Further welcome tax incentives announced for renewable energy sector

capetownRenewable energy is seen as the long term future to the planet’s energy demands as a result of the increasing effects of climate change due to the long term use of fossil fuels. South Africa, in particular, has certain obligations as a party to the United Nations Framework Convention on Climate Change (UNFCCC) to ensure the reduction of greenhouse gas emissions and to incentivise investments in low carbon, clean energy. In addition to the environmental factors, South Africa’s load shedding and insufficient power supply has resulted in a further demand for the greater procurement and use of renewable energy.

However, renewable energy projects and initial set up costs are expensive. As a result, government has introduced many tax incentives in the renewable energy sector. Some of the incentives or mechanisms which have been introduced are focused on reducing carbon emissions, including the still to be introduced carbon tax. Other incentives are focused on energy efficiency such as the industrial policy projects’ additional allowance contained in s12I of the Income Tax Act, No 58 of 1962 (Act), the energy efficiency savings’ allowance contained in s12L, as well as the production of renewable energy and fuels’ allowance contained in s12B.

The Draft Taxation Laws Amendment Bill, 2016 (Draft TLAB 2016) intends introducing the latest renewable energy incentive. The Explanatory Memorandum to the Draft TLAB 2016 states that large scale renewable energy projects are currently not sufficiently catered for “due to the capital intensive nature of the supporting infrastructure whose tax treatment would need to be specifically targeted”. In particular, ancillary capital expenditures that indirectly support renewable energy production, such as the construction of necessary fences and roads close to renewable energy farms do not qualify for any deductions under the Act. The lack of sufficient tax deductions for such auxiliary outlays is, according to the industry, one of the major restrictions on the feasibility of such projects.

Government therefore proposes that provision is made for further specific tax deductions to encompass the supporting capital infrastructure for large renewable energy projects. The proposal is limited to renewable energy projects exceeding 5MW and above. The reason for this appears twofold, firstly projects within the 5MW to 50MW band are barely economically viable and this will hopefully boost such projects’ viability. Secondly, all renewable energy projects approved under the Renewable Energy Independent Power Producers Procurement Programme of the Department of Energy exceed at least 5MW.

The proposal includes provision for a deduction of pre-trade expenditure in much the same way as s11A of the Act to the extent that the capital expense is actually incurred prior to the commencement of and in preparation of carrying on that trade and where it has not been allowed as a deduction previously in the current or any previous year of assessment. The new intended s12U of the Act also provides for an anti-avoidance mechanism, in that any supporting infrastructure capital expenditure that exceeds the income in any year of assessment be ring fenced to the specific trade of the production of renewable energy. The proposed amendment is due to apply to large renewable energy projects undertaken during any year of assessment commencing on or after 1 April 2016.

While the increase of renewable energy tax incentives is most certainly welcome, it remains to be seen whether the recent round of proposed amendments will have a positive effect on the uptake of large renewable energy projects. An additional tax deduction in a similar form as the additional 50% research and development tax deduction has, despite calls from the industry, not been forthcoming. Nevertheless such an amendment may have a much larger impact on the feasibility of sorely needed large scale renewable energy projects.

Written by Jerome Brink




Green, greener, greenest – a ruling on section 12K of the Income Tax Act

carbon tax 5The recent announcement by Eskom that it would reconsider its position on the use of renewable energy has caught the attention of many in the renewable energy industry. The Income Tax Act, No 58 of 1962 (Act) contains a number of tax incentives which are available to participants in the renewable energy industry, including the exemption of certified emission reductions (CERs), contained in s12K of the Act.

On 9 June 2016, the South African Revenue Service (SARS) issued Binding Class Ruling 053 (Ruling), which deals with the application of s12K of the Act in the context of a Clean Development Mechanism (CDM) project. The parties to the Ruling are a non-profit association of green energy producers (Applicant), the project developer and sponsor of the registration of the CDM project with the Executive Board of the United Nations Framework Convention on Climate Change (UNFCCC) (Project Developer) and the owners of the CDM projects registered under the programme of activities (CPA owners).

