Industry fears that South Africa’s Carbon Tax Act lacks teeth

Opinion piece:

By Eckart Zollner, Head of Business Development at EDS

South Africa is already experiencing the adverse effects of climate change and faces multiple challenges in relation to this phenomenon over the next decade. Since 1990, South Africa’s average temperature has increased at a rate of more than double that of global increases, already resulting in more frequent droughts and extreme weather events.


Alarmingly, the country has seen a seven-fold increase in its fossil-fuel CO2 emission levels since 1950, with 80-90% of these emissions resulting from the burning of fossil fuels. When expressed as gross emissions per individual, each South African was responsible for emitting 9.8 tonnes of carbon dioxide equivalent in 2015. Our reliance on coal contributes an average of 91.8% of total carbon dioxide emissions between 2000 and 2015, with other significant emitters being transport, livestock and manufacturing waste.


Greenhouse gases (water vapour, carbon dioxide, methane, nitrous oxide and ozone) can absorb and emit radiation at a certain level, causing the “greenhouse effect” which leads to the warming of the Earth’s surface. This has a major adverse impact on the environment, causing climate change, resulting in weather extremities like storms, flooding and droughts, all of which impact farming productivity and food security.


Take responsibility

As the world’s 13th largest emitting country for fossil-fuel emissions and a domestic economy powered by coal, South Africa’s private sector needs to step up and take responsibility for its contribution.


This involves complying with the Carbon Tax Act, gradually reducing emission-producing activities and phasing in cleaner technology. With 15 coal-powered power plants across the country, it’s likely to be an extensive process to reduce dependence on coal which only emphasises the need for private sector organisations to take charge in powering South Africa’s greener future.


Effective as of 1 June 2019, the Carbon Tax Act, together with the Customs and Excise Amendment Act, are intended to reduce Greenhouse Gas (GHG) emissions in a manner that is sustainable yet compelling. In a further attempt to encourage businesses to reduce their carbon emissions, an initial levy of R120 per ton of carbon dioxide equivalent (CO2e) will be charged over the threshold of tax-free allowances.


The Act gives effect to the polluter-pays-principle for large emitters and forces businesses to take these costs into account for future production, consumption, and investment decisions, encouraging them to adopt cleaner technologies and production methods in the next decade.


Three phases

Framed to roll out in three phases, the Carbon Tax Act will only be applicable to scope 1 emitters in the first phase. The first phase will run from 1 June 2019 to 31 December 2022, and the second phase from 2023 to 2030. In relation to a business’ operations, sources of GHG are classified according to the level of phases over making less emission intensive operational choices.


In the first phase, direct emissions from the stationary combustion of fossil fuels (such as diesel generators) are taxable, while the second phase will address scope 2 emissions, which is gases that escape through venting or from landfills, and the third phase will address indirect emissions.


However, the outbreak of the global COVID-19 pandemic last year and subsequent lockdown saw the first filing of carbon tax returns for the 2019 reporting period deferred by three months, to 31 October 2020, as part of the COVID-19 relief mechanisms for taxpayers. Currently, the country’s heavy greenhouse gas emitters are scrambling to register for carbon offset projects as the deadline looms for the payment of carbon tax in June this year.


The pandemic did not permit carbon tax to be a primary focus for businesses throughout last year, and it is expected that this year’s filing of carbon tax returns will likely feel like a hurdle to most businesses, as the economic climate remains tough and cash flows are constrained.


Lacks teeth

This has raised concerns within the industry that the Carbon Tax Act – much like the Protection of Personal Information (PoPI) Act – lacks teeth to achieve its purported objectives. The PoPI Act has faced questions about its ability to fully protect individuals’ data privacy due to the evolving nature of technology, the continuous quantity of data created, advanced cyber fraud and the non-adherence by responsible parties to ethical use of personal information. The Act has faced criticism that, on its own, it lacks the legislative impact required to regulate technology companies in a time of unprecedented data collection and processing.


Similarly, it is questionable whether the Carbon Tax Act will be effective adhered to by industry, especially given that the entry threshold for liability is currently set so high that it essentially targets extremely large polluters and for the moment excludes “medium-sized” polluters. Furthermore, it has been argued that developing projects that comply with carbon credit regulations is a complex, time-consuming process.


However, organisations regardless of size need to start gearing towards adherence, as non-compliance with carbon tax laws will have detrimental effects on the environment and organisations’ bottom line.


Opportunity for relief

The initial phase of the Act offers significant opportunity for relief in the form of tax-free emission allowances ranging from 60% to 95%, including a basic tax-free allowance of 60% for all activities plus a 10% process and fugitive emissions allowance. There is also a maximum 10% allowance for companies that use carbon offsets to reduce tax liability, as well as a performance allowance of up to 5% for companies that reduce the emissions intensity of activities.


Furthermore, a 5% carbon budget allowance is provided for reporting compliance and a maximum 10% allowance for trade exposed sectors. The legislature takes into consideration the need to balance aggressive measures to address climate change. This is coupled with the need to soften the financial impact on sectors such as manufacturing and heavy industry.


To take advantage of these discounts and allowances, and adequately calculate tax liability, businesses in the manufacturing sector will need to assess their emissions and get a clear picture of their carbon footprint.


Fortunately, this is not something organisations need to figure out on their own, as there are numerous carbon tax analysis tools available on the market. If businesses haven’t already done so, it is advisable to look for homegrown solutions that are designed specifically for local conditions to make tax compliance easy. Process or emissions data simply needs to be fed into the carbon analytics tool to generate an automated report that details emissions by source. The tool can also calculate an exact tax liability amount and provide a solid foundation for carbon reduction in manufacturing in a way that minimises the impact on the bottom line.


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