The next step in carbon taxes: Carbon Offset paper
n May 2013 the Department of Treasury published a Carbon Tax Policy Paper for public comment. A revised version of the document was due to be published in July 2013, however, following public objection and comment this document was not forthcoming. In February 2014 the Minister of Finance confirmed in the Budget Speech that carbon taxes would be delayed until 2016 as “a package of measures is needed to address climate change and reduce emissions”. These measures include the development of a Carbon Offset in terms of which companies can reduce their tax liabilities.
The proposed carbon tax in its current format includes a tax-free threshold for emissions above a minimum 60% threshold for scope 1 emissions for the first 5 years. This threshold could be increased to a maximum of 90% based on exemptions for trade exposure (10%), process emissions (10%) and carbon offsets (10%) depending on the sector in which the emissions reduction is occurring. (The agriculture, forestry, land use and waste sectors will be exempt from the carbon tax for the first 5 years based on the difficulties associated with measuring and verifying emissions in these sectors). In an attempt to provide further clarity in relation the Offset exemptions the Carbon Offsets Paper was published in April 2014 and is open for comment until 30 June 2014.
The paper sets out Treasury’s intention to create a domestic carbon offsets market in terms of which companies can generate carbon credits by investing in carbon avoidance, reduction or sequestration projects and in turn reduce their carbon tax liability. The incentive to investing in these projects is that it may be cheaper than retrofitting a company’s own operations to reduce carbon emissions. In order to qualify for credits, the following eligibility criteria have been proposed:
- only South African based project credits will be eligible for use in the South African Carbon Tax exemption. As a result, certificates of emission reduction generated in terms of the European Union Emissions Trading Scheme (for example) cannot be used;
- only entities that are not liable for carbon taxes will be entitled to implement emission-reduction projects and sell the credits generated to those entities that are liable for tax in order to avoid double-counting;
- the project will need to fall within the pre-approved project types in order to meet the additionality requirements and therefore projects will not be assessed on their own merits to determine whether they meet the multi-tiered additionality requirements.
The Carbon Offset Policy also includes ineligible project types which includes the Renewable energy projects developed under the Renewable Energy Independent Power Producer Programme.
Any offset credits that are issued prior to the implementation of the Carbon Tax will be eligible for use under the carbon tax regime. These credits will need to be transferred from the international registry to the South African registry (that will be created) within 12 months of the carbon tax coming into effect. Following this date, credits that have not been transferred will not be accepted. Similarly carbon projects that will be registered prior to the implementation of the carbon tax will have to transfer the credits issued to them within 6 months of the credit issuance to ensure that the credits will be eligible under the South African carbon tax system, failing which they will not be accepted.
To facilitate the introduction of this scheme, the policy proposes that credits developed in terms of the Clean Development Mechanism, Verified Carbon Standard, Gold Standard and Climate, Community and Biodiversity Alliance standards will be permitted during the first phased of the carbon tax regime. However, only credits that meet the eligibility requirements set out above will be permitted. A carbon-offset standard will then need to be developed in order to ensure the development of a carbon credit market in South Africa, along similar lines to those developed in California, Australia and the European Union. The policy provides the minimum institutional requirements in order to give effect to the development of the carbon-offset standard and the carbon-offset market.
As in the case of the Carbon Tax Policy, the Carbon Offset Paper has been published for comment. Comments need to be submitted to Treasury by 30 June 2014.