South Africa’s draft carbon tax bill ‘will 'boost low carbon energy sector investments’

Out-Law News | 11 Nov 2015 | 12:29 pm | 2 min. read

South Africa’s government has published a draft carbon dioxide tax bill which it said will “encourage investments in and the uptake of more energy efficient and low carbon technologies” and support the reduction of greenhouse gas emissions.

The National Treasury said the draft bill (4-page / 192 KB PDF), published on 2 November, will also help the country’s growing renewable energy sector “compete on a more level playing field in comparison to fossil fuels”.

Proposed measures include an initial “marginal carbon tax rate" of 120 rand (ZAR) ($8.7) per tonne CO2-emission (CO2-e). A “basic 60% tax-free threshold” is also proposed during the year of implementation up to 2020, together with an additional 10% tax-free allowance for industrial process emissions and a further tax-free allowance for trade-exposed industries of up to 10%.

The National Treasury said taking into account all of the proposed tax-free thresholds, “the effective carbon tax rate will vary between ZAR 6 and ZAR 48 ($0.43 and $3.50) per tonne CO2-e".

According to a ‘draft explanatory memorandum’ (30-page / 480 KB PDF) released with the draft bill, the proposed “significantly high tax-free allowances and phased-in approach will ensure that South Africa’s competitiveness is not compromised”.

The memorandum said: “The carbon tax will be revenue-neutral during the first five years and all revenue will be recycled by way of reducing the current electricity levy, credit rebate for the renewable energy premium, a tax incentive for energy efficiency savings, increased allocations for free basic electricity / alternative energy and funding for public transport and initiatives to move some freight from road to rail.”

The proposed ZAR 120 carbon tax rate has remained unchanged from measures outlined in a ‘Carbon Offsets Paper’ (50-page / 1.44 MB PDF) released for public comment by the government in April 2014. The National Treasury said the new draft bill “marks the next step in the consultation process”, which began in 2010.

However, the final tax rate, exemptions, and the actual date of implementation of measures outlined in the latest draft bill are still subject to confirmation by the finance ministry “through the annual budget process”, the National Treasury said.

Up to 95% of South Africa’s electricity is currently generated by coal-fired power stations and the country is among the world’s top 25 producers of greenhouse gases, according to government figures. However, the country is committed to investing in new generation facilities, rationalising consumption and diversifying its energy mix.

The results of an independent study showed that renewable energy from South Africa’s first wind and solar plants generated more than ZAR 4 billion ($288 million) for the country during the first six months of 2015 than they cost.

Earlier this year the company behind a UK-backed pilot carbon offsets trading scheme for South Africa, Prometheum Carbon, said the scheme had been successfully demonstrated for “market readiness” in the country (17-page / 609 KB PDF).

The demonstration programme was the culmination of a three-year research project conducted in cooperation with the Johannesburg Stock Exchange (JSE), the JSE’s commodities registry Silocerts and the registry’s technology provider Done Technologies. The demonstration consisted of performing actual trades of carbon credits on an over-the-counter basis from a wide variety of international standards such as the clean development mechanism (CDM), which can include projects such as hydropower, wind energy and industrial efficiency improvements.

According to the study, a knock-on effect of the carbon trading scheme is expected to be the development of a “local auditing industry”, with accredited auditors in turn helping firms reduce carbon project registration costs.

The study said the offset mechanism under the carbon tax could contribute almost 10% of the total 34% cut in emissions which South Africa has pledged to make by 2020.