Carbon Tax Law
Updated: Aug 10
The Carbon Tax Act 15 of 2019 (“the Act”) finally became law on 1 June 2019. The Act imposes tax on greenhouse gas (“GHG”) emissions. GHG emissions are calculated as “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 [GHG]”. Accordingly, carbon tax is defined to mean a tax on the carbon dioxide equivalent.
A taxpayer is required to pay carbon tax for each tax period. The first tax period ran from 1 June 2019 until 31 December 2019. The next tax period commenced on 1 January 2020 and runs until 31 December 2020.
The implementation of carbon tax takes the form of an incremental or phased approach. During the first phase which runs from 1 June 2019 until 31 December 2022 only scope 1 emitters (defined below) will be required to pay carbon tax. The rate of tax has been set at R120 per tonne of carbon dioxide equivalent. The second phase will commence in 2023 and will run until 2030. The rate of tax for this second phase has not yet been determined.
“Scope 1 emissions” are direct emissions from an owned or controlled source such as those produced by an emitter burning fossil fuels. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.
All premises where emissions are subject to carbon tax must apply for and obtain a manufacturing licence in terms of section 54E of the Customs and Excise Act, 1964. On 23 December 2019, the rules published in Government Notice R.1874 of 8 December 1995 were amended by GNR 1700 (“the Amended Rules”).
In terms of the Amended Rules, the period for licence applications commences on 2 January 2020 and the period for the submission of documents and payment. In other words, a consolidated annual account and annexures that relate to the calculation of the environmental levy in respect of the licensed warehouse; a consolidated payment for the total environmental levy liability; and any supporting documents the Commissioner of the South African Revenue Service (“the Commissioner”) may request.
The Amended Rules prescribe that a taxpayer must obtain a consolidated licence for the combination of each of its emissions facilities at its customs and excise manufacturing warehouse for the generation of emissions liable to carbon tax.
Furthermore, the taxpayer must designate the premises of its operational control in South Africa as the premises for such a consolidated licence. This requirement is not applicable to taxpayers where the activity is listed in Schedule 2 of the Act and the taxpayer either has a basic tax-free allowance of 100% or the tax threshold is indicated as ‘not applicable’. In other words where no carbon tax would be due.
Section 16 of the Act provides that the Commissioner must administer the provisions of the Act as if the carbon tax were an environmental levy as contemplated in section 54A of the Customs and Excise Act. Put differently, carbon tax is paid as an environmental levy would be. Accordingly, the Commissioner is responsible for the administration of the Act as carbon tax is an environmental levy in terms of the Customs and Excise Act.
The Amended Rules deal with the calculation of the environmental levy payable in terms of section 4 of the Act. The calculation in terms of each licensed manufacturing warehouse is as follows:
The GHG liable to environmental levy consists of the carbon dioxide equivalent of fuel combustion, industrial process and fugitive emissions that must be determined in accordance with –
an emissions determination methodology approved by the Department of Environment, Forestry and Fisheries as contemplated in section 4(1) of the Act ; or an emissions determination methodology contemplated in section 4(2) of the Act that employs – – readily available statistical data on the intensity of processes (activity data) and emission factors as specified in the ‘IPCC Guidelines for National Greenhouse Gas Inventories’ (2006); or – the statistical data and emission factors as specified in item (aa) including country-specific emission factors.
The allowances that reduce the emissions contemplated must be determined where relevant
The rate of the environmental levy must be determined in accordance with Section F of Part 3 of Schedule No. 1 and section 5 of the Act. [Section 5 sets the current rate of tax at R120 per tonne of carbon dioxide equivalent for the first phase.]
The amount of environmental levy payable must be determined in accordance with Section F of Part 3 of Schedule No. 1 and section 6 of the Act. [Section 6 sets out a detailed formula for calculating carbon tax.]
The issue is that Section F has not yet been enacted into law. It appears that the Amended Rules are based on the assumption that the amendments to the Customs and Excise Act have come into operation. This creates the potential for a legal challenge of this section.
The Act provides for tax free emissions as well as reductions. To place this in context, the example of mining and quarrying which is activity 1A2i in Schedule 2 to the Ac could be scrutinised. The threshold to trigger carbon tax for the activities mining and quarrying is 10MW(th). This means that the activity has the capacity equal to or above 10MW(th) net heat input. If the capacity is lower, then no carbon tax is triggered. Note that in respect of coal mining and handling specifically, there is no threshold and, therefore, all such operations will attract carbon tax.
If you look at Schedule 2 under the column for mining and quarrying, you will note the following:
Basic tax-free allowance for fossil fuel combustion emissions
This is set at 60%. Accordingly, before you even begin to look at reductions you will start by having to pay carbon tax on a maximum of 40% emissions.
Trade exposure allowance is set at a maximum of 10% This is designed to mitigate impacts on industry competitiveness. Regulations are expected to guide this process but have not yet been published.
