UK funds carbon credits pilot trading scheme in South Africa

Out-Law News | 17 Jul 2014 | 2:51 pm | 2 min. read

The UK is funding the second phase of a pilot carbon offset trading programme in South Africa in readiness for new carbon tax legislation that will come into force in 2016.

The British High Commission in Pretoria has confirmed it is supporting the programme to help companies prepare for the introduction of the 120-rand (ZAR) ($11.21) per tonne carbon dioxide (CO2) tax.

A pilot trade of carbon credits on the Johannesburg Stock Exchange will be included in the programme to show how businesses can “optimise the use of relief measures for carbon tax”, according to carbon and climate change advisory firm Promethium Carbon, which is conducting the programme.

Robbie Louw, a director of South African energy consultancy Promethium, said: “The testing of the trading platform will demonstrate how business can optimise the use of relief measures for carbon tax.”

According to Promethium, “a number of mitigation projects are currently stranded or parked due to a low carbon price and non-existing market”. The new UK funding will help to “fast track” development of a local carbon trading system, Promethium said.

The South African National Treasury set the ZAR 120 per tonne tax rate, to be payable on emissions above a ‘default’ tax-free threshold of 60%, in its carbon tax policy paper published in May 2013. Promethium said this meant tax would be payable on 40% of overall emissions, “making the default effective tax rate ZAR 48 per tonne”.

The National Treasury published a further paper on carbon offsets in April 2014 (50-page / 1.46 MB PDF). Promethium has issued a detailed response paper (37-page / 864 KB PDF).

Major emitters expected to be affected by the new legislation include South Africa’s national utility Eskom. However, the carbon tax will also affect all countries connected to the Southern Africa Power Pool through the impact of the proposed carbon tax on the electricity tariff. Promethium said: “This impact could be mitigated if countries linked to the grid can be allowed to participate.”

Promethium said a first phase study into potential carbon tax trading, also funded by the UK, included a “high-level analysis of the potential market supply and demand, which found that there is sufficient potential volume at a marginal cost of ZAR 120 per tonne CO2 to create a viable market”.

The study recommended using “credible international standards”, such as the clean development mechanism (CDM), “especially during the implementation phase of the carbon offset trading system”. However, the study said that, at a later stage, the development of a South African standard “might be beneficial, or other international standards might become available”.

The study said the introduction of credits into a South African system should be done under “a process that checks the appropriateness of the project to be traded into the South African system”. The study recommended a set of ‘national appropriateness tagging rules’ be used to “specify the eligibility criteria of projects that can be traded within the system”. Tagging rules should be overseen by a committee of representatives drawn from government and the private sector, the study said.

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.