/ 17 February 2022

South Africa forges ahead with domestic carbon offset programme

The tax puts a price on releasing greenhouse gases from fuel combustion and industrial processes.
The tax puts a price on releasing greenhouse gases from fuel combustion and industrial processes. (Samantha Reinders)

South Africa is forging ahead with a domestic framework for a carbon offset programme. 

The programme will allow industries who contribute to carbon emissions to take advantage of carbon tax allowances if they finance projects that help the country meet its international climate commitments through mitigation. 

Carbon tax and carbon markets are mechanisms through which countries are able to finance ways to meet their nationally determined contributions (NDCs) under the Paris Accord, which seeks to limit global warming to 1.5 degrees celsius. 

South Africa introduced a carbon tax in June 2019 as part of policy measures to help achieve the cabinet-approved NDC commitments submitted under the global Paris Agreement on climate.

Carbon emissions are the primary cause of accelerated climate change, which has led to more frequent extreme weather events and other natural disasters. Despite decades of effort, emission reductions have not been near enough to limit warming to a threshold that the planet and people can manage. 

South Africa ambitiously increased its targets in the latest NDC submitted to the United Nations Framework Convention on Climate Change at the UN climate talks in Scotland last year. The NDC was previously in line with limiting warming to 2 degrees celsius, a level scientists have found would still be far too catastrophic for people and the planet. 

The department of mineral resources and energy said there was a need to develop a domestic framework for carbon offsetting as the international market was characterised by high costs. 

“To assist industries to transition their activities and shift to sustainable and low carbon practices in a cost-effective manner, a carbon offset tax free allowance is provided to companies under the Carbon Tax Act (No 15 of 2019) to help reduce their carbon tax liability and encourage additional investments in eligible low carbon offset projects,” it said.

The draft framework sets out the requirements, criteria for selection, evaluation and approval of domestic standards to complement the three international standards, while balancing the government’s interests in protecting the integrity of its greenhouse gas emission mitigation objectives.

When a company with a high footprint participates in a carbon offset project, that counts towards its own emission reductions without it having to cut them at source. This means, for example, that power utility Eskom can finance a reforestation project away from its operations and gain a carbon offset credit that it can count towards its emission reduction responsibility. The credit can also be traded on the carbon market and a different emission intensive company can buy it. 

“Offsets have the benefit of reducing a taxpayer’s liability, by enabling additional GHG (greenhouse gas) emission reductions where taxpayers for technical or other reasons may not have otherwise been able to implement reductions on site, or at least do so cost effectively, ” said Olivia Rumble from Climate Legal, which helps governments, the private sector, start-ups and civil society use law to realise climate change and environmental ambitions.

“Offset projects deliver least cost emission reductions but they also generally tend to have broader co-benefits. These benefits, as identified by the government, include the channelling of capital to rural development projects, creating employment, restoring landscapes, reducing land degradation, protecting biodiversity, and encouraging energy efficiency and low carbon growth.”

The new draft framework seeks to keep the domestic market in line with international standards which must be measurable, permanent, independently verifiable, unique and traceable.

According to Rumble, taxpayers are afforded a suite of other allowances, in addition to the carbon offsets one, based on the nature of their activities.

“A taxpayer would need to look at Schedule 2 of the Carbon Tax Act and determine which activity they undertake, for example electricity and heat production and then based on that activity it could then determine which other allowances it is entitled to,” she said. 

These allowances include an industrial process emissions allowance of up to 10%; a fugitive emissions allowance of up to 10%; a maximum 10% allowance for trade exposed industries; a performance allowance of up to 5%; and a 5% allowance for participating in the carbon budget system. 

In an overview of the carbon tax developments expected in 2022, the Tax Faculty said GHG emissions resulting from fuel combustion activities, industrial processes and fugitive emissions expressed as a carbon dioxide equivalent will be taxable. 

There are however concerns that South Africa’s current price on carbon is not enough to significantly contribute to reductions. According to the South African Revenue Service the current carbon tax rate is R120 a tonne of carbon dioxide equivalent emissions.

According to PwCo, carbon today is priced from US$0 to more than US$130 a tonne of carbon dioxide equivalent in different regions. 

“This creates an uneven playing field and limits the climate ambition of countries that fear loss of international competitiveness,” PwC firm said. 

The World Economic Forum believes an international carbon price floor (ICPF) could reduce emissions by 12% globally. 

Last year the International Monetary Fund put forward a framework for an ICPF that proposes different price points for emissions for economies at different stages of development to drive greater participation in emissions reduction.  

It found that an ICPF could raise up to 3% of GDP in revenue in some countries, which could be redistributed to lower-income households and help deliver a just transition.

PwC global chairman Bob Moritz said the findings of its own analysis are encouraging.

“Introducing an ICPF could make a significant contribution to tackling global warming by accelerating emissions reductions. We found this could be done without severe economic damage to livelihoods and business, although the effects would be somewhat uneven across the world,” he said, adding that the costs to society and business of failing to act are far greater. 

“The political and technical challenges remain very significant, but we hope the research will encourage countries to consider pricing carbon in such a way that it scales up effort to reach net zero in time to limit the worst effects of climate change on people and our planet.”

Public comments for the new carbon offset framework will be open until 28 February.

Tunicia Phillips is a climate and economic justice reporting fellow, funded by the Open Society Foundation for South Africa.