Member Article

Just as it seemed that the South African Government’s appetitefor introducing the carbon tax was waning we were informed by the Minister of Finance that the long awaited carbon tax policy paper will be released by the end of March 2013.

The carbon tax policy paper is expected to be an update of the carbon tax discussion paper that was published for comment in December 2010. The policy paper will in all likelihood provide further detail on the specific carbon tax design features contained in the 2012 Budget Review.A carbon tax needs to be set at a fairly high tax rate to have the desired effect of reducing carbon emissions. The current design of the carbon tax contemplates that it will be introducedat an initial modest effective tax rate that will,after taking into account the tax-free thresholds and the applicable allowances,be substantially below the stated tax rate of R120 per ton of carbon dioxide equivalents (CO₂e). Government has also made an important concession in the proposed application of the revenues raised by the carbon tax by indicating that these will be recycled to fund the energy efficiency savings tax incentive.

Interestingly, the current design of the carbon tax should reward clean energy generators as the proposed design of the carbon should permit such clean energy generators to selltheir carbon offsets to fossil fuel energy generators to reduce their carbon tax liability. This will enable the clean energy generators to raise additional capital for their clean energy projects. In this one is potentially dealing with a massive transfer of wealth and possible the reinvigoration of the local carbon offset industry. In addition to their financial value, carbon offsets created in South Africa will, increasingly, form part of the country’s reporting, at the international level, on progress towards reducing the national carbon footprint. It therefore comes as no surprise that the contract documentation for the renewable energy independent power producer programme seeks to retain to government the right to revisit the question of ownership of carbon offsets generated by the programme - possibly with a view to applying such offsets to the national emissions profile.

The Minister of Finance also signalled emphatically that the carbon tax will be introduced with effect from 1 January 2015. Our advice to companies operating in sectors which will be subject to the carbon tax is to –

·         firstly, determine their carbon tax exposure; secondly, to take steps to mitigate their exposure by, for instance, improving carbon performance, optimal utilisation of tax incentives and offsets; and

·         thirdly, to provide inputs on the proposed design of the carbon tax after the policy paper is released.

In a related development, the Minister indicated that the income tax exemption which applied to sales of carbon offsets generated in South Africa according to the scheme established by the Kyoto Protocol, but which ended on 31 December 2012, is now likely to be extended until the end of the decade. In anticipation of the end of the exemption ENS engaged directly with Treasury and made particular submissions in relation to the