Facts

The Applicant is a non-profit organisation which aims to raise awareness and facilitate the transition to a climate resilient society within South Africa. It achieves its objectives through, amongst other things, providing an independent platform for the hosting of programmes of activities (CPAs) for CDM projects registered under the Kyoto Protocol and acts as the coordinating and management entity for these CPAs. The Applicant and the Project Developer, who is also a CPA owner, have established a CDM project in a programmatic form, contemplated in Article 12 of the Kyoto Protocol, which is registered with the CDM Executive Board. The CPA owners intend to produce CER credits under the CPA which will be sold to industrialised countries, in terms of emission reduction purchase agreements. The relationship between the parties will be governed by a CPA agreement which states, amongst other things, the following:

  • The CPA is to be registered with the CDM executive board together with the first CDM project undertaken by the Project Developer. Other potential CPA owners who wish to participate in the CPA will be invited to do so upon payment of an inclusion fee and will be added by way of supplemental deeds of inclusion to the CPA as provided for by the CDM rules.
  • The Applicant will do a number of things, including acting as the coordinating and management entity for the CPA and managing the CER credits sales process and collecting the revenue (carbon revenue) in its capacity as manager of the CPA on behalf of the CPA owners. It will receive a fee for services rendered as manager of the CPA.
  • The Project Developer will fund the development phase budget to establish the CPA. All CPA owners will pay an annual fee to cover expenses of the CPA.
  • The CER credits generated by the CPA will be jointly owned by the Project Developer and the CPA owners on the basis that ownership of a certain specified percentage of the gross CER credits will accrue to the Project Developer as the project sponsor and the balance will be jointly owned by all CPA owners and accrue to each CPA proportionally according to its contribution of CER credits in the relevant period.
  • The Applicant will pay all the expenses related to the running of the CPA from the inclusion fees, annual fees and carbon revenue, if required, and will distribute the surplus to the CPA owners according to their proportional share of revenue calculated based on the CER credits contributed in the relevant period.

Background to section 12K

Section 12K of the Act came into effect on 11 February 2009 and according to the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2009 (2009 Explanatory Memorandum) the reason for this was the limited uptake of CDM projects within South Africa. The 2009 Explanatory Memorandum states that CDM was created by the Kyoto Protocol as a mechanism to ensure that developed countries can meet their carbon emission reduction targets, while also ensuring that developing countries can participate in a global reduction market. In this regard, the Kyoto Protocol makes it possible for CDM projects to yield CERs which are technically saleable to and usable only by developed countries.

According to the 2009 Explanatory Memorandum, the limited uptake of CDM projects within South Africa stems from the high financial (and bankable) hurdle rates due to the risks associated with CDM project activities (CPAs). Financial hurdle rates include, amongst other things, the high cost involved in financing CPAs. The South African government recognised that climate change requires a considered international and domestic policy response and as part of South Africa’s domestic policy response to climate change, tax relief in the form of s12K was introduced to overcome the market failure associated with environmental protection.

The provisions of section 12K

Section 12K(2) states that any amount received by or accrued to or in favour of any person in respect of the disposal by that person of any CER derived by that person in the furtherance of a qualifying CDM project carried on by that person. Section 12K(1) states that for a CDM project to constitute a “qualifying CDM project”, the designated national authority (DNA) must issue a letter of approval as contemplated in the Regulations establishing the DNA. Secondly, the CDM project must be registered in terms of the modalities and procedures for a clean development mechanism as defined in Article 12 of the Kyoto Protocol.

Ruling

SARS ruled that:

  • The CPA will be a “qualifying CDM project” as defined in s12K(1) of the Act.
  • The CPA owners and the first CDM project owner will be the persons carrying on the “qualifying CDM project”.
  • The carbon revenue generated by the CPA will be exempt from income tax under s12K(2) of the Act in the hands of the CPA owners. The exemption is not affected by the fact that the carbon revenue will be received by the Applicant acting in its capacity as manager of the CPA.
  • Only carbon revenue from the CER credits that the first CDM project owner derives from conducting its own CDM project of activities will qualify for exemption under s12K(2) of the Act and the carbon revenue from the disposal of the extra CER credits accrued in terms of the CPA agreement will not be exempt from normal tax under s12K(2) of the Act.
  • The CER credits need not be accounted for as “trading stock” as defined in s1(1) of the Act.
  • The sale of CER credits to non-resident purchasers will be subject to VAT at a zero rate under s11(2)(l) of the VAT Act, No 89 of 1991 provided all the requirements of that section are complied with.

Comment

It should be noted that in terms of the current Draft Regulations to the Draft Carbon Tax Bill, a CDM project, similar to the one discussed in the Ruling, can generate carbon offsets. The carbon credits generated by such project will have to be surrendered to SARS to make use of the carbon offset allowance. As the Draft Regulations to the Draft Carbon Tax Bill currently stand, it appears that it might be possible for carbon credits generated by a “qualifying CDM project” in terms of s12K, to be used by a taxpayer to receive an offset allowance in terms of the Draft Carbon Tax Bill. However, we will only have clarity once the legislation regarding carbon tax has been finalised.

