reporting regulations (e.g. some manufacturing industries like (1A2d) paper, pulp and print, (1A2e) food processing, beverage and tobacco, (1A2j) wood and wood products and (1A2l) textile and leather) are vaguely or indirectly referred to in the national pollution prevention plan regulations (General Notice 171 of 14 March 2014 – National Pollution Prevention Plan Regulations, published under sections 29(3) and 53(o) and (p) read with section 57(1) of the National Environmental Management: Air Quality Act) and the Bill.

A distinction is made between direct greenhouse gas emissions from non-stationary sources (e.g. vehicles, plant and equipment) and stationary sources (e.g. direct and process emissions from installations listed in Annexure 1 of the greenhouse gas reporting regulations). The greenhouse gas reporting regulations currently provide for only reporting emissions from stationary sources to the DEA (emissions from regular operations and abnormal events, including start-up and shut-down and emergency situations over the reporting period), and do not include emissions from mobile machinery for transportation purposes. The carbon tax on greenhouse gas emissions from petrol and diesel combustion would have been recovered though an environmental levy included in the fuel price paid at the pump, or for bulk fuel delivery to larger customers. Therefore, carbon tax liable entities must maintain accurate record keeping of fuel purchases for mobile sources to enable the correct deduction of mobile fuel combustion emissions from their total greenhouse gas emissions.

Step 3: collect the emissions data

Emissions data can be collected in a number of ways. It is important that carbon tax liable entities review their existing internal questionnaires, procedures and controls, and establish a framework to ensure accountability for these processes and reliability of information. The competent authority within the DEA may request verification of the data and information submitted via the NAEIS and SARS could require documentary evidence to support tax calculations; therefore, proper record keeping will provide a defensible position in the event of questioning from any regulator.

The greenhouse gas reporting regulations provides that "Technical Guidelines for Monitoring, Reporting and Verification of Greenhouse Gas Emissions by industry" (i.e. reporting methodology approved by the competent authority) will be made available on the DEA website. At the time of drafting this article, the technical guideline document was not yet available on the website.

Step 4: apply the emissions factors

The Explanatory Memorandum states that the carbon tax calculation is based on fuel inputs with approved emission factors or an approved transparent and verified monitoring procedure. The use of the disjunctive "or" suggests that carbon tax liable entities have a choice between these approaches. This is how many commentators interpreted this wording. However, the Bill makes it clear that there is no election. Instead, the Bill imposes a hierarchy. The Bill states that if there are no emission factors available for the purposes of the calculation of greenhouse gas emissions, then a reporting methodology approved by the DEA must be applied to determine those emission factors. Carbon tax liable entities will generally prefer using the emission factor method, as the alternatives may require continuous monitoring of emissions, which could be expensive. However, where the carbon tax liable entity achieves reductions in its actual process emissions, it may want to use different reporting methodologies that reflect its actual emissions, and result in a reduction in carbon tax liability.

Schedule 1 of the Bill contains three tables of emission factors: combustion emission factors are listed in table 1, fugitive emission factors are listed in table 2, and industrial process and product use emission factors are listed in table 3. These emissions factors are described as CO2e, meaning carbon dioxide equivalent, which is in line with the DEA's reporting requirement for applying country-specific emission factors (the Tier 2 method; where "tier" refers to a method used for determining greenhouse gas emissions as set by the International Panel on Climate Change (IPCC Guidelines for National Greenhouse Gas Inventories (2006). This means that the emissions factors in the Bill are applied per tonne of raw material used or product produced. Please note that the DEA allows "data providers" from some sectors and sub-sectors to apply the Tier 3 method as well (emission models, material carbon balances and continuous emission measurements). The Tier 1 method (applying default IPCC emission factors) is also available to data providers not listed in Annexure 3 of the greenhouse gas reporting regulations. Continuous emissions monitoring and measurement may result in emissions being disaggregated into their specific greenhouse gases (i.e. carbon dioxide, methane, nitrous oxide, etc.), which are then aggregated into carbon dioxide equivalent by applying the relevant global warning potentials of each greenhouse gas.

The process of calculating the greenhouse gas emission should involve those with appropriate technical knowledge. Carbon tax liable entities should seek an assurance from the preparer of the emissions data that the input and process data are correct and the emissions factors are properly applied in terms of the greenhouse gas reporting regulations and the carbon tax.

Step 5: apply allowable thresholds and allowances

The taxpayer will apply the various allowances and thresholds to reduce its taxable emissions. These allowances are subject to a number of requirements, exceptions, conditions and limiting factors, which will be dealt with in future articles.

The Explanatory Memorandum states that for stationary emissions, only entities with a thermal capacity of around 10 megawatts will be subject to the carbon tax in the first phase (from 2017 to 2020). It is interesting to note that the Bill designates a carbon taxpayer as a person who conducts activities listed in Annexure 1 to the notices issued for the declaration of greenhouse gases as priority air pollutants (which effectively has a reporting threshold for submitting pollution prevention plans). There is no provision in the Bill that contains a reporting threshold. The Bill could be amended to either include the 10 megawatt carbon tax liability threshold or to make reference to an annexure listed in the national greenhouse gas reporting regulations.