Performance allowance up to 5% This is where the taxpayer outperforms its peers and is based on the GHG intensity benchmark associated with over performance within a specific sector.
Carbon budget allowance up to 5% This is awarded where there is compliance with information reporting requirements for the carbon budgeting process.
Offsets allowance to a maximum of 10% Here a company invests in a GHG reduction project, it may reduce its own tax to a maximum of 10%. Regulations are expected to guide this process, but these are yet to be published.
Accordingly, a mine or quarry could end up paying tax on only 10% of its emissions.
On 29 November 2019, regulations on carbon offsets were published (“the Offset Regulations”).
Offsets provide flexibility to a taxpayer to reduce its carbon tax liability, without necessarily reducing its own GHG emissions but instead by investing in a locally based emissions reduction sector or project which itself is not directly covered by the tax. Put differently, the system of offsets is expected to allow greater flexibility to reduce emissions on the margin by investments outside a specific sector. Some examples include investment in renewable energy projects, landfill gas recovery projects and social impact projects.
Carbon offsets are recognised in the Kyoto Protocol (“the Protocol”), an international treaty which extends the 1992 United Nations Framework Convention on Climate Change (“UNFCC”) and a strong driver behind our carbon tax legislation. There are certain requirements under the Protocol which must be met before the project qualifies as a clean development mechanism, which project may then attract investment in, or purchase of, a carbon offset. The Protocol prescribes a validation process to ensure clean development projects produce valid additional benefits.
In 2014, a report funded by the British High Commission of Pretoria was published in respect of carbon trade in South Africa. The report identified that there is a market for carbon trade in South Africa. Critics argue however, that there will be more demand for offsets than the market can supply.
The Offset Regulations enable offsets for the following types of projects:
1. Clean Development Mechanism (“CDM”) project; 2. Verified Carbon Standard (“VCS”) project; 3. Gold Standard project; or 4. A project that complies with another standard approved by the Minister responsible for Energy or delegated authority.
Let us consider each separately.
CDM is defined in the Regulations to mean the Clean Development Mechanism as defined in the Protocol. A CDM Project is defined to mean a project that has been registered in terms of the Protocol and which has also received a letter of approval in terms of regulation 7(3) of the Regulations for the Establishment of a designated National Authority for the Clean Development Mechanism published in 2005 under NEMA.
A VCS Project is defined to mean a greenhouse gas reduction program voluntarily entered into that is registered on the VCS project database in respect of which a verified carbon unit is issued. VCS project database is defined as the central VCS project database to which the VCS registry system is able to connect; and VCS registry system is defined to mean the platform where offsets are assigned unique serial numbers for the purposes of tracking the VCS project in respect of that offset. An extended letter of approval that contains confirmation that a confirmation the project meets the registration requirements for the applicable standard is required. The VSC project database can be found here.
Gold Standard Project
Gold Standard is defined as the Gold Standard and Certification Body, a non-profit organisation established in 2003 and Gold Standard project is defined as a project that complies with the requirements set out in “Revised Annex C: Guidance on Project Type Eligibility” issued by the Gold Standard. As with a VCS Project, an extended letter of approval that contains confirmation that a confirmation the project meets the registration requirements for the applicable standard is required.
A list of the projects have been certified, as well as those that have applied can be found here.
Certain operations are excluded from offsets. These include, for example, a renewable energy project with installed capacity exceeding 15MW with a cost equal to or less than R1.09 per Kilowatt hour; nuclear energy and energy in respect to a power purchase agreement in respect of the IPP bid programme that was signed on or before 9 May 2013 with a contracted capacity exceeding 15 MegaWatt, with a cost equal to or lower than R1.09 per kilowatt hour.
Application for an offset
The procedure through which to claim the offset allowance is detailed in the Offset Regulations. A person is required to register with the administrator in the time, form and manner prescribed by the administrator; to submit any documents required by the administrator to enable the issuance of an extended letter of approval. If the administrator is satisfied with the application, he or she must, among others, list the offset in the offset registry and issue a certificate.
It’s clear from the above that the Act and Regulations are by no means simple. What further complicates things is that all regulations required to guide the implementation of the Act have not yet been published, nor have all the relevant amendments to the Customs and Excise legislation become operational.
In addition, this legislation must be read with certain regulations published by the Department of Environment, Forestry and Fisheries under the National Environmental Management: Air Quality Act; namely the Greenhouse Gas Emission Reporting Regulations and the National Pollution Prevention Plan Regulations. So, the web is complex.
The Act itself represents a step in the right direction in respect of South Africa’s international obligations to limit the harmful effects of climate change. Those in favour suggest that this approach will ease the financial implications placed on industry. However, critics argue that the incremental way in which the Act is being phased in, coupled with all the allowances, essentially waters down the Act and renders it ineffective in assisting South Africa to meet its Nationally Determined Contributions (which have themselves been described as inadequate) and reduce GHG emissions.