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.


International focus on mechanisms to mitigate global greenhouse ("GHG") emissions has always included the notion of carbon pricing among a range of measures. This is one of the stated reasons for government's persistence in introducing a carbon tax into the South African economy, namely as part of government's mix of measures to spur domestic mitigation efforts. South Africa is not alone in these efforts. Since January 2012, the number of carbon pricing instruments already implemented or planned for implementation has almost doubled, rising from 20 to 38. Similarly, the proportion of emissions covered by carbon pricing has risen threefold over the last decade. This article places the Bill in its international context and locates it within evolving national climate change policy.


The Twenty-First Conference of the Parties under the UN Framework Convention on Climate Change ("COP21"), which commenced on 29 November 2015 in Paris, France, is now in its final throes. The primary purpose of COP21 is to reach a new international climate change legal agreement, intended (at least partially) to replace the Kyoto Protocol regime, and which will come into effect in 2020. Amongst other things, the agreement includes measures to be taken by all country parties to the United Nations Framework Convention on Climate Change ("UNFCCC") to reduce GHG emissions, as well as the provision of financial and technological support for UNFCCC developing country parties to adapt to the impacts of climate change.

A draft agreement is currently under negotiation in Paris, and the outcome is expected on 11 December 2015. While current indications are that the negotiation text agreed prior to the commencement of COP21 on use of carbon markets as a mitigation measure is being used as the sacrificial lamb on the altar of political expediency required to achieve the Agreement, there are at least three important factors that must be borne in mind when assessing the future of markets in the global drive to mitigate GHG emissions; namely:

  • Pricing carbon into the global economy is an inexorable international movement. Economies price carbon through the use of instruments such as a carbon tax or an emissions trading scheme. Typically, carbon pricing is seen as an economic means to facilitate the internalisation of environmental costs associated with GHG emissions resulting from manufacturing and other industrial activities. A recent report indicates that the number of implemented or planned carbon pricing schemes around the world has almost doubled since 2012, with existing schemes now worth about $50 billion; and, that about 40 nations and 23 cities, states or regions (representing the equivalent of about seven billion tonnes of carbon dioxide, or 12% of annual global greenhouse gas emissions) are using a carbon price. Please see the graphic below for an indication of the current geographical spread of carbon pricing mechanisms.

    Source: World Bank, State and Trends of Carbon Pricing 2015, September 2015. Coloured areas of the map indicate the presence of some form of carbon pricing, either extant or developing, in the economy at that location.
  • Flowing from, and emphasised by, the abovementioned point, Paris is primarily focused on the form of the agreement and is only the first of five COPs during which the content of the agreement will be elaborated. If detailed agreement on the use of markets is sacrificed in Paris, then this will become an increasingly important item for negotiation as we move closer to 2020.
  • One must never second-guess the outcome of a COP until it's all over and the negotiators are on their way home. It is not unusual that an aspect of the discussions that may have fallen by the wayside in the approach to a COP's ultimate plenary (usually a long-haul event for the participants) reappears in the last moments of the COP as the catalyst for consensus and finalisation of the COP's business.

Given these trends and the international support for carbon pricing, it comes as no surprise that the proposed carbon tax forms a central pillar to South Africa's Intended Nationally Determined Contribution ("INDC"), which was submitted prior to the commencement of COP21. INDCs were intended to serve as an outline of a country's ambitions for responding to climate change in the context of their national priorities, circumstances and capabilities. The respective INDCs submitted by the parties to the UNFCCC are expected to play a pivotal role in the outcome of COP21, and will determine the emissions reduction obligations of developed, and potentially also developing, country parties. It is not yet known how the INDCs will be incorporated into the final text of the COP21 agreement (if at all). However, it is possible that they will be housed in Annexes A and B to the agreement and will form an integral part of its mitigation component.

South Africa indicated in its INDC that, as part of its mitigation efforts, it would develop a carbon tax. It also stated that the tax would be accompanied by the development of what is domestically referred to as government's "mix of measures". These include:

  • desired emission reduction outcomes ("DEROs") for sectors;
  • company level carbon budgets; and
  • regulatory standards and controls for specifically identified GHG pollutants and emitters.

