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South Africa: Carbon-Tax Legislation Proposed

(Nov. 9, 2015) On November 2, 2015, the South African National Treasury published for public comment the Draft Carbon Tax Bill, 2015, which seeks to “price carbon by obliging the polluter to internalize the external costs of emitting carbon, and contribute towards addressing the harm caused by such pollution.”  (Press Release, Republic of South Africa National Treasury, Publication of the Draft Carbon Tax Bill for Public Comment (Nov. 2, 2015); Draft Carbon Tax Bill, 2015, Department of National Treasury website (last visited Nov. 5, 2015).)  In other words, the legislation aims to impose a  carbon tax on certain activities for the purpose of reducing greenhouse gas emissions (GHG).


The legislation is a culmination of  a five-year discussion on how best to curb South Africa’s GHG emissions.  In the 2009 Copenhagen Climate Change Conference, South Africa committed to reducing its GHG emissions by 34% below its current levels (see below) by 2020 and 42% below current levels by 2025.  (South African Government’s Position on Climate Change, Department of Environmental Affairs website (last visited Nov. 11, 2015).)  The achievement of these goals required the development of a legal and institutional framework, set in motion when the National Treasury issued in 2010 a carbon-tax discussion paper for public comment.  This discussion paper made the case for the gradual introduction of a carbon-tax system as the best way to reduce the country’s GHG emissions.  (Department of National Treasury, Reducing Greenhouse Gas Emissions: The Carbon Tax Option 58-59 (Dec. 2010).)

The 2010 discussion paper was followed by three other key documents.  In 2011, the government released  a white paper outlining a national climate change policy framework for making the transition to a low-carbon economy. (GOVERNMENT OF THE REPUBLIC OF SOUTH AFRICA, NATIONAL CLIMATE CHANGE RESPONSE WHITE PAPER (Oct. 2011).)  In May 2013, the National Treasury issued an update to the 2010 discussion paper, ruling out the introduction of a cap-and-trade system in the near future and outlining key features of the proposed carbon-tax system.  (Department of National Treasury, Carbon Tax Policy Paper: Reducing Greenhouse Gas Emissions and Facilitating the Transition to a Green Economy 34 & 58 (May 2013).)  In April 2014, the National Treasury issued a paper on carbon offsets for public comment.  (Department of National Treasury, Carbon Offsets Paper (Apr. 2014).)

Tax Base

If the legislation is enacted in its current form, a carbon tax would be levied on what are known as Scope 1 emissions (direct GHG emissions), “emissions from sources that are owned or controlled by the entity,” including emissions from fuel combustion and non-energy industrial processes.  (Draft Explanatory Memorandum for the Carbon Tax Bill, 2015, at 9, Department of National Treasury website (Nov. 2, 2015).)  Carbon tax will not be levied on what are known as Scope 2 emissions (“indirect GHG emissions resulting from the generation of electricity, heating and cooling, or steam generated off site but purchased by the entity”) or Scope 3 emissions (“indirect GHG emissions (not included in scope 2) from sources not owned or directly controlled by the entity but related to the entity’s activities.”)  (Id.)

In addition, in the first implementation phase of the legislation, which is slated to run from the beginning of 2017 through 2020, carbon tax will not be imposed on activities involving agriculture, forestry and other land use, or waste.  (Id.; Draft Carbon Tax Bill, Sch. 2.)

The legislation would encourage the reduction of Scope 2 GHG emissions through “complementary measures and incentives” including an “energy efficiency savings tax.”  (Draft Explanatory Memorandum for the Carbon Tax Bill, 2015, at 9.)

Tax Rate

The legislation sets the initial carbon tax rate at R120 (about US$8.60) per ton of CO2-equivalent (a measure of energy absorbed in comparison to energy radiated into space).  (Draft Carbon Tax Bill, §§ 1 & 5.)  However, entities would be accorded a number of tax-free allowances in the first phase of the implementation of the legislation in order “to provide for a smooth transition to a low carbon economy and to take into account international competitiveness and carbon leakage concerns.”  (Draft Explanatory Memorandum for the Carbon Tax Bill, 2015, at 21.)  These allowances are:

  • Basic Allowance: a basic tax-free allowance of 60% for fuel combustion emissions and 70% for process emissions (GHG emissions “other than combustion emissions occurring as a result of intentional or unintentional reactions between substances or their transformation …”);
  • Fugitive Emissions Allowance:  an additional 10% allowance for sectors with fugitive emissions (“emissions that occur from the release of [GHG] during extraction, processing and delivery of fossil fuels”), including coal mining and oil and gas production;
  • Trade Exposure Allowance: an additional 10% allowance for entities exposed to international competition, including those in the petroleum refining, iron and steel, and food processing industries;
  • Performance Allowance:  an additional allowance of up to 5% available to entities that have implemented proactive measures to reduce their GHG emissions;
  • Carbon Budget Allowance: an additional allowance of up to 5 % available to entities that comply with reporting requirements for the purpose of the carbon budgeting process; and
  • Offset Allowance: an additional 5 or 10% allowance, depending on the industry, for entities that buy carbon offsets to reduce their tax liability.  (Id. at 5, 22-25; Draft Carbon Tax Bill, §§ 1, 7-13.)

The legislation caps the maximum tax-free allowance that an entity may avail itself of to offset the carbon tax at 95% of the entity’s total GHG emissions.  (Draft Carbon Tax Bill, § 14.)

The application of the above described allowances is expected to substantially reduce the effective carbon tax in the initial implementation phase to a range of R6 (about US$0.43) to R48 (about US$3.45) per ton of CO2-equivalent.  (Draft Explanatory Memorandum for the Carbon Tax Bill, 2015, at 6.)

It is possible that the tax-free thresholds will be reduced in the second phase of the tax regime (after 2020).  (Id. at 5-6.)  In addition, an absolute tax-free threshold may be introduced to replace the percentage based allowance system envisaged in the legislation.  (Id.)

State of Emissions

South Africa’s GHG emissions are among the highest in the world, and its absolute carbon dioxide emissions rank among the top 20 countries, “with emissions per capita in the region of 10 metric tons per annum.”  (Carbon Tax Policy Paper: Reducing Greenhouse Gas Emissions and Facilitating the Transition to a Green Economy, supra at 19.)  The energy sector, which relies heavily on coal, is the highest emitter and accounts for 48% of the country’s total emissions, followed by the metal products sector (which also relies heavily on coal) with about 22% of emissions, and the transportation sector (which includes household use of petroleum), which generates about 10% of emissions. (Reducing Greenhouse Gas Emissions: The Carbon Tax Option, supra at 16-17.)  The chemical, rubber, and water-supply sectors are responsible for about 5% of emissions, while all other sectors are responsible for about 15% of total emissions.  (Id.)