Managing carbon pass through: 10 tips to prepare for South Africa's carbon tax

South Africa’s National Treasury released its Carbon Tax Policy Paper in May 2013.  Submissions on the Paper closed in August 2013 and the South African Government is expected to now draft legislation to implement the Carbon Tax from 1 January 2015.

The key features of the Government’s proposed Carbon Tax are:

  • companies that emit more than 100,000 tons of greenhouse gases (GHGs) annually or that consume electricity that results in more than 100,000 tons of emissions from the electricity sector will be required to report on their GHG emissions;
  • the Carbon Tax will operate as a fuel input tax on coal, crude oil and natural gas, based on their carbon content;
  • the Carbon Tax will be set at R120 per ton CO2-e for the 2015 financial year and will rise by 10% per annum until 31 December 2019;
  • Scope 1 emissions, i.e. those that result directly from fuel combustion and gasification and non-energy industrial processes, will be covered by the Carbon Tax;
  • the agriculture, forestry and land use and waste sectors will be excluded during the first 5 years of the Carbon Tax;
  • transitional tax-free thresholds will be applied to covered sectors during the first 5 years of the Carbon Tax;
  • additional relief or assistance may be given to trade intensive sectors;
  • companies will be able to use offsets up to variable limits depending on the sector in which they operate;
  • rebates will be applied to carbon capture and storage (CCS); that is, technology that could be used to capture CO2 emissions from coal combustion and gasification processes;  and
  • the Carbon Tax will be supported by a number of complimentary policy measures related to renewable energy, energy efficiency and public / efficient transport.

The proposed thresholds are set out in Table 1

Click here to view table

Industry sectors across the board – as well as consumers – will be impacted either directly or indirectly as the Carbon Tax filters through the South African economy. Experience from other countries that have introduced a price on carbon, either through emissions trading schemes or carbon taxes, demonstrates that those companies that are directly liable to pay a carbon price will seek to pass the carbon costs on to their customers, who in turn will also pass costs the through. 

Whether the full Carbon Tax can be passed on to a company’s customers will depend on a range of factors including:

  • existing contractual relationships with customers
    • are these long term fixed contracts?
    • how is the price structured?
    • can the price be varied as a result of a change in law?
    • the commercial environment in which the company in operating and what its competitors are doing; and
    • the operation of consumer protection laws which may limit how a carbon price is passed through supply chains.

Preparing for South Africa’s Carbon Tax

In preparation for the proposed Carbon Tax, businesses should be considering the following:

  1.  Determine Liability – Will your company be covered by the Carbon Tax directly and have to pay the Carbon Tax to the Government?
  1. If so, what is the extent of your liability having regard to tax free thresholds and industry assistance? 
  2. If not, does your company operate in a sector where its suppliers may be directly liable to pay the Carbon Tax and be seeking to pass those costs on?
  1. Know your customers and suppliers – Understanding the inputs and outputs of your customers and suppliers will assist in determining whether it is reasonable and feasible to pass through the Carbon Tax.
  2.  Review Supply Contracts – Do your existing contracts make provision for increasing the price of goods or services as a result of the introduction of a Carbon Tax – either specifically or in general terms as a result of change in law or change in tax clauses? 
  1. If so, be aware of any time limits for giving notice of the introduction of the Carbon Tax, a change in tax or change in law and the possible time it may take to negotiate agreed pass through.
  2. If not, for example if the contract is for a fixed price or if change in law or change in tax clauses are not triggered, consider whether there are other grounds to amend or renegotiate the contract or even to terminate the contract if it becomes uneconomical.
  1. Update Template Contracts – Does your company use standard supply contracts for its goods and services? If so, you may want to include provisions which clearly specify who will be responsible for direct and indirect costs associated with the Carbon Tax.
  2. Consider when to start passing costs on – Consumer protection laws may also prevent companies from changing their pricing structures for goods and services until the company has actually incurred the Carbon Tax or had associated costs passed through to it. Consider when the Carbon Tax legislation commences, and when liable companies are required to actually pay the tax to the Government.
  3. Determine how to best allocate carbon costs – There are a number of different options for determining how costs associated with the Carbon Tax are allocated between parties, depending on the type of contract and the anticipated costs to the business. Companies may want to consider the level of transparency required in calculating the amount of the Carbon Tax that is passed through, for example, through using a fixed increase, formulas or industry standards. Note that, as consumer protection laws may limit the extent to which costs can be passed through, you may have to be able to demonstrate the costs claimed to be associated with the Carbon Tax.
  4. Consider when to allocate carbon costs – Companies should also consider whether carbon costs should be charged periodically based on an agreed uplift or only after they have been incurred and verified.
  5. Explore options to refuse or limit pass through from your suppliers – In certain circumstances you may be entitled to push back on the whole or partial pass through of the Carbon Tax, for example, if your suppliers are in a competitive market or are unlikely to incur any significant carbon costs.
  6. Influencing the supply chain – Some companies may be able to put pressure on others in their supply chain to improve the fuel efficiency of their operations by resisting the pass through of part of the Carbon Tax and requiring suppliers to take measures to reduce their GHG emissions
  7. Take advantage of offsets – Companies will be able to use offsets to meet between 5-10% of the Carbon Tax depending on which sector they are in. There may be commercial synergies that would enable your company to generate offsets as a result of its own activities or you may be able to source offsets from your suppliers or customers in lieu of passing through the Carbon Tax or at a discount.

Authors:

  • Baker & McKenzie
  • Wildu du Plessis, Morne van der Merwe, Paul Curnow, Martijn Wilder and Graham J. Stuart
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