The carbon tax: Why it could work

The carbon tax is an important step on the road for South Africa to meet its commitments in terms of the Paris Agreement on Climate Change and to reduce its greenhouse gas emissions. (Photo: Oupa Nkosi)

The carbon tax is an important step on the road for South Africa to meet its commitments in terms of the Paris Agreement on Climate Change and to reduce its greenhouse gas emissions. (Photo: Oupa Nkosi)

The Carbon Tax Act kicked into effect as of July 2019 and with it has come outcry, concerns and shouts ofit being “unconstitutional”. But this Act and this tax could potentially change the dynamics in South Africa and put the country on a stronger footing with regards to global perceptions.

According to the International Monetary Fund (IMF), carbon tax is the most efficient way to cut greenhouse gas emissions. The report states that carbon pricing is “the single most effective mitigation instrument” for doing this, because it provides incentive to reduce energy consumption and to use cleaner fuels.

It also provides much-needed revenue, but in South Africa, this revenue is a point of contention. For many, it’s a concern that the South African treasury has not ringfenced the funds to be raised by carbon tax to be specifically used to minimise carbon emissions.

“This money falls into the main fiscus and then disappears into the ether,” says Kevin James, founder and chief executive of sustainability consulting firm GCX. “Treasury’s refusal to ringfence this tax is a problem due to governance and the allocation of funds, which should be used to reduce carbon emissions. What should happen is that the funds raised for polluting one tonne of CO2 must go to reducing that same amount, in principle. Yet, here, it doesn’t look like that is going to be the case. Instead, there is a complicated structure for the carbon taxes that adds complexity and expenses and admin.”

What exactly is the tax and how is it levied? According to a tax alert issued by PwC, Carbon Tax will be levied at a tax rate of R120 per tonne of CO2 emitted. There are tax-free allowances available to reduce the liability to a maximum of 95% of taxable emissions. This introduces, as James points out, several complexities for the organisation looking to remain compliant. They have to check several boxes that include identifying the emission sources, determining their control over the activity, and more. It seems that perhaps the new tax is nothing more than another exercise in administrative futility. Or is it?

“This carbon tax has achieved one very significant benefit,” says James. “It has got boardrooms talking. This is a positive thing. Organisations need to adhere to governance and compliance mandates, so now the conversations are ensuring that risks are addressed, responsibilities allocated, and carbon emissions managed more effectively. It could potentially see businesses change their behaviour in a positive way.”

The carbon tax is an important step on the road for South Africa to meet its commitments in terms of the Paris Agreement on Climate Change and to reduce its greenhouse gas emissions. Dom Chennels, financial director at the SOLA Group, believes that if companies focus on the carrot rather than on the stick, then they will appreciate the benefits of implementing carbon-reducing energy solutions such as solar power.

“Cost drivers for many businesses are likely to be the ones that produce the most greenhouse gases such as fossil-fuel generated electricity, business travel, and waste disposal,” he adds. “Supplementing the organisation’s energy mix with a solar photovoltaic system is a cost-effective way of reducing operating costs and carbon emissions in the long term.”

Let’s not forget that there are also tax incentives for going green. In 2013, Section 12L of the Income Tax Act was passed: this allowed for companies to claim deductions of 95c per kilowatt-hour of energy efficiency savings made within a year against a verified 12-month baseline. Section 12B of the same law made provision for an accelerated wear-and-tear allowance for movable assets used in the production of renewable energy, and could see up to a 28% deduction in income tax in the year that the asset is brought into use. These tax benefits make it financially viable for companies to install rooftop solar and even battery systems.

The IMF paper also pointed out that to meet the Paris CO2 mitigation pledges and the 2°C target, that would mean emissions would have to be cut by a third by 2030, with a global carbon price of around $70 per tonne – that’s around R1 000 at the current exchange rate. In South Africa, the carbon tax is R120 per tonne.

“The carbon tax is too cheap,” says James. “It has been R120 a tonne since it was first put forward around nine years ago, while the price of everything that contributes to pollution has gone up by double digits every year. There’s a need to reconcile that.”

Dalian Govender, environmental scientist at AECOM, adds: “Some may argue that the tax rebates are not harsh enough, however, we must keep in mind that this is a stepping stone process. To draw on the Environmental Impact Assessment (EIA) regulations, amendments have been added as new information and understanding arises from the public domain. Therefore, compliance with the Act is very important at this stage; financial commitment is merely a by-product of the ultimate goal of reducing carbon emissions. I would say that the Act is fair and sufficient at this stage, purely because the goal is to encourage compliance and understanding.”

The IMF paper also underpins another central benefit to the carbon tax — it can make a difference on a global scale, to the world and to the country. This extends beyond the reduction of pollution, which is significant in itself, and into how it can potentially shift South Africa’s image on the global stage.

“Global and local backlash should not deter the South African government from implementing such policies, but rather serve as an incentive for it to reinvest in the country by using the revenue collected from the carbon tax to support the introduction and roll-out of smarter mobility,” says Ben Pullen, cofounder and chief executive of Generation.e. The global trend is to put a price tag on pollution, so South Africa is doing the right thing.The country ranks high in terms of being a polluter and if this is not addressed, it will further impact on its international reputation.

“If we don’t advance with intent to reduce our emissions and adhere to the global conversation, then we run the risk of being an even bigger pariah on the global stage,” concludes James. “We need to consider this a critical benefit in our arsenal when it comes to trading in the global arena. But we do have to make improvements — Eskom needs to become compliant — and we need to mimic best practice that is aligned with the rest of the world.”

Carbon Tax may be complicated and a lengthy process to manage. It does introduce concerns around ringfencing and actual use of the funds towards reducing taxes. But, if it is done with the right intent, the funds are used correctly, and organisations use this as an opportunity to achieve compliance, then it could set South Africa on a far more economically powerful path.