Taxation of greenhouse gas emissions
Through the Carbon Tax Act, the South African National Treasury has elected to impose taxes on local activities which take place in South Africa, that release significant amounts of greenhouse gases.
Conversely, the Act will also reward entities that use energy efficiently and who have reduced the amounts of greenhouse gases which they emit through the incorporation of certain tax incentives.
The Carbon Tax Act, therefore, aims to encourage investments in energy-efficient, low carbon technologies, with a view to reducing greenhouse gas emissions and which via the taxation of one’s emissions is a vessel through which South Africa can contribute to the global effort to stabilise greenhouse gas concentrations in the atmosphere and drive sustainable economic growth.
The intention of the Act THEREFORE is not primarily to raise tax revenue, but rather to implement the objectives to reduce greenhouse gas (“GHG”) emissions as set out in the National Climate Change Response Policy of 2011, to comply with the 2015 Paris Agreement on climate change and to encourage industry to find alternatives to carbon-intensive business practices.
Act to be phased in
The Act will be phased in over several years:
- Phase 1 will be from the 1st June 2019 to the 31st December 2022;
- Phase 2 will be from 2023 to 2030.
Carbon tax is payable annually, 2019 being the first tax year which runs from 1st June 2019 until 31st December 2019. Thereafter each tax year will run from 1st January to 31st of December.
Carbon Tax for the 2019 tax period will need to be submitted to the South African Revenue Service (SARS) before the last working day of July 2020.
Polluter pays principles
The Carbon Tax Act embraces the principle of “the polluter pays” where the costs of environmental damage must be paid by those who are responsible for harming the environment. In other words, the amount of carbon tax that a company is required to pay is dependent on the number of greenhouse gases that are emitted. Greenhouse gases refer to compounds that have a long term, harmful effect on the environment. When greenhouse gases are released into the atmosphere in large quantities, they act as a blanket over the earth’s atmosphere and trap heat from the sun. This trapped heat causes the earth’s temperature to rise. This phenomenon is referred to as global warming.
Pollutants regulated by the Carbon Tax Act
Whilst there are many greenhouses gases, the Carbon Tax Act recognises six main greenhouse gases that are emitted from industrial activities.
- Carbon Dioxide (CO),
- Methane (CH4),
- Nitrous Oxide (N2O),
- Hydrofluorocarbons (HFC’s),
- Perfluorocarbons (PFC’s) and
- Sulphur hexafluoride (SF6).
Some of these gases cause more global warming than others.
Which pollutants are the most harmful?
Each greenhouse gas causes a varying degree of harm to the atmosphere when compared to CO2.
This degree of harm is referred to as the Global Warming Potential (GWP) of greenhouse gas.
Every greenhouse gas has its own GWP factor that was developed by the Intergovernmental Panel on Climate Change (IPCC).
For example, 1 kg of methane causes 28 times more global warming than 1kg of CO2, and 1kg of sulphur hexafluoride causes 23 500 times more global warming than 1kg of CO2.
Carbon Tax regulates six pollutants as per the table below which shows how detrimental each of these gases are:
- Greenhouse Gas. Global Warming Potential (GWP)
- Carbon Dioxide (CO2). 1
- Methane (CH4). 23
- Nitrous Oxide (N2O). 296
- Hexafluoroethane (C2F6). 11 900
- Carbon Tetrafluoride (CF4). 5 700
- Sulphur hexafluoride (SF6). 22 200
To calculate a factory’s total greenhouse gas emissions, the quantity of each greenhouse gas (kg/year) is multiplied by its GWP factor and these six numbers are summed. This total is called the “Carbon Dioxide Equivalent” or CO2e.
Cause of the pollutants and how they enter into the atmosphere
There are many ways in which greenhouse gases can enter the atmosphere as a result of industrial activities.
The Carbon Tax Act divides the sources of greenhouse gas emissions into three categories which are described below.
Category 1- Fuel combustion emissions
Most factories in South Africa burn fuel such as gas, coal, HFO or wood to create heat, which is used in the manufacturing of products. These fuels are burned in combustion appliances such as boilers, furnaces, kilns, and incinerators. Greenhouse gases are released during this combustion.
Category 2- Industrial process emissions
In addition to the emissions from combustion appliances, greenhouse gases are also released from the manufacturing processes themselves when raw materials are chemically or physically transformed into products. Common manufacturing processes include cement manufacturing, steel making and the petroleum industry.
Pollutants from both the combustion of fuel and from manufacturing are typically emitted into the atmosphere via chimney stacks.
