The companies responsible for the bulk of SA’s greenhouse gas emissions have, in effect, been given another three-year grace period to reduce their consumption of carbon-intensive energy resources and to bring in new technologies that can help reduce their overall emissions.
SA introduced the first phase of the carbon tax in June 2019 as part of government’s broader climate change mitigation policy. This first phase, which makes provisions for companies to receive 60% — 95% tax allowances such as rebates or exemptions, was scheduled to end this year, but Treasury has now announced that it will be extended by three more years up to the end of 2025.
Treasury said in the 2022 Budget Review that by extending the first phase of the carbon tax to 2025 the transitional support measures afforded to companies in the first phase to reduce the carbon tax burden, such as significant tax-free allowances and revenue-recycling measures, would also continue over this period.
“The first phase of the carbon tax, with substantial allowances and electricity price neutrality, will be extended to December 2025,” minister of finance Enoch Godongwana said in the budget speech.
The carbon tax is only levied on companies and state-owned enterprises emitting more than a certain level of emissions and Treasury’s decision to extend the first phase of this tax is good news for the biggest emitters, such as Eskom, Sasol and smelters such as ArcelorMittal, that will now have more time to transition their operations to cleaner technologies. But it does place a question mark over the feasibility of meeting SA’s ambitious new climate commitments that were made by government at COP26 in Glasgow last year.
Carbon taxes have an important role to play in helping SA achieve its climate goals since it penalises businesses that fail to reduce their emissions and incentivises investment in low-carbon technologies.
SA, which is the largest greenhouse-gas (GHG) emitter in Africa and the 12th largest globally, committed to having GHG emissions peak in 2025 at 510-million tonnes, and at COP26 the country committed to reduce domestic carbon emissions to within a target range of between 350-million tonnes and 420-million tonnes by 2030.
To better enable the country to meet emissions targets, Treasury was widely expected to remove a lot of the flexibility allowed under phase one of the carbon tax from 2023.
Instead, it has opted for a gradual increase in the carbon tax rate up to 2025, and to then ramp up the rate during the second phase of the carbon tax, which will now start in 2026.
Proposed measures that may increase the carbon tax liability for companies over the next three years include stricter criteria for the trade exposure allowance, a higher tax rate proposed for emissions above the carbon budgets, and the carbon budget allowance also falling away, reducing the allowances by 5% from January 1 2023.
According to Godongwana, in line with SA’s commitments at COP26, the carbon tax rate would be progressively increased every year to reach $20 per tonne (R300) by 2026. In the second phase from 2026 onwards, the carbon tax rate will have larger annual increases to reach at least $30 by 2030, accelerating to higher levels of about $120 beyond 2050, and the allowances will rapidly fall away.
The World Bank recommends carbon prices of $50 to $100 by 2030 while the International Monetary Fund recommends lower carbon prices for developing countries of between $25 to $50 by 2030.
The World Wide Fund for Nature SA previously said in a report that a “meaningful” initial carbon tax rate for SA would be between R162 and R433 per tonne.
“The basic tax-free allowances will also gradually be reduced to strengthen the price signals under the carbon tax from 2026 to 2030. To encourage investment in carbon offset projects, government intends to increase the carbon offset allowance by 5% from 1 January 2026,” according to Treasury.
Under SA’s current carbon tax regime, for businesses liable to pay this tax 5% — 10% of emissions can be rebated using carbon offsets through the purchasing of carbon credits.
“We urge all our companies that have not already done so to develop plans to progressively reduce their emissions over the next 10 years, otherwise they will face these steep taxes. Our exporters will also face overseas border taxes for carbon-intensive goods such as iron and steel, which will reduce their competitiveness,” Godongwana said.
For 2022 the carbon tax rate will increase by R10 to R144/t.
The carbon tax on fuel (carbon fuel levy) which was also introduced in 2019 will increase by 1c for 2022 to 9c/l for petrol and 10c/l for diesel, from 6 April 2022.
Update: February 23 2022
This article was updated on 23 February with additional information.
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