Carbon Tax – Liable Entities

carbontaxAuthor: Mansoor Parker and Andrew Gilder (ENSafrica)

On Monday 2 November 2015, the South African National Treasury published a Draft Carbon Tax Bill (the “Bill”) for public comment, with the comment period commencing immediately and continuing until 15 December 2015.

Among the themes that we will be exploring in this series of articles on the Bill are the aspects of the carbon tax regime that will feel out-of-the-ordinary for professional tax practitioners. Like the phenomenon to which it is intended to respond, namely climate change (as much an economic challenge as an environmental one), a comprehensive response to the carbon tax will require tax professionals to look beyond their usual sphere of operations and to cooperate with professionals from a range of other disciplines. This is also a function of the tax design which encompasses elements of tax law, carbon markets law, environmental law and financial and operational strategy. While this theme will be explored more fully in later articles in this series, this article sets the scene by considering a fundamental connection established by the Bill between tax law and environmental law.

Our point of departure is to consider the simple question of which entities will be carbon tax liable and to provide a high level/first response to the question. Making this determination is slightly more complex than one would imagine. Section 2 of the Bill provides that there “…must be levied and collected for the benefit of the National Revenue Fund, a tax to be known as the carbon tax”. Section 3 of the Bill is the charging provision and it provides that:

“A person is—

(a)  a taxpayer for the purposes of this Act; and

(b)  liable to pay an amount of carbon tax…,

if that person conducts an activity as set out in Annexure 1 to the Notice issued by the Minister responsible for environmental affairs in respect of the declaration of greenhouse gases as priority air pollutants under section 29(1) read with section 57(1) of the National Environmental Management: Air Quality Act, 2004 (Act No. 39 of 2004)” (our emphasis).

The following elements of the emphasised portion of section 3 warrant some consideration:

  • “conducts an activity”;
  • “Annexure 1 to the Notice… in respect of the declaration of greenhouse
    gases as priority air pollutants” and;
  • “issued by the Minister responsible for environmental affairs.”

Conducts an activity

The suite of discussion documents that has, hitherto, explained Treasury’s intentions in relation to the design and application of the carbon tax, provides only an indication of the sectors that will be susceptible to carbon taxation. This permitted educated guesses to be made in relation to whether particular entities would be tax liable, especially for major sectoral players, e.g., in the energy generation sector. The Bill is more specific on who will be tax liable and relies upon a legal construction that is fairly typical in South African environmental law, namely the idea of a person who “conducts an activity”.

The “conducting of activities” that may have detrimental impact on the environment, e.g., infrastructure development activities, emitting activities which have implications for air quality or waste management activities, triggers the obligation for the person conducting the activity to make application for and to obtain a permit or license that authorises the conduct of that activity prior to its commencement. Given that carbon tax is aimed at pricing greenhouse gas emissions in the South African economy and that such emissions have an air quality/environmental impact, the carbon tax design looks to air quality/environmental legislation to determine liability for carbon tax. In short, in order to ascertain carbon tax liability, one must consider Annexure 1 to the Notice mentioned in section 3 of the Bill.

Annexure 1 to the Notice in respect of the declaration of greenhouse gases as priority air pollutants

In terms of section 29 of the National Environmental Management: Air Quality Act 39 of 2004 (“NEMAQA”), which provides for pollution prevention plans, the Minister of Environmental Affairs (“Minister”) may declare any substance contributing to air pollution as a priority air pollutant and require persons falling within a category specified in the notice to prepare, submit for approval, and implement pollution prevention plans in respect of a substance declared as a priority air pollutant. On 14 March 2014, the Minister gave notice in the Government Gazette of her intention to declare a basket of six greenhouse gases or, cryptically, any other gases as priority air pollutants and to require any person falling within the specified category to prepare and submit for approval, a pollution prevention plan under section 29(1), read with section 57(1) of NEMAQA (“Proposed Declaration”). 1The Proposed Declaration lists the initial six greenhouse gases provided for in the Kyoto Protocol as priority pollutants in respect of which pollution prevention plans must be prepared. The gases are the following: Carbon Dioxide (CO2); Methane (CH4); Nitrous Oxide (N2O); Hydroflurocarbons (HFCs); Perfluorocarbons (PFCs); and Sulphur hexafluoride (SF6).