Category 3- Fugitive emissions
Greenhouse gases can escape a process when they are not meant to do so, such as through leaks, evaporation, materials handling, expansion and contraction. These are referred to as fugitive emissions. Common sources of fugitive emissions include mines and the processing and transportation of liquid fuels.
Who does carbon tax apply to?
The Act will apply to entities who generate Green House Gas (GHG) emissions. GHG emissions related to stationary and non-stationary sources and include, inter alia, fuel combustion activities, manufacturing and construction, transport, industrial processes and product use, agriculture, forestry and waste (treatment and disposal).
For example, some of the current thresholds include 10 MW (thermal) for fuel combustion activities, 4 million bricks manufactured a month for brick manufacturing and 2 million litres of wastewater treated and discharged per day for domestic wastewater treatment and discharge facilities.
Every entity that conducts an activity that results in GHG emissions that are above the threshold listed in Schedule 2 of the Act will be liable to pay an amount of carbon tax.
Schedule 2 of the Carbon Tax Act specifies a threshold for each activity that releases greenhouse gases.
The threshold is determined by matching the activity listed in the column labelled “Activity/Sector” in Schedule 2 with the corresponding number in the column labelled “Threshold”.
If a company conducts an activity and exceeds the given threshold, the company will be liable to pay a carbon tax.
It is important to note that the thresholds listed in Schedule 2 of the Act align with the thresholds provided for in Annexure 1 of the National Greenhouse Gas Emission Reporting Regulations (“NGGER Regulations”) published by the Department of Environmental Affairs (“DEA”) in 2017.
Annexure 1 provides a “List of Activities for Which GHG Emissions Must Be Reported to the Competent Authority”.
In terms of the NGGER Regulations, a data provider is, inter alia, any person in control of or conducting an activity that is listed in Annexure 1 if the activity results in GHG emissions above the capacity given in the threshold column of the table.
Consequently, those entities classified as data providers and who are required to report on their GHG emissions in terms of the NGGER Regulations will be liable to pay a carbon tax.
Examples of activities that are eligible for carbon tax
- Iron & Steel
- Glass, Cement, Lime
- Waste Incineration
- Pulp, paper & print
- Textiles & Leather
- Wastewater Treatment
- Wood & Wood Products
- Non-ferrous Metals
- Brick Manufacturing
Carbon Tax charges
The amount of Carbon Tax is calculated by multiplying the carbon dioxide equivalent by the current rate of tax which is:
R120 per tonne of CO2e.
It is not necessary to actually measure the amount of greenhouse gas emissions that are released. The Carbon Tax Act specifies emissions factors for each industrial process that is regulated. The emissions factors were determined by the IPCC and are specified in schedule 2 of the Carbon Tax Act.
The tax rate is set to increase by the consumer price inflation (CPI) index plus 2 % each tax year until 31st December 2022.
Thereafter, the tax rate is set to increase by CPI each tax year.
The tax liability calculation and allowances
The carbon tax will be implemented in a phased manner. The first phase will be from 1 June 2019 to 31 December 2022. The initial rate of the carbon tax on GHG emissions is an amount of R120 per ton of carbon dioxide equivalent (“CO2e”) of the GHG emissions of a taxpayer.
The tax period is from 1 June 2019 and ending on 31 December 2019, and subsequently, each tax period will commence on 1 January of each year and ending on 31 December of that year.
From 1 June 2019 until 31 December 2022, the annual rate of tax must be increased by the amount of the consumer price inflation plus two per cent for the preceding tax period as determined by Statistics South Africa. After 31 December 2022, the rate of tax must be increased by the amount of the consumer price inflation for the preceding tax year as determined by Statistics South Africa.
[‘‘Carbon dioxide (CO2) equivalent’’ means the concentration of carbon dioxide that would cause the same amount of radiative forcing (the difference of sunlight absorbed by the Earth and energy radiated back to space) as a given mixture of carbon dioxide and other greenhouse gases”.]
To ensure a smooth transition to a low carbon economy and to provide organisations with enough time and flexibility to adapt to and/or improve their use of renewables and other low carbon measures, the design of the carbon tax provides significant tax-free emissions allowances ranging from 60 per cent to 95 per cent for the first phase.
- A basic tax-free allowance of 60 per cent for all activities;
- An additional tax-free allowance of 10 per cent for process emissions;
- An additional tax-free allowance of 10 per cent for fugitive emissions;
- A variable tax-free allowance for trade-exposed sectors (up to a maximum of 10 per cent);
- A maximum tax-free allowance of 5 per cent for above-average performance;
- A 5 per cent tax-free allowance for companies with a Carbon Budget; and
- A carbon offset allowance of either 5 or 10 per cent.