 




Where there’s smoke there’s fire (and carbon tax) – National Treasury releases the Draft Regulations: Carbon Offsets

carbon tax 5In November 2015, the Draft Carbon Tax Bill (Draft Bill) was published by National Treasury, setting out the framework within which carbon tax would be levied. We reported on the main tenets of the Draft Bill in our Tax Alert of 20 November 2015 (Carbon tax in South Africa). On 20 June 2016, flesh was given to this framework with the release of the Draft Regulations: Carbon Offsets (Draft Regulations), which were published in terms of clause 20(b) of the Draft Bill. The Explanatory Note for the Draft Regulations on Carbon Offset (Explanatory Note) was released at the same time.

Section 4 of the Draft Bill states that carbon tax will be levied in respect of greenhouse gas (GHG) emissions resulting from:

  • the combustion of fossil fuels;
  • fugitive emissions in respect of commodities, fuel or technology; and
  • industrial processes, and product use.

Any taxpayer who is liable for carbon tax can reduce their carbon tax liability by making use of the allowances mentioned in the Bill, including a carbon offset allowance of either 5% or 10%. Schedule 2 of the Bill sets out the percentage allowance that will be applicable to taxpayers in different sectors. The Draft Regulations set out the requirements to qualify for the carbon offset allowance and the documentation that a taxpayer would have to submit to the South African Revenue Service (SARS) in this regard.

Policy rationale and purpose of the carbon offset system

The Explanatory Note describes carbon offsets as investments in specific projects that reduce, avoid or sequester emissions. A carbon offset is an external investment that allows a firm to access GHG mitigation options at a lower cost than investment in its current operations. The carbon offset system also aims to incentivise mitigation in sectors or activities that are not directly covered by the carbon tax or are benefiting from other government incentives, especially transport, agriculture, forestry and other land use (AFOLU) and waste.

Eligibility – when will a taxpayer qualify for a carbon offset allowance?

Carbon offsets can only be generated by an approved project. The Draft Regulations define an approved project as a Clean Development Mechanism (CDM) project, a Verified Carbon Standard (VCS) project, a Gold Standard (GS) project or a project that complies with another standard approved by the Minister of Energy or a delegated authority. CDM, VCS and GS are existing accepted international carbon offset standards, each with their own associated institutional and market infrastructure. During the initial stage of the carbon offset scheme, it is envisaged that it will rely primarily on these existing standards and any offset project will need to be approved by one of these standards.

In terms of Regulation 1 of the Draft Regulations, an offset will be allowed in terms of s20 of the Draft Bill, in respect of any certified emission reduction (CER) derived from the furtherance of an approved project that is carried on by a taxpayer on or after 1 January 2017 if that project is wholly undertaken in South Africa or if that project is in respect of an activity that is not subject to the carbon tax. Where a project has been registered prior to the implementation of the carbon tax and offset credits issued in terms of the project have not been retired, those credits will be eligible, provided they are transferred from an international registry (CDM, GS or VCS) to the South African registry within 12 months of the implementation of the carbon tax. Projects that are currently under development and which will be registered before the start date of the tax and credits issued following the introduction of the carbon tax will have to be transferred from an international registry to the South African registry within 6 months of their issuance.

In terms of Regulation 4 of the Draft Regulations, projects benefitting from other government incentives, such as projects registered for the Energy Efficiency Savings Tax Incentive in terms of s12L of the Income Tax Act, No 58 of 1962 (Act), will not be eligible for the carbon offset allowance or activities conducted in terms of the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP).

For how long may a carbon offset be used?

To address the issue of permanence pertaining to certain offset projects, the crediting period for carbon offset projects will require periodic reviews to ensure, most importantly that the baseline assumptions of the project are still valid. To give effect to this, Regulation 2 states that an offset generated by a CDM project may be used for a non-renewable 10 year period or for a 7 year period which is twice renewable, constituting a period of 21 years in total. The same crediting periods apply to any GS project. In the case of a VCS project, all non-AFOLU projects will have a 10 year crediting period which may be renewed twice and all other AFOLU projects may be credited for a minimum period of 20 years and a maximum period of 100 years which may be renewed four times. Any project approved under another standard will have a crediting period specified by the Minister of Energy or a delegated authority.

How does a taxpayer claim the carbon offset allowance?

Regulation 7 merely states that a taxpayer that intends to utilise an offset as a carbon tax allowance must register that offset with the administrator in the form and manner and at the place that the administrator may determine. In terms of Regulation 5, the Designated National Authority (DNA) within the Department of Energy will fulfil the role of administrator. The Explanatory Note summarises the envisaged process whereby the transfer of carbon credits and generation of carbon-offset certificates will take place as follows:

  • Once emissions reductions are verified, the project developer may request the issuance of carbon credits, being CERs under the CDM, Verified Carbon Units (VCUs) under the VS and GS credits under the GS.
  • Upon approval of the project by the issuing bodies, the credits are deposited into the project developer’s account in the relevant registry (CDM, VCS or GS).
  • For the credits to be used to offset a tax liability under the South African carbon tax scheme, offset developers or entities responsible under the carbon tax will have to request credits to be cancelled in the international registry and then transferred to the South African registry.
  • This will be a mirror system where one tonne CO2 is transferred as such into the South African registry. These carbon credits will have to meet the local eligibility criteria and then are registered in the South African registry only after the DNA has received confirmation that the same credits have been cancelled in the respective international registry. Offset developers or entities must obtain a carbon-offset certificate from the DNA.