The INDC reiterates South Africa's commitment to a GHG emissions trajectory, which peaks between 2020 and 2025, plateaus for approximately a decade and declines in absolute terms thereafter, with the ultimate objective of decarbonising the electricity sector by 2050. Interestingly, the country's previous international and domestic non-binding commitment, which was to seek to achieve a deviation below the current emissions baseline of around 34% by 2020 and by around 42% by 2025, has been deliberately abandoned in favour of the abovementioned Peak Plateau and Decline ("PPD"), with an emissions trajectory range of 398 and 614 Mt CO2–eq in 2025 and 2030. The latter figure (614 Mt) gives South Africa significant leeway to pursue a relatively carbon intensive economy by 2030 and is one of the reasons the South African INDC has been criticised by international commentators as being sub-optimal.

The fact that the carbon tax has been woven into South Africa's submission to the UNFCCC, demonstrates the Bill's integral role in South African climate policy and creates further impetus for its implementation. Undeniably, there remain a number of variables that will influence whether the Bill will be implemented and the ultimate form and content of the carbon tax legal regime. These include the attitude of the private sector and Treasury's appetite for what could cynically be seen as simply a revenue-raising exercise on government's part. Similarly, whilst the carbon tax forms an integral part of the country's mitigation strategy, South Africa's international stance is that its mitigation efforts are conditional. Consistent with its proposals and submissions to the COP since 2009, South Africa's INDC remains contingent upon the effective implementation by developed country parties of their commitments under the UNFCCC relating to financial resources, development and transfer of technology, capacity building and the finalisation of an ambitious, fair, effective and binding multilateral agreement at COP21. The provision of finance to developing country parties of the UNFCCC is one of the more contentious issues at COP21 and agreement on the extent of funding provided and mechanisms to ensure its provision will most likely determine the extent to which developing countries agree to take on emission reduction targets.

In the circumstances, the outcome of COP21 in Paris has the potential to be a significant driver in the design of not only the carbon tax, but also the wider climate change response in the country. For these reasons, the carbon tax should not only be seen in the context of government's international submissions but in the broader context of its proposed "mix of measures" intended to keep the country within the PPD and emissions trajectory range.

According to an explanatory memorandum released in September 2014, as read with the National Climate Change Response Policy 2011 ("NCCRP"), government's intended mix of measures entails the following:

  • regulatory measures (such as carbon budgets and technology standards);
  • economic measures (such as the carbon tax);
  • direct government action (such as procurement and investment); and
  • support measures (such as research and development and education).

Whilst there is no scope to address the detail of each of these measures in this article, it is important to understand the philosophy and design of the DEROs and carbon budgets in order to appreciate the role and impact of the carbon tax within the broader suite of mitigation measures.

Simply put, DEROs are overarching sector mitigation goals for the country, of which company-level carbon budgets form a part. The key "sectors" identified by government include energy, industry, transport, waste and AFOLU (Agriculture, Forestry and Other Land Use). It has been government's stated policy since the publication of the NCCRP to develop DEROs for all sectors and subsectors of the economy. It is currently intended that DEROs will be composed of company-level carbon budgets and other measures (as identified in the preceding list), depending on the nature of the sector in question and what is considered most appropriate to achieve that sector's emission reduction objective. For example, the measures used to achieve the "transport" sector DERO will differ significantly from the measures to achieve the DERO in the "industry" sector, given that the manner in which these emissions are generated and can best be mitigated differs substantially.

The introduction of carbon budgets is also not a new concept, and it has also formed part of the architecture of climate policy since 2011. It is intended for carbon budgets to be developed for "significant GHG emitting sectors and/or subsectors" and for these carbon budgets to trigger a range of reporting and related obligations. The company-level carbon budget is the so-called proposed "emissions allowance" that the Department of Environmental Affairs (the "DEA"), intends to allocate to identified high GHG-emitting entities. The DEA has already initiated discussions and circulated requests to various members of industry in order to establish these budgets.