Schedule 2 provides a maximum total allowance of 100 per cent for certain taxpayers, however, all other taxpayers must only receive an allowance that does not exceed 95 per cent of the total GHG emissions of that taxpayer in respect of that tax period.
In summary, the carbon tax liability is calculated as the tax base [total quantity of GHG emissions from combustion, fugitive and industrial processes proportionately reduced by the tax-free allowances] multiplied by the rate of the carbon tax.
Companies will have to be licensed and register as manufacturing warehouses according to the Customs and Excise Act.
What are tax-free allowances?
Tax-free allowances are included in the Carbon Tax Act to assist South Africa to smoothly transition into a low carbon economy.
Tax-free allowances or incentives will reduce the amount of Carbon Tax that taxpayers are obliged to pay.
Tax-free allowances or incentives will be applied as either rebates or refunds after the allowances are verified for each taxpayer.
Taxpayers may be eligible for the following allowances:
Allowance Overview Percentage
- Fossil Fuel Combustion Emissions – For fuel combustion activities- 60%
- Industrial Process Emissions- For industrial process activities- 60/70%
- Fugitive Emissions- Activities releasing fugitive emissions- 10%
- Trade Exposure- Based on exports, imports and total production- 0-10%
- Performance- For above-average emissions performance- 0-5%
- Carbon Budget- Participation in phase 1 of the Carbon Budget System- 0-5%
- Offset- Provides additional flexibility to reduce GHG emissions- 0-10%
Multiple allowances can be granted to a taxpayer.
The total amount of tax-free allowances that are granted during Phase 1 (1st June 2019 – 31st December 2022) may not exceed 95 % and in some cases 90 %.
See the Regulations regarding the trade exposure, performance and offset allowances – 29 NOVEMBER 2019 No. 42873 1556. These regulations will indicate which industrial activities can qualify for these allowances and to what extent each allowance may be applied. For example, certain activity may qualify for a full 5 % for the performance allowance or for a mere 3 %.
When do I need to pay my carbon tax?
The first tax period is 1st June 2019 until 31st December 2019.
Thereafter in subsequent years, the tax period will span from 1st January until 31st December.
Carbon Tax will be administered by the South African Revenue Service (SARS), and taxpayers will be expected to submit Carbon Tax payments annually to SARS by the last business day of July in the year after the tax period.
Carbon Tax will be administered as an environmental levy in terms of the Customs and Excise Act, 1964 (No.91 of 1964).
Applicable sections of the Customs and Excise Act
Sec 54E – Manufacturing warehouse licensed in terms of this Act.
(1) No environmental levy goods may be manufactured in the Republic except in an excise manufacturing warehouse licensed in terms of this Act.
(2) The applicant for such a license must apply on the form prescribed by rule and must comply with all the provisions of this Act and any requirements the Commissioner may prescribe in each case.
(3) The application must be supported by the agreement and other documents as may be prescribed by rule.
(4) Before such warehouse is licensed the applicant for a license must—
(a)furnish such security as contemplated in section 60 (c) (i); and
(b)pay the licence fee prescribed in Schedule No. 8.
(5) The provisions of section 60 (2) shall apply mutatis mutandis in respect of any application for a licence or the suspension or cancellation of a licence.
Sec 54A. Imposition of environmental levy.
A levy known as the environmental levy shall be—
(a) leviable on such imported goods and goods manufactured in the Republic as may be specified in any item of Part 3 of Schedule No.1; and
(b) collected and paid in respect of carbon tax imposed in terms of the Carbon Tax Act, 2019.
Sec 54AA. Provisions relating to a carbon tax
For the purposes of the administration and collection of carbon tax revenues as contemplated in section 54A—
(a)(i)any reference to the Carbon Tax Act, 2019, in this Act must be regarded as including the Tables and Schedules to that Act and any regulation made in terms of that Act;
(ii)a word or expression in this Act to which a meaning has been assigned in the Carbon Tax Act, 2019, has the meaning so assigned unless the context indicates otherwise;
(b)the allowances and limitation of allowances prescribed in the Carbon Tax Act, 2019, must be administered as rebates, refunds or drawbacks, as may be applicable, in terms of this Act;
(c)a taxpayer as defined in the Carbon Tax Act, 2019, must in terms of section 54E license any premises on which emissions as defined in the Carbon Tax Act, 2019, occur, in a manner and subject to requirements as may be prescribed by rule; and
(d)any administrative actions, requirements and procedures for purposes of submission and verification of accounts, collection and payment of carbon tax as an environmental levy or the performance of any duty, power or obligation or the exercise of any right must, to the extent not prescribed in the Carbon Tax Act, 2019, be prescribed by the Commissioner by rule.