Examining the Carbon Tax in South Africa

The Government of the Republic of South Africa has shown its commitment time and again to renewable energy by making pledges and entering into agreements in conjunction with the international community, like the Copenhagen Accord and the Paris Agreement.
These pledges are focused on decreasing carbon emissions, increasing renewable energy generation capabilities and phasing out the use of coal-fired plants for energy generation purposes.
The latest development resulting from these pledges is that Parliament has enacted the Carbon Tax Act No.15 of 2019 (“the Act”) with an effective date of 1 June 2019.
The primary objective of the Act is to reduce greenhouse gas (“GHG”) emissions in a sustainable, cost-effective and affordable manner. The Act is based on the “polluter-pays” principle, which means that those who emit GHG in South Africa will incur this additional tax in order to compensate for their GHG emissions.
Phased-in Approach
The Act currently provides for substantial allowances in order to decrease the immediate impact on businesses and allows for a “phased-in” approach.
The phased-in approach encompasses three phases of implementation. The first phase is effective from 1 June 2019 up until 31 December 2022 and the second phase from 2023 – 2030. The third phase is expected to be effective from 2031, with no sunset clause currently enacted.
Impacts for Consumers and Industry
The most immediate and pertinent impact of the implementation of the Act for end-consumers is the increase in retail fuel prices.
The fuel price increase attributable to Carbon Tax was 7 cents per litre for petrol and 8 cents per litre for diesel on 5 June 2019. This brings the total taxes and levies charged on fuel to an all-time high and is detailed below:
  Petrol  Diesel
General Fuel Levy 3.54 3.39
RAF Levy 1.98 1.98
Customs and Excise 0.04 0.04
Carbon Tax 0.07 0.08
Total 5.63 5.49
Unfortunately, however, the Act does not stop there and entails not only a Carbon Tax liability for petrol and/or diesel consumption, but rather on all fuel combustion activities, industrial process emissions and fugitive emissions.
The scope of the Act is therefore extremely wide, and it is of high importance that all our readers, as a minimum, consider the impact of the Act to ensure tax compliance.
Although the Carbon Tax Act has the word “Carbon” in it – which most readers will associate with “Carbon Dioxide” - the Act in fact includes multiple other GHG emissions such as methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons and sulphur hexafluoride. The Act provides for conversion factors which translate the different GHG emissions into a “Carbon Dioxide equivalent”, which is then taxed accordingly.
Submission Dates
Carbon Tax will be payable to SARS, with the first year of submission ending on 31 December 2019, representing a 9-month period. For all future periods, a 12-month period ending December will be the tax period in relation to Carbon Tax.
Determining Risk
In order to determine if a person is at risk for Carbon Tax, it must be concluded whether that person’s operations (or “activity”) is listed in Schedule 2 of the Act. The “activities” listed are extensive and therefore cannot be cited in this article.
If the person’s activities are listed, the next step would be to determine the volume and type of fuels used. A person who is liable for Carbon Tax will be referred to hereinafter as a “taxpayer”.
The following industries are listed in Schedule 2, under which more specified activities are then listed:
  • Energy
  • Manufacturing
  • Construction
  • Transport
  • Property
  • Agriculture
  • Non-specified (Stationery, Mobile, Multilateral Operations)
From the above, it is quite clear that the aim of the Act is to include the largest emitters of GHG, which is in line with the “polluter-pays” principle (on which the Act is based).
The fuel combustion sources are all-encompassing and it is suggested, as a general rule, that if a taxpayer utilises any type of fuel to generate power, heat, steam or any other energy requirements, above the threshold (discussed below), that an in-depth investigation be launched in order to determine the possible Carbon Tax risk exposure.
Our qualified consultants at Moore Stephens can assist you with your Carbon Tax assessment.
Phase 1
Phase 1 of the Act is effective from 1 June 2019 and sets a threshold for the minimum amount of energy that must be produced before registration for Carbon Tax is required.
The explanatory memorandum released by National Treasury states that entities with a total installed capacity for an activity that is equal to or exceed the indicated threshold (a total installed thermal capacity of around 10MW) shall report their emissions and be subject to Carbon Tax during this first phase. This allows for smaller GHG emitters to currently continue emitting GHG without retribution for their GHG emissions.
Carbon Tax will be levied at a rate of R120/ton of C02 equivalent emitted by the taxpayer.
There is, however, good news in that the Act contains numerous allowances which in turn decreases the effective Carbon Tax rate in phase 1, as briefly listed below:
  • Allowance for fossil fuel combustion
  • Allowance for industrial process emissions
  • Allowance in respect of fugitive emissions
  • Trade exposure allowance
  • Performance allowance
  • Carbon budget allowance
  • Offset allowance
The allowances above are based on a percentage of discount/rebate of the tax rate.
These allowances are, however, limited to a maximum of 95% discount on the rate of tax (currently R120 per ton of C02 equivalent). The effective rate of Carbon Tax is therefore expected to range between R6 and R48 per ton of Carbon Dioxide equivalent of the GHG emissions during Phase 1.
These allowances can be amended in phase 2 and phase 3 in order to slowly increase the Carbon Tax liability for taxpayers.
Double Taxation
It is important to note that the possibility of double taxation has been addressed in that compensation for Carbon Tax paid with the purchase of petrol and/or diesel has been made when calculating the Carbon Tax liability, if the taxpayer uses petrol or diesel in its activities. This is because the retail price of petrol and/or diesel will already include a Carbon Tax levy in the retail price.
Furthermore, the Carbon Tax liability calculated is decreased with the renewable energy premium paid as well as the environmental levy paid by the taxpayer.
The rate of tax (currently R120 per ton of CO2 equivalent) will increase by the Consumer Price Index (CPI) plus 2% per annum per year until 31 December 2022, after which the increase will be equal to the average CPI for the preceding year.
This provides much needed surety to taxpayers when compiling budgets and forecasts as certainty is gained as reliable Carbon Tax expenditure can be budgeted for.
The Carbon Tax Act will play a crucial role in achieving the objectives set out in the National Climate Change Response Policy of 2011 (NCCRP).
Practical Application
The practical application of the Carbon Tax Act is yet to be clarified by SARS, such as whether or not separate tax returns would be required for submission purposes, although this seems to be the only possible solution as otherwise the date per the Act for submission won’t be adhered to, as taxpayers have different year- ends for their annual tax return submission.
The inevitable taxes on GHG emissions, combined with various tax incentives for renewable energy and/or energy saving projects (which will be discussed in a future issue) as well as secured, stable power generation for manufacturing entities make a compelling argument for taxpayers to consider the cost-benefit of implementing renewable energy projects.
Should you feel that your business is included within the scope of the Carbon Tax Act and therefore may be susceptible to Carbon Tax, please do not hesitate to contact your local Moore Stephens Office which will assist you to navigate the unknown waters that is South Africa’s first Carbon Tax.