The pursuit of company-level carbon budgets has, unsurprisingly, raised some concern within a number of industries as to how the proposed carbon tax will integrate with these budgets. Whilst mention is made of carbon budgets in the White Paper, they are not expressly provided for in the National Environmental Management: Air Quality Act,2004 ("NEMAQA"), nor are they provided for in the relevant regulations issued under this Act, and it is unclear under what empowering provisions they can now be imposed. For now, industry has agreed to co-operate with the DEA regarding its request for information in order to develop these budgets, however, their legal status, the consequences of a failure to comply with the budget (it has been hinted that there may be sanctions after 2020) and the powers of the DEA to implement them, remain unspecified.

The introduction of carbon budgets also raises obvious double taxation concerns. Interestingly, the Explanatory Memorandum for the Carbon Tax Bill acknowledges that regulating GHG emissions by imposing regulatory fines and penalties – such as may eventuate with carbon budgets – is an indirect way of pricing carbon. By contrast, a carbon tax is a direct method of pricing carbon in the economy. The dual application of these mechanisms would amount to the pricing of carbon via two, concurrent means which is likely to be unfair, unreasonable and unpopular, and may have difficult and complex economic consequences, again underscoring the need for harmonisation.

In an attempt to align what may well amount to two parallel and potentially overlapping processes to "price" carbon emissions from industry in the country, the Carbon Tax Bill proposes a 5% tax offset for carbon tax liable entities if they "participat[e] in the carbon budget system". The Explanatory Memorandum to the Bill hints at this element being later refined to better integrate the two systems. For example, it suggests that this could be achieved through the percentage-based tax-free allowance being replaced with "an absolute tax-free threshold which could be in line with the proposed carbon budgets". The exact design of this alignment, for now, remains unknown. The lack of clarity to date is unsurprising given that this particular issue of alignment has remained a source of contention between industry, the DEA and Treasury for many years.

Although the exact design of the carbon budget system remains unknown, it is anticipated that it will be integrally linked with the draft regulations under NEMAQA relating to GHG emissions reporting and the development of pollution prevention plans. In an explanatory note to the design of the carbon budget system from the DEA to certain industries in May 2015, it was suggested that industries subject to carbon budgets would be identified according to a set of criteria and in consultation with business. The DEA would then allocate carbon budgets to these companies and they would be required to submit Pollution Prevention Plans, and would be required to annually report their GHG emissions as contemplated by draft regulations, which were circulated for public comment in 2014. These regulations include the notice by the Minister her intention to publish the national pollution prevention plans regulations, under sections 29(3), 53(o), and (p) read with section 57(1) (a) of NEMAQA ("Draft Pollution Prevention Plans Regulations"), which were published on 14 March 2014. This notice was accompanied by a notice of intention to declare a basket of six GHGs as priority air pollutants. The latter requires any person falling within the specified category to prepare and submit for approval, a pollution prevention plan under section 29(1), read with section 57(1), of NEMAQA (" Proposed Declaration of Greenhouse Gases as Priority Air Pollutants").

These regulations should be read together with the Draft National Atmospheric Emission Reporting Regulations published in 18 July 2014, which regulate the reporting of all data and information from point, non-point and mobile sources (including GHG emissions) to the internet-based National Atmospheric Emissions Inventory System ("NAEIS"). Some confusion reigns in the Carbon Tax Bill regarding which entities would be liable to pay the tax in terms of section 3(b). As it currently stands, tax liable entities are identified as those entities listed in Annexure 1 of the Proposed Declaration of Greenhouse Gases as Priority Air Pollutants. However, industry was led to believe that, in fact, only entities that were required to report emissions under the Draft National Atmospheric Emission Reporting Regulations would be liable.

The following graphic seeks to locate the carbon tax against the other elements of mitigation policy currently under development by the DEA:

In light of the above, it is clear that the carbon tax is contingent and subject to a highly dynamic and evolving legal and policy regime, both domestically and internationally. Without a clear understanding of the architecture of the carbon budget, it is difficult to anticipate what the economic impact of the carbon tax will be in the longer term, and it will be interesting to see how the legal regime on this issue evolves. It is also clear that it will be politically difficult for South Africa to escape the global impetus to price carbon, particularly after COP21, and that South Africa is not alone in its endeavours to do so.

This is the fourth in a series of articles on the draft Carbon Tax Bill. Other articles in the series can be found here.

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.