Sub-Regulation 3 of the Proposed Declaration provides that a “…person conducting an activity set out in Annexure 1 to (the) Notice (in which the Proposed Declaration appears) which involves the emission of greenhouses (sic) declared as (sic) priority air pollutant  … in excess of 0.1 Megatonnes (109) (Mt) or more annually or (sic) measured as C02-eq is required to submit a pollution prevention plan”. Annexure 1 to the Notice comprises the following table:

Emission Sources Activities
Fuel combustion (both stationery and mobile) Energy industries

  • Electricity and heat production
  • Petroleum activity (refineries)

Manufacturing industries and construction

  • Chemicals

Transport sector

  • Civil aviation
  • Road transportation
  • Railways
  • Water-borne navigation

Other sectors

  • Commercial / institutional
  • Residential
  • Agriculture / forestry / fishing
Fugitive emissions from fuels
  • Surface and underground coal mining
  • Processing of coal
  • Storage of coal and wastes
  • Processing of sold fuels
Industrial processes and other product use Mineral production

  • Cement production
  • Lime production
  • Glass production

Chemical production

  • Ammonia production
  • Nitric acid production
  • Carbide production
  • Titanium oxide production

Metal industry

  • Iron production
  • Steel production
  • Ferroalloys production
  • Aluminium production
  • Lead production
  • Zinc production
Agriculture, forestry and other land use Livestock

  • Enteric fermentation
  • Manure management


  • Forest land
  • Cropland
  • Grassland
  • Wetlands
  • Settlements
  • Other land

Aggregate sources and non-Co2 emissions on land

  • Biomass burning
  • Liming
  • Urea application
  • Direct N2O emissions from managed soils
  • Indirect N2O emissions from managed soils
  • Indirect N2O emissions from manure management
Waste management
  • Solid waste disposal
  • Wastewater treatment and
  • Industrial waste

The net result of section 3 of the Bill, is that persons who conduct the activities listed in the abovementioned table will be liable to pay the carbon tax. The actual financial exposure will depend on a variety of factors, particularly the efficiency with which the allowances permitted in the Bill to limit such exposure can be utilised. These factors will be discussed in later articles in this series.

It is very important to note that the threshold of 0.1 Megatonnes of emissions of greenhouse gas which limits the requirement for the preparation and implementation of pollution prevention plans to persons that have emissions in excess of this volume, does not apply to the carbon tax. This is because section 3 of the Bill does not provide that persons required to prepare and implement pollution prevention plans are carbon tax liable, but rather that persons who conduct the activities listed in the Annexure to Notice declaring greenhouse gases as priority pollutants are liable. This clarifies an uncertainty that had crept into the carbon tax discourse over whether, in addition to the percentage allowances provided for in the Bill which can limit carbon tax exposure, there was also a threshold of absolute emissions (derived from reporting or other legal requirements imposed by the Department of Environmental Affairs) below which no carbon tax would be payable. Instead, the explanatory memorandum which accompanies the Bill states that for stationary emissions, reporting thresholds will be determined by source category as stipulated in the National Environmental Air Quality Act of 2004. Only entities with a thermal capacity of around 10MW will be subject to the tax in the first phase (2017 – 2020). This threshold is, according to the explanatory memorandum, in line with the proposed Department of Environmental Affairs greenhouse gas emissions reporting regulation requirements and the Department of Energy’s energy management plan reporting.

We are expecting the Draft Declaration to be formally promulgated in due course, but for the moment the document remains only in draft. We have previously discussed the Proposed Declaration here.

Issued by the Minister responsible for environmental affairs

Returning to the theme that the carbon tax will pose unusual challenges to the tax professional by creating connections between the tax legal regime and other legal regimes, such as those for the environment and climate change, the crux of the Bill (the determination of who will be carbon tax liable) relies very firmly on a declaration of the Minister of Environmental Affairs made for the specific purpose of dealing with an adverse air quality impact. While the sense of this connection is obvious from the environmental objective of the Bill (to reduce industrial greenhouse gas emissions), the approach is novel in South African taxation law.

One other aspect is that the carbon tax will be implemented as an “environmental levy” under the Customs and Excise Act No. 91 of 1964. This connection of the Bill to another legal regime harks back to the Draft Environmental Fiscal Reform Paper (Treasury, April 2006), which is the first comprehensive discussion of the use of financial instruments to deal with environmental challenges in the economy. This aspect of the carbon tax will be explored in a future article in this series.

This is the second in a series of articles that we are drafting/have drafted on the draft Carbon Tax Bill. Other articles in the series can be found here.

1 NEMAQA section 29 empowers the Minister to declare a substance to be a priority pollutant, with the consequent requirement tor emitters of priority pollutants to prepare and implement pollution prevention plans, while section 57 provides for a stakeholder process to be undertaken in respect of the declaration of priority pollutants – hence the Proposed Declaration having been published for public comment.