Carbon tax: What you need to know

South Africa’s largest emitters of greenhouse gas are entering the second round of their carbon tax returns in July this year. Teething problems during the first round have to a large extent been smoothed out.

However, not all companies embraced the concept of the carbon tax; from an estimated R3 billion, the South African Revenue Service (Sars) collected around R2.5 billion.

The tax has been in the making for many years and companies whose activities rely on 10 megawatts (MW)  and more of electricity, heat production and petroleum refining started paying the carbon tax last year.

Andrew Gilder, director at Climate Legal, says entities that are engaged in the listed activities had to register with Sars and license their emitting facility as a customs and excise warehouse.

The tax become effective on June 1, 2019 and companies submitted their carbon tax returns for the six months to December 31 in October last year after some reprieve was given due to the impact of the Covid-19 pandemic. The second tax return period extends from January 1 until December 31, 2020, and returns are due from the end of July.

Eckart Zollner, head of business development at Economic Development Solutions, says the tax is a big cost for large emitters.

“It can be anywhere between 5% and 10% of their gross profit if they are not mitigating their exposure.”

Companies faced some challenges when it came to the process of reporting to the Department of Environment, Forestry and Fisheries (DEFF) and converting the emissions into the tax liability.

“I think there is now a greater understanding [of] how to use the data for the tax calculation,” says Zollner. “The initial hurdles have been overcome and the forthcoming reporting period should be a whole lot smoother.”

The formula

Gilder agrees that the calculation of the tax liability is complicated, but not overly complicated to leave a professional tax practitioner flummoxed by it. “There is a formula and the Carbon Tax Act unpacks each of the symbols or values in the formula.”

It is important that the tax and air quality department responsible for collecting the emissions data for the DEFF engage with each other.

“The tax was deliberately introduced at a low level so that taxpayers could become familiar with the administrative processes before it is significantly ramped up,” says Gilder, who is member of the South African Institute of Taxation’s carbon tax work group.

The tax was introduced at a rate of R120 per ton of CO₂ emissions. During phase one – which extends to the end of 2022 – it is set to increase by CPI plus 2%. It is currently at R134/t CO₂.

During phase two, which starts in January 2023 and runs until 2030, the rate will increase by inflation annually.

Zollner says South Africa’s national determined contribution in terms of the Paris Agreement for the second phase is currently under discussion.

An initial draft was published in March, and all inputs are being compiled and must be approved by cabinet by August. It will be presented to the Intergovernmental Panel on Climate Change in November.

Review and adjustments

A review on the impact of the carbon tax will be conducted by 2022. “Adjustments to the tax design beyond this first phase will depend on the economic circumstances at that time and how effective the tax will have been in mitigating emissions,” Sars said in a discussion paper recently.

Gilder says the review will enhance, improve and make the tax more efficient in order to ensure that it achieves its objective, namely to change behaviour in terms of carbon emissions.

In other words, the tax teeth will become sharper.

As the tax will increase in intensity, so too will the need for mitigating measures. According to Gilder it is currently possible to reduce a heavy emitter’s carbon tax exposure by between 80% and 90%.

Mitigation measures

In terms of the current allowances the first 60% of reported emissions is tax-free.

Furthermore, companies are allowed a maximum of 10% for trade exposure, up to 5% for a performance allowance, and 5% for complying with carbon budgets as well as another 5% or 10% for carbon offset projects.

Zollner expects these allowances to be lowered.

He also expects that the current 10MW threshold will be lowered to pull more companies into the tax net. He foresees additional thresholds that could be based on other criteria that are not focused on the use of energy.

It is still unclear what the overall economic impact of the carbon tax will be on the economy.

Eskom is the largest polluter by far because of its coal-fired power stations and has been excluded from the first phase. It is likely to be included in phase two. What is not clear is how legislation will be framed regarding what Eskom will and won’t be allowed to do.

“If they are allowed to simply pass the additional cost on to the end consumer it will have a major negative effect on the economy,” says Zollner. “The intention is not to let that happen, but to incentivise them to move to renewable energy and other offset programmes sooner rather than later.”

Gilder adds that the announcement of the 100MW self-generation for companies is certainly a “game-changer”.

Read: Companies can produce up to 100MW of power – Ramaphosa

If companies are able to generate electricity by using renewable energy, it will reduce their tax liability by the extent to which they are able to generate renewable electricity.

“The company owns the infrastructure, can amortise it over 20 years, and is not beholden to Eskom for the next 20 years.”

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