Record keeping

In order to administer the scheme, an offset registry will be created in terms of Regulation 8. The registry must reflect a number of things, including any offsets registered in terms of Regulation 5 and any offsets transferred in terms of Regulation 3.

From the taxpayer’s perspective it will be crucial to obtain a certificate from the DNA, proving its entitlement to claim the carbon offset allowance. The Explanatory Note states that in order to obtain a certificate, project developers would apply to the DNA for a pre-screening letter that a proposed project would be eligible against the domestic eligibility requirements of the carbon tax. The project developers apply for an Extended Letter of Approval (ELOA) from the DNA to confirm domestic eligibility approval before a project is undertaken. The project is then undertaken under the rules and modalities of the international offset standard (CDM, VCS or GS) or an approved methodology for South African specific projects and then issued with credits under the respective standard. The project developer would then request for the international programme credits to be transferred into the domestic registry.

The DNA would then assess each request for transfer against the domestic eligibility criteria and would either accept or reject the transfer. If the transfer is accepted, the DNA will issue corresponding domestic carbon offset into the nominated account of the transferee in the domestic offset registry. The units issued into the domestic registry could be either linked to the specific CER, if this is a CDM project, or simply represent an undifferentiated CER held in the national account. Entities liable for carbon tax will have to surrender their carbon offset credits to SARS should they wish to use the offset credits to reduce their carbon tax liability. If SARS decides to carry out an audit or a specific carbon tax liable entity, the DNA will work with SARS to provide information on the offset credits used by an entity to reduce its tax liability. This will be achieved through providing SARS access to the offset registry/database, which should contain proof of retirement of the carbon offsets. The certificate issued by the DNA must contain specific information, which is detailed in Regulation 10 of the Act. In terms of Regulation 9, the taxpayer will have to retain this certificate for a minimum period of 15 years.

Comment

In the 2016 Budget announced by the Minister of Finance in February, it was stated that “given the economic outlook, the carbon tax has been designed to ensure that its overall impact will be revenue neutral up to 2020…” and that 90 comments on the Draft Bill had been received up until that point. The 2016 Budget further stated that the Draft Bill will be revised, taking into account public comments and further consultation. Although Treasury has not issued a revised version of the Draft Bill, it is very possible that the carbon tax will come into effect at the beginning of 2017. Taxpayers that could be liable for carbon tax in terms of Section 4 of the Draft Bill, are advised to understand what their carbon tax liability will be once it comes into effect and to take steps to make use of the allowances offered by the Draft Bill to the greatest extent possible. Persons wishing to submit written comments or requesting clarifications on the Draft Regulations, should submit them to Treasury by 29 July 2016.

Written by Louis Botha and Heinrich Louw




SARS issues important tax ruling for renewable energy financing structures

Author: Mansoor Parker (ENSAfrica).

On 13 April 2016, the South African Revenue Service (“SARS”) issued Binding Private Ruling 228 (“BPR 228”), which dealt with the issue whereby a project company becomes an operating company for the purpose of s8EA of the Income Tax Act, No 58 of 1962 (“ITA 1962”). This question is an important one in the context of financing the activities of renewable energy project companies but its relevance stretches further to many other infrastructure-related project companies.

BPR 228: facts and circumstances

In BPR 228, the applicant taxpayer sought a tax ruling from SARS concerning its financing of a newly established project company. The applicant proposed injecting capital into the project company by means of loan funding as well as subscribing for 25% of the ordinary shares in the project company.

The applicant would finance the subscription price of the ordinary shares in the project company out of the proceeds of issuing ordinary shares to its holding company and issuing preference shares to the co-applicant, a finance provider.

The co-applicant required the applicant’s holding company to provide the co-applicant with a guarantee for any amount which the applicant had contracted to pay to the co-applicant, but fails to pay in respect of the preference shares. The co-applicant also required a cession and pledge by the applicant’s holding company of its shares in the applicant.

The transaction steps are contained in the in the diagram below.

This sort of financing structure is typical in the context of the government’s Renewable Energy Independent Power Producer Programme. Finance providers typically favour preference share funding because dividends from preference shares are normally exempt from income tax making it a cheaper form of funding.

