The carbon tax is just over two-and-a-half months old in South Africa, following a near decade of consultations on the impact of this policy. It gives effect to the polluter-pays principle and has been met with mixed reaction from both industries reliant on energy and climate campaigners.
South Africa, the largest polluter on the continent, is cautiously adopting the levy approach, while the global and domestic economic landscapes have vastly changed since the policy was first mooted in 2010. The urgency of combatting climate change has recently reverberated around the world and in Africa. Flooding in Durban and the Cape Town drought are two examples of changing weather patterns affecting major cities. In December 2015 the Paris Agreement was signed by 195 countries, recognising the importance of cutting back on carbon emissions to limit the global temperature increase to 2°C above preindustrial levels. South Africa is a signatory to this.
Izak Swart, director: carbon tax and government at Deloitte Africa, said it is difficult to measure the effect of the brand-new policy as yet on the economy. “You and I would have felt it directly in the petrol and diesel price increases, but this hasn’t been in huge increments and was part of overall fuel price fluctuations,” Swart said.
The cement industry is an example of one sector that has already raised prices to offset the carbon tax cost, according to Swart. He adds that the real impact will be felt when companies pay the levy over in the next tax period, in July 2020.
Swart says that the carbon tax is currently set at a “very low price” but that in five years, it will represent “a significant cost” for companies and consumers, and the economic impact will be clear.
The Carbon Tax Act was signed into law by President Cyril Ramaphosa on May 26 2019 and became effective from June 1.
Government is implementing it in a staggered approach due to concerns of job losses if further taxes are implemented in a weak economic growth environment. The first phase will run until the end of 2022 and levy a rate with allowable tax breaks ranging from R6 to R48 per tonne of C02 emitted.
The presidency described this as “a relatively low tax rate to further provide current significant emitters time to transition their operations to cleaner technologies through investments in energy efficiency, renewables and other low carbon measures.”
The next phase will run between 2023 and 2030. Before this levy is implemented, government will conduct a review of the impact of the tax and consider whether it has successfully reduced carbon emissions.
“Future changes to rates and tax-free thresholds in the Carbon Tax will follow after the review, and be subject to the normal transparent and consultative processes for all tax legislation, after any appropriate budget announcements by the minister of finance,” the presidency stated.
The figures to be collected from the Carbon Tax are forecast to be modest. The February 2019 budget, tabled by Finance Minister Tito Mboweni, projected it will collect R1.8-billion for the financial year. This is a tiny drop in the ocean of the total collected by the South African Revenue Services (SARS) for 2018/2019 — R1.287- trillion.
Too far, or not far enough?
Swart said business reaction to climate change depends on the sector the businesses operate in.
“Heavy industry don’t want it; they don’t want the extra costs, [however], if I’m doing renewable energy I would welcome this, as it is still more expensive to produce clean energy than fossil fuels and this carbon tax is starting to level the playing field,” Swart commented.
The Minerals Council, representing the mining industry in South Africa — which is a heavy consumer of electricity — warned of large-scale job losses should the tax be implemented.
“We have rising production costs, because our ores must be accessed at greater depths, and escalating input costs. Any further increases in costs of doing business through the imposition of a carbon tax will further undermine employment levels and decrease employment creation potential,” the council warned.
Environmental activists meanwhile warned that the carbon tax did not go far enough.
South Africa is in the middle of a difficult economic period but it is important to remember that taxing greenhouse gas emissions, with a view to creating sustainable and cleaner industries in the long term, is increasingly a policy undertaken by middle-income countries such as South Africa, according to the World Bank. The Washington-based lender estimated in 2016 that 15% of all global emissions are subjected to tax or pricing mechanisms.
Good business sense
South African businesses are slowly coming to the realisation that their bottom line in the future will be affected by climate change, and that they need to change their operating models.
“Ten years in the making, the Carbon Tax bill sends an important signal to the markets that the direction of travel is towards long-run decarbonisation of growth,” said Jon Duncan, head of responsible investment at Old Mutual Investment Group.
In May, South Africa’s the first ever climate risk-related resolution was tabled at Standard Bank’s annual general meeting. It called on the bank to prepare a report on its exposure to climate risk in its lending, financing and investment activities.It further proposed that the banking giant adopt and publicly disclose a coal power and mining lending policy.
Most shareholders voted against the first resolution, while 55% supported the second proposal.According to Duncan the Standard Bank decision indicates that environmental, social and governance (ESG) issues will increasingly be showing up on the corporate agenda.
Duncan points out that climate change is a social risk multiplier, and given the triple social challenges faced by South Africa of poverty, inequality and unemployment, it is critical that these knock-on risks are considered. “The climate models for South Africa predict that the country will generally get drier in the west and wetter in the east, with higher intensity weather events.We have witnessed the effects of the droughts in Western Cape and recent flooding in the KZN and Eastern Cape, and so have first-hand experience of how these events impact the vulnerable, let alone industry.”