South Africa's efforts to tackle climate change are intensifying as government looks to sharpen its focus on emissions reductions. The Climate Change Act, signed on 23 July 2024, underscores this commitment, which is aimed at streamlining the country's response to climate change and to further pave the way toward a low-carbon, resilient economy. An essential part of this shift, South Africa's carbon tax, initially implemented in June 2019, has now entered an evolving second phase with proposed key changes aimed at accelerating emissions reductions, particularly in high-emission sectors.
A phased, flexible approach was used to introduce carbon tax to industry, to allow for adoption of more sustainable practices. Initially set at a modest headline rate of R120 per tonne of carbon dioxide equivalent (tCO2e), the tax reflects the "polluter-pays" principle and urges companies and individuals to consider the climate impacts of their decisions. Substantial tax-free allowances ranging from 60 to 95 percent were made available in the first phase to help industries transition without a sudden economic impact. This first phase also avoided price impacts on electricity, which supported South Africa's energy-intensive sectors, such as mining and steel production. Revenue from the tax was also put back into the economy through credits and incentives like the electricity generation levy credit, renewable energy premium credit, and the energy efficiency savings tax incentive.
However, South Africa's ambitious emissions targets, as outlined in its Nationally Determined Contributions ("NDCs") under the Paris Agreement, require heightened action. The country aims to limit emissions to a range of 398 to 510 million tCO2e by 2025, further reducing this to 350 to 420 million tCO2e by 2030. By 2050, South Africa has set its sights on reaching net zero emissions. These targets necessitate a stronger carbon tax framework, and thus, phase two of the tax is set to take effect in 2026, with adjustments to the tax structure aimed at reinforcing emissions reductions and enhancing policy certainty.
The second phase will see significant increases in the carbon tax rate, designed to align with international benchmarks. The 2022 Budget outlined a stepwise escalation. By 2026, the tax will reach R308 per tCO2e, climbing to R462 per tCO2e by 2030. These rates were determined to establish a clear carbon price signal that incentivises industries to adopt low-carbon technologies and to provide a predictable price path to 2050.
In the 2024 Budget, the South African government also announced a forthcoming discussion paper on phase two of the carbon tax, set for public comment. The discussion paper covers proposals on the carbon tax design from 2026 to 2035, considering the NDCs' emissions reduction goals. Key topics for consultation include proposed adjustments to the basic tax-free allowance, carbon offsets, the electricity generation levy, the renewable energy premium, and the energy efficiency savings tax incentive.
The public consultation period for this discussion paper provides a vital opportunity for stakeholders to influence the final design of the tax. Written comments can be submitted to carbontax@treasury.gov.za, with the closing date for submissions on 13 December 2024. After the consultation process, the proposals will be reviewed, with any adjustments announced in the 2025 Budget.
Click here to view the media statement and here to read the discussion paper.
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