The impact of section 8EA

Section 8EA was introduced in order to strengthen the anti-avoidance rules where the dividends in respect of the share issues were guaranteed by third parties. Where the dividends are guaranteed by third parties, section 8EA will treat the dividend as income. The result for the finance providers is that the dividend becomes taxable.

Finance providers normally protect themselves against this risk by requiring the preference share issuer to “gross-up” the amount of the dividend by increasing the amount payable to the finance provider to include taxes that would be incurred by the finance provider. This increases the cost to the preference share issuer.

The safety hatch in section 8EA: the operating company exception

Section 8EA was, subsequent to its introduction, amended to provide greater relief for transactions, especially in the context of black economic empowerment, where shares are issued to finance the acquisition of shares in an operating target company. One of the ways in which parties may avoid the anti-avoidance rule is if the consideration for the issue of the shares is applied directly or indirectly to acquire equity shares in an operating company.

In BPR 228, at the time of the applicant’s investment, the project company would not be operating or providing the goods or services that it intends to provide for consideration. The project company was expected to be operational within 18 months from the commencement of the construction of a plant.

SARS ruled that the applicant’s subscription for the ordinary shares in the project company will not be regarded as having been applied for a “qualifying purpose” as defined in s8EA(1). Consequently, the project company will not be an “operating company” at the relevant time.

Section 8EA defines an operating company as follows:

operating company” means—
(a) any company that carries on business continuously, and in the course or furtherance of that business—

(i) provides goods or services for consideration; or

(ii) carries on exploration for natural resources;

(b) any company that is a controlling group company in relation to a company contemplated in paragraph(a); or

(c) any company that is a listed company;”

In order to determine whether the project company in BPR 228 is an operating company, it must first be ascertained that it “carries on business continuously.” The ITA 1962 does not contain an exclusive definition of the meaning of “carries on business continuously”. It is a factual question which is divided into two: does the project company carry on business and is that business carried on continuously? Thus, isolated transactions in the nature of trade do not satisfy the “carries on business continuously” requirement because they do not involve a continuity of operations.

BPR 228 seems to be based on the fact that the project company is not yet carrying on business. This is relevant for renewable energy transactions where the funds derived from the preference shares are usually used to acquire equity in a project company which intends to construct and thereafter operate a plant that will generate the renewable energy for subsequent sale. At the time of the acquisition of the equity in the project company, the project company is not carrying on business. This means the funds derived from the issue of the preference shares do not have a qualifying purpose.

Several views have been expressed in the past concerning this issue. One view was that a purposive interpretation should be applied because the intention of the project company is to become an operating company after the construction phase of the plant is completed. On this latter interpretation, the meaning of “carries on business continuously” should be enlarged in order to capture companies which intend to carry on business. BPR 228 dismisses this view.

BPR 228 does not explain how it arrived at the conclusion that the project company is not an operating company. We believe that SARS took the position that the words “carries on business continuously” must be interpreted in their plain, obvious and common sense and that the context in section 8EA does not furnish any grounds to enlarge its interpretation to companies that intend to carry on business continuously.

 

Mansoor Parker

tax | executive
mparker@ENSafrica.com
+27 83 680 2074

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Draft Carbon Tax Bill – Liable entities

carbontaxThe South African National Treasury has published a Draft Carbon Tax Bill (the Bill) for public comment.

This article explores 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. This article considers a fundamental connection established by the Bill between tax law and environmental law.

The 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)”

The following elements 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”.
  • “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 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). 1 The 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 CO2-eq is required to submit a pollution prevention plan”.

Annexure 1 to the Notice comprises the following table:

Emission Sources Activities
Fuel combustion (both stationary 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

Land

  • 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
    discharge
  • Industrial waste disposal

 

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 the 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.

The Draft Declaration is expected to be formally promulgated in due course, but for the moment the document remains only in draft.

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.

1 NEMAQA section 29 empowers the Minister to declare a substance to be a priority pollutant, with the consequent requirement for 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.

ENSafrica
Draft Carbon Tax Bill, 2015
Explanatory Memorandum on Draft Carbon Tax Bill
National Environmental Air Quality Act 39 of 2004
Government Gazette 37421, 14 March 2014  
Kyoto Protocol




Carbon Tax Draft Bill published for comment

carbon tax 1On Monday, 2 November 2015, the South African National Treasury published a Draft Carbon Tax Bill (the “Bill”) for public comment by 15 December 2015. At first glance, the Bill does not stray too far from the carbon tax design that Treasury has been proposing since 2010 in various discussion papers, national budget speeches and their associated explanatory memoranda and responses to stakeholder commentary on the design. Whilst the Bill does not change the essentials, it does progress certain of the detail while providing only a tantalising glimpse of some of the more interesting aspects of the design. While the proposed tax is vaunted as thecarbon tax, this is not the only or the first carbon tax imposed in South Africa. Emissions on new vehicles are subject to emissions taxation and approximately five years ago, the fossil fuel electricity levy was introduced. These are both taxes on greenhouse gas emissions, as is the proposed carbon tax.

