How will the carbon tax bill affect your business?
The draft carbon tax bill which was released in December 2017 for comment and outlines the carbon tax design has caught the attention of the business community which has to date been dragging it’s feet with respect to transitioning to a low carbon economy.
To date the tax has been delayed a number of times. While many believe delays will continue, the treasury has indicated that it will stand firm on implementing the tax in 2019 as stated in the bill.
Recognising the importance of reducing carbon emissions and foreseeing the benefits that a low carbon economy can bring, the South African government has committed to ambitious greenhouse gas emissions reductions of 34% by 2020 and 42% by 2025 against a business as usual curve. Policies, frameworks and financial instruments need to support these commitments for any hope of achieving such reductions. The purpose of a carbon tax, seen too often as a way to increase the tax base, is intended more to send the necessary price signals to change consumer behaviours and stimulate investor appetite to shift towards low carbon options. With a commitment to implement revenue recycling measures the effects on economic growth in the broader economy should be minimal.
In summary, the key points of the design features of the carbon tax include:
- The tax will be phased in over a period of time to allow for smooth transition in adopting cleaner and more efficient technologies and behaviours. The first phase will run from implementation up to 2022.
- The initial marginal carbon tax rate will be R120 per tonne of CO2e (carbon dioxide equivalent). Taking into account the thresholds mentioned below, the effective tax rate is much lower and ranges between R6 and R48 per tonne.
- To allow businesses to adapt and transition to low carbon alternatives in the first phase a basic percentage based threshold of 60% will apply below which tax is not payable. The following additional tax-free allowances apply:
- An additional 10% for process emissions;
- An additional allowance for trade exposed sectors, to a maximum of 10%;
- An additional allowance of up to 5% based on performance against emissions intensity benchmarks. These benchmarks will be developed in due course.
- A carbon offsets allowance of 5 to 10% per cent, depending on sector;
- And finally, an additional 5% tax-free allowance for companies participating in phase 1 of the carbon budgeting system.
- The combined effect of all of the above tax-free thresholds will be capped at 95%.
- Due to the complexity of emissions measurement in the waste and land use sectors, 100% thresholds have been set i.e. these sectors are excluded from the tax base for phase 1.
- The tax base comprises emissions from fossil fuel combustion, emissions from industrial process and product use and fugitive emissions.
- The greenhouse gases covered include carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons and sulphur hexafluoride.
- Carbon tax on liquid fuels (petrol and diesel) will be imposed at source, as an addition to the current fuel taxes.
- For taxation on stationary emissions, reporting thresholds will be determined by source category as stipulated in the National Environmental Air Quality Act. Only entities with a thermal capacity of around 10MW will be subject to the tax in the first phase. This threshold is in line with the proposed DEA GHG emissions reporting regulation requirements and the Department of Energy (DoE) energy management plan reporting.
- The carbon tax will be administered by the South African Revenue Service.
The Bill together with supporting documentation also maps out the technical workings of the tax. If not au fait with emissions and emissions calculation methodologies, the services of a carbon consultant will help you navigate this process.
It is important for all organisations to assess the likelihood and extent of risk exposure to the tax, understand where you may be exposed to tax, to what extent you will be exposed and start planning to transition away from a reliance on carbon. Outside of direct taxation businesses should also anticipate potential price increases on taxable activities such as transport. A full review of a business’ supply chain will also provide information on a supplier’s exposure which may trigger price hikes.
Businesses who use this window now to review their risk exposures and start the necessary process of evolving their business practices will be better equipped in the long run.
For more information on the proposed carbon taxation and it’s relevance to your organisation and our carbon tax consulting services please call us on +27 21 403 6411.