Proposed carbon tax likely to stimulate carbon industry in SA

Submitted by: Margaret McKenzie, Monday, March 5, 2012

The carbon tax proposal announced during the February 2012 Budget speech indicates that carbon taxes are likely in 2013/2014.    The current proposals for the tax are likely to stimulate the carbon industry in SA in four ways.

Carbon Footprinting

The current tax proposals suggest that the tax will be directly levied on CO2 equivalent emissions. This means that CO2 equivalent emissions of organisations will need to be measured and verified.     It is likely that at minimum the verification would need to be done by an independent agency, providing a number of business opportunities for those in the carbon footprinting business.    However, as there is considerable complexity involved in measuring CO2 equivalent emissions many organisations are likely to bring in outside expertise to undertake the entire measurement process.    Treasury could have elected to use a simpler indirect tax mechanism by placing a carbon tax levy on fuels that release carbon emissions.  If this kind of indirect tax was to be used, there would be much less call for carbon footprinting services.

What is not yet clear from the tax proposals is what scale of organisation will be impacted by the carbon tax.   It is unlikely that treasury intends to tax organisations with low emissions because of the reporting burden.  If treasury limits the tax to very large emitters many of them already measure and report their carbon emissions through the SA JSE 100 Carbon Disclosure Report and thus may not be purchasing addition footprinting services.

Carbon Offsetting

The current proposals allow for organisations in some sectors to offset between 5% and 10% of their emissions.     Considering that 10% of Eskom 2011 scope one emissions is 23 Million tonnes, the potential to stimulate the carbon offset market is large.   The current proposed tax rate per tonne is R120 for the 2013/2014 year with a 10% annual escalation to 2019. If sellers of carbon offsets are able to provide them at below the proposed tax rate, they have a considerable opportunity for new business.

What is not clear from the current proposals is the level of verification that would be required for carbon offsets and if organisations would be limited to purchasing offsets in South Africa. Considering that there are not many carbon offset sellers in South Africa, many organisations may look to purchase offsets outside South Africa.

Carbon Mitigation

While the tax is likely to stimulate carbon mitigation activities, the design of the tax means that there is less incentive for mitigation than it first appears.    This is because the key element of the proposed tax is a tax free threshold.  This is a minimum of 60% for some sectors and can be as much as 100% for other sectors.    What this means is that while the tax per tonne is R120, an organisation reducing its emissions by one tonne will at most be achieving a tax savings of R48 (40% of R120).    This is illustrated by the following example:

The tax proposals have attempted to fix this incentive problem by adding in an additional tax measure through which the basic tax free threshold would be adjusted by a factor related to an organisation’s carbon intensity performance compared against a sector carbon intensity benchmark.  Organisations that are efficient in relation to this benchmark would have their tax free threshold raised and those that are inefficient would have their tax free threshold reduced.   The difficulty with this mechanism is the problem associated with setting the sector benchmark. Opinions on what is an efficient carbon intensity figure per sector will vary widely and it is likely that there will be intense lobbying regarding the setting of each benchmark.

Electricity use reduction

Since Eskom is the single highest CO2 equivalent emitter in the country its carbon taxes will be significant.   It is anticipated that this tax will be passed onto electricity users by Eskom leading to an increased price per kWh in the region of 4.9c.    South Africa already has a levy on electricity generated from non-renewable sources which is currently 3.5c per kWh.    Since this levy currently acts as a form of carbon tax it can be speculated that Treasury will do away with this tax levy once carbon taxes.  This means that the actual increase in electricity price as result of the new carbon tax will be in the region of 1.4c.    So while the tax will add to the general trend towards efficient use of electricity it should not be expected to have a dramatic effect.

Margaret McKenzie