The following high-level points are important to note in relation to the Bill:

  • The essential carbon tax design that has been discussed since 2010 is unchanged, although the Bill provides greater detail on particular architectural elements while providing only glimpses of others, e.g. the proposed use of carbon offsets against a carbon tax liability, the detail of which will be provided in a regulation that is expected to be published for comment in early 2016.
  • The Bill proposes that carbon tax be paid in respect of every ‘tax period’ and that the first tax period will commence on 1 January 2017 and end on 31 December 2017. Note the distinction between ‘tax period’ and the ‘phase’ of carbon tax implementation, discussed below.
  • In an evolution of Treasury’s previous stance that carbon tax revenues will simply go into the general revenue pool, the Bill proposes that revenues will be spent on a range of sustainable interventions, e.g. providing tax relief for rooftop solar power, a reduction in the fossil fuel electricity levy or providing support for free basic electricity. While this represents a welcome softening of Treasury’s position, it is unlikely that Treasury will irrevocably commit itself to these applications of carbon tax revenue due to the need to retain fiscal flexibility in the national budget.
  • While the Bill provides some insight into the proposed design up to 2020, including emissions thresholds and exemptions, it is silent on the post-2020 period, which is unhelpful for predicting the longer-term implications of the carbon tax. It is probably safe to assume that the tax will gradually be ramped-up after 2020, including the lowering of thresholds and the removal of exemptions.
  • The carbon tax will be introduced in a phased manner. The first phase of the tax will run from the commencement of the regime until 2020, during which time the tax is intended to be neutral to revenue and to electricity prices (once revenue recycling measures are taken into account).  However, a press statement accompanying the Bill states rather obliquely, that while “the tax and revenue recycling measures are designed to be revenue neutral from a macroeconomic perspective [they] will not necessarily be neutral for companies with significant emissions”. This is a warning to large emitters of scope one emissions that the carbon tax will have financial consequences for them from its commencement.
  • The six greenhouse gasses originally targeted in the Kyoto Protocol (carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons and sulphur hexafluoride) will be the focus of the carbon tax, but the seventh Kyoto gas (nitrogen trifluoride) is excluded due to the absence of this gas from South African industrial emissions.
  • The Bill includes the following thresholds and exemptions (which are more numerous and complex than before, particularly their inter-relationship):
    • A basic 60% tax-free threshold during the first phase.
    • An additional 10% tax-free allowance for process emissions.
    • An additional tax-free allowance for trade exposed sectors of up to 10%.
    • An additional tax-free allowance of up to 5% as recognition for early actions and/or efforts to reduce emissions that beat the industry average.
    • A carbon offsets tax-free allowance of between 5% and 10%.
    • A phase one-specific additional 5% tax-free allowance for companies participating in the Department of Environmental Affairs carbon budgeting system in recognition of their participation and of the role of carbon budgets in the overall tax design.
    • Phase one tax-free exemptions will range between 60% and 95% of total emissions, implying that the carbon tax will be imposed on 5% to 40% of actual emissions during the period.
    • In phase one, an initial marginal carbon tax rate of R120 will be imposed per tonne of carbon dioxide equivalent (“tCO2e”), but the effective carbon tax rate will vary between R6 and R48/tCO2e with a comprehensive application of the system of tax-free allowances.

In relation to the potential economic consequences of the carbon tax, the accompanying explanatory memorandum indicates that a 2012 economic modelling exercise initiated by the National Treasury found that “…a carbon tax with broad sector coverage implemented gradually and complemented by effective and efficient revenue recycling will contribute towards significant greenhouse gas emission reductions, and have only a marginal negative impact on economic growth over the short-term”. There are at least two considerations that arise from this statement:

  • Firstly, the idea that the carbon tax will have only a marginal negative economic effect over the short-term is unlikely to be of any comfort to those industries and their customer bases that will feel the negative impact. In any event, the economic modelling that has been released to date on the carbon tax is relatively superficial and the conclusions have been challenged. One of the imperatives going forward must be a comprehensive economic modelling of the anticipated impact of the carbon tax as input to public and private sector strategic decision-making around the tax.
  • Secondly, by its reference to the carbon tax’s potential to contribute to greenhouse gas emissions reduction, the statement locates the carbon tax within the national and international political landscape of the climate change negotiations and the explanatory memorandum describes the carbon tax as “integral” to domestic climate change policy. In fact, the carbon tax is relevant to a number of macro-economic concerns, not least of which is power generation and the future energy mix. For example, the explanatory memorandum indicates that the carbon tax aims to change the behaviour of firms, incentivising them to shift towards cleaner technology when replacing/renewing machinery, technology or processes. While the carbon tax may drive the market in this direction, it is also true that, in the absence of a systemic change in our power sector, the carbon tax will not drive the significant opportunity for greenhouse gas emissions reduction, namely a shift to less emissions-intensive forms of electricity generation. This is because the energy mix is not determined by market forces, but by the Integrated Resources Plan, 2030 (the IRP) which does not offer energy-sources alternatives for energy-consumers other than Eskom’s emissions-abundant power. The pending revision of the IRP might introduce some flexibility which would tend to support the effectiveness of the carbon tax as a driver towards a less emissions-intensive electricity sector, but this remains to be seen.