Step 6: consolidate the emissions data

Finally, the carbon tax liable entity will consolidate facility level emissions data at the company level. This process of consolidating the emissions data should be reviewed to confirm that it is accurate and that there is no undercounting or double counting of emissions data.

Carbon emissions data reporting and tax liability determination

Register with the National Atmospheric Emissions Inventory System

The greenhouse gas reporting regulations (General Notice 541 of 5 June 2015 – Draft National Greenhouse Gas Reporting Regulations, published under sections 12(b) and (c) and 53(aA), (o) and (p) read with section 57 of the National Environmental Management: Air Quality Act) require data providers to submit the total greenhouse gas emissions (of all their facility level emissions at company level based on operational control) for the preceding calendar year to the NAEIS by 31 March of each year. All data providers are required to register on the NAEIS within 30 days after the commencement of the greenhouse gas reporting regulations, or within 30 days of commencement of a listed activity that takes place after the regulations are in place.

File your environmental levy accounts with SARS

SARS will be responsible for administering the carbon tax as an environmental levy and will have access to the data and information recorded on the NAEIS. SARS requires taxpayers to submit six-monthly environmental levy accounts and payments as prescribed by rules in terms of the Customs and Excise Act, 1964, for every tax period commencing on 1 January and ending on 30 June, and the period commencing on 1 July and ending on 31 December of that year. Required adjustments for a tax period must be effected in the subsequent environmental levy account and payment of the period commencing on 1 January and ending on 30 June in the following tax period. The tax liability would therefore fall to the operator of a facility who may not necessarily be the owner. The SARS commissioner is required to report the amount of greenhouse gases reported and the amount of tax collected to the Minister of Finance within six months of the end of every tax period.

Record-keeping

The greenhouse gas reporting regulations require the data provider to keep records of the information submitted to the NAEIS for five years and such record must be made available for inspection by the competent authority on request. This is in alignment with SARS' record keeping requirements for tax purposes. If the competent authority reasonably believes that the information submitted to the NAEIS is incomplete or incorrect, the authority would instruct a data provider, in writing, to verify the information submitted. Energy combustion data from the Central Energy Database of the Department of Energy ("DoE") will be included in the NAEIS, and could be used to cross-reference emissions data reported by entities. Greenhouse gas process emissions information reported on the NAEIS at installation level will be aggregated to company level in order to verify that companies are complying with their tax liabilities. According to Treasury's draft Explanatory Memorandum, the DEA will work closely with the DoE as a joint implementation partner in the carbon tax MRV work.

The carbon tax system is based on own/self-assessment and reporting of emissions, and the professional tax practitioner is required to declare that the particulars provided in the application and reporting forms are true and correct. The NAEIS and DEA will assist SARS' auditing process to verify the self-reported greenhouse gas emissions.

The carbon tax period spans one calendar year with the commencement date proposed as 1 January 2017. Therefore, carbon taxpayers and tax practitioners would need to ensure that sufficient documentary evidence is available and retained for fossil fuel combustion, fugitive emissions and industrial process and product use (as reported on the NAEIS) and for fossil fuels combusted in mobile equipment (as these would not be reported on the NAEIS) as of January 2017. Electricity generated from fossil fuel has been subjected to an environmental levy for some time now, and SARS record keeping requirements for an electricity producer registrant/licensee include keeping and maintaining proper registers, electronic and manual records of daily readings of generated electricity, proper books, accounts, documents and data created. Back-up data is to be kept in a fireproof area or off-site for a period of five years.

Administrative guidance

Although the carbon tax is considered "new" in South Africa, it is not the first "carbon" tax to be put in place. An environmental levy for electricity generated in South Africa from non-renewable (fossil) fuels and environmentally hazardous (nuclear) sources has paved the way. SARS has published an excise external standard for reporting and record keeping requirements for electricity producers, along with registration and tax reporting forms for the environmental levy payable. So, we could reasonably expect to see similar guidelines and standards from SARS for the "new" carbon tax elements as well. While the carbon tax Bill currently adopts an approach of own/self-assessment and reporting of emissions, it is interesting to note that the SARS standard requires the person who generates electricity to submit a report "prepared, signed and certified by an engineer accredited with the Engineering Council of South Africa". So, we may still see some published internal assurance requirements from SARS related to the reporting of carbon emissions.

Due to the complexity of the proposed tax design (a topic for a future article) and the myriad strategic and operational implications that the imposition of the tax will have for industry, professional tax practitioners may well feel overwhelmed at having to account for greenhouse gas emissions and to declare that the particulars and information provided are true and correct. Collaboration and cooperation with the client's operational, environmental and financial personnel, as well as a range of professionals from other disciplines and industries, would be required to ensure the proposed carbon tax obligations are met.

Previous articles in the series can be found here.

Written in collaboration with: Mandy Momberg, CarbEnviro Service, Managing Director

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.

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