It is only with an appreciation of where and how it fits into broader macro-economic concerns that a proper understanding of the carbon tax can be formulated. Due to the complexity of the proposed tax design and the myriad of strategic and operational  implications that the imposition of the tax will have for industry, this article is the first of a series that will examine the context for and various features of the proposed carbon tax. Future articles in this series will explore the policy, legal and strategic positioning of the carbon tax, with a view to inform this understanding.

ENSafrica
Draft Carbon Tax Bill, 2015




Draft bill on carbon tax released

carbon tax 1Author: Heinrich Louw (International Law Office).

Having been the subject of various discussion papers since 2011, the introduction of a carbon tax in South Africa is becoming a reality with the release of a draft carbon tax bill earlier this month. It has been clear since at least 2013 that South Africa would opt for a carbon tax in order to price carbon, as opposed to an emissions-trading scheme. The draft bill sets out the mechanics of the carbon tax.

Greenhouse gas levy

Essentially, the carbon tax will be levied in respect of the greenhouse gases that result from:

  • the combustion of fossil fuels;
  • fugitive emissions in respect of commodities, fuel or technology; and
  • industrial processes and product use.

In other words, not only emissions from the combustion of fossil fuels will be taxed, but also emissions from certain industrial or mining processes and activities. Emission factors will be used to calculate the resultant mass of greenhouse gases.

The base carbon tax rate will be R120 per ton of greenhouse gases emitted (or the carbon dioxide equivalent thereof).

Parties that conduct the activities listed in a forthcoming notice published by the minister of environmental affairs will be liable to account for carbon tax. However, certain sectors will be excluded, including agriculture, forestry and waste.

Further, certain thresholds will apply and – at least in respect of stationary emissions – only entities with a thermal capacity of 10 megawatts or more will be subject to carbon tax to begin with. For non-stationary emissions, the carbon tax will effectively be included in the specific fuel tax.

Allowances

The draft bill provides for a number of allowances that will reduce an entity’s carbon tax liability. In respect of the combustion of fossil fuels, an entity will generally receive a 60% allowance of the total percentage of greenhouse gas emissions for the period, depending on the relevant sector. Further, ‘sequestrated’ emissions (ie, carbon collected or trapped in a carbon reservoir) will also reduce the entity’s liability.

Allowances are also available for:

  • fugitive emissions and industrial processes, depending on the sector;
  • trade-exposed sectors (up to 10%);
  • entities that have implemented additional measures to curb emissions (up to 5%);
  • companies which participate in the carbon budget system (5%); and
  • offsets, as prescribed by the relevant minister.

A limit of 95% will apply to allowances. Percentages and limitations are to be reviewed after 2020, in order to phase in the effect of carbon tax.

Administration

Administration of the carbon tax will largely lie with the South African Revenue Service, working together with the Department of Environmental Affairs and the Department of Energy to establish mechanisms for monitoring, reporting and verifying emissions.

However, the system will largely involve a self-assessment process, whereby taxpayers will be responsible for measuring their own emissions and calculating their tax liability.

This article first appeared on internationallawoffice.com.



Room for improvement in SA Carbon Tax Bill, says Centre for Environmental Rights

carbon tax 3Author: Chantelle Kotze (Mining Review).

At the start of December, the Centre for Environmental Rights (CER) submitted comments on the Carbon Tax Bill, 2015, which was published for public comment on 2 November by National Treasury.

The Bill, which is intended to take effect in January 2017, aims to put a price on carbon by levying a tax of R120 per each ton of carbon dioxide equivalent (CO2e) emitted.

The Centre notes the following:

  1. The Bill does not do enough to promote a meaningful reduction of GHG emissions, and makes provision for substantial allowances to be given to big GHG emitters. The Bill also provides for tax-free thresholds that can rise as high as 95% and will remain fixed until 2020, after which time they may be reduced or replaced.
  2. The amount of tax – i.e. R120 per ton of carbon dioxide equivalent – is insufficient to serve as an adequate incentive to reduce GHG emissions, and it is not an accurate reflection of the true external cost of carbon emissions. Despite SA’s dubious status as the leading CO2 emitter in Africa, accounting for 40% of African emissions, and the 13th largest emitter in the world, the carbon tax rate is substantially lower than in numerous other jurisdictions.
  3. The Bill fails to provide that the revenue generated from the tax will be used on measures to reduce South Africa’s GHG emissions – in keeping with the aim of the Bill.
  4. The Bill provides for a carbon offset allowance, which allows a taxpayer to reduce their liability for carbon tax by utilising carbon offsets. Offsets contradict and would not achieve the objective of reducing GHG emissions, as they would allow large GHG emitters to emit in perpetuity.
  5. The Bill fails to provide for measures to avoid industry simply passing on the tax burden to consumers, where consumers don’t have alternative carbon-free options.
  6. The tax is technically complex and its implementation – particularly reporting by industry of their emissions – will be difficult to monitor. It is essential for reports submitted under the Bill to be publicly available to promote effective implementation and compliance monitoring.

The CER’s submissions emphasise the need for alignment of the Bill with the objectives and principles in national legislation such as the National Environmental Management Act, 1998 (NEMA) as well as the right to an environment that is not harmful to health or well-being and the right to have the environmental protected for the benefit of present and future generations in terms of s 24 of the Constitution.

Meanwhile, the Chamber of Mines too believes that the introduction of a carbon tax should be delayed by five years.

The Chamber, which still needs to scrutinize the proposed bill, says a delay in the publishing of the bill will be advantageous given the absence of a proper regulatory impact assessment on the economic costs and benefits of imposing such a tax.

Commenting on the effect that it could have on the mining sector, Chamber of Mines CEO Roger Baxter said that “with electricity prices already having trebled in real terms in the past seven years, further cost increases imposed by carbon taxes could further undermine the embattled mining sector.

This article first appeared on miningreview.com.




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

Land

  • 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
    discharge
  • Industrial waste
    disposal

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.




Carbon tax in South Africa

carbontaxAuthor: Heinrich Louw.

After having been the subject of various discussion papers since 2011, the introduction of a carbon tax in South Africa is becoming a reality with the release of the Draft Carbon Tax Bill (Draft Bill) earlier this month.

It has been clear since at least 2013 that South Africa would opt for a carbon tax in order to price carbon, as opposed to an emissions trading scheme. The Draft Bill now sets out the mechanics of the carbon tax.

Essentially, the carbon tax will be levied in respect of the greenhouse gasses (GHGs) that result from:

  • the combustion of fossil fuels;
  • fugitive emissions in respect of commodities, fuel or technology; and
  • industrial processes and product use.

In other words, not only emissions from the combustion of fossil fuels will be taxed, but emissions from certain industrial or mining processes and activities will also fall into the carbon tax net. Emission factors will be used in order to calculate the resultant mass of GHGs.

The base carbon tax rate will be R120 per ton of GHGs emitted (or the carbon dioxide equivalent thereof).

Persons who conduct activities which will be listed in a notice published by the Minister of Environmental Affairs will be liable to account for carbon tax. However, certain sectors such as the agricultural, forestry and waste sectors will be excluded.

In addition, certain thresholds will apply, and at least in respect of stationary emissions, only entities with a thermal capacity of 10MW or more will be subject to carbon tax for the time being. For non-stationary emissions, the carbon tax will effectively be included in the specific fuel tax.

The Draft Bill makes provision for a number of allowances that will reduce an entity’s carbon tax liability.

In respect of the combustion of fossil fuels, an entity will generally receive a 60% allowance of the total percentage of GHG emissions for the period, depending on the relevant sector. This is in addition to the fact that ‘sequestrated’ emissions will also reduce the entity’s liability, essentially being carbon collected or trapped in a carbon reservoir.

Allowances are also available for:

  • fugitive emissions and industrial processes, depending on the sector;
  • trade exposed sectors, up to 10%;
  • entities who have implemented additional measures to curb emissions, an allowance of up to 5%;
  • companies who participate in the carbon budget system, an allowance of 5%; and
  • offsets as prescribed by the relevant minister.

A limitation of 95% will apply to allowances. Percentages and the limitations are to be reviewed after 2020 in order to phase in the effect of carbon tax.

Administration of the carbon tax will largely lie with the South African Revenue Service (SARS), working together with the Department of Environmental Affairs and the Department of Energy in order to establish mechanisms for monitoring, reporting and verifying emissions.

However, the system will largely constitute a self-assessment process, whereby taxpayers will be responsible for measuring their own emissions and calculating their tax liability.

Cliffe Dekker Hofmeyr will be involved in making submissions on the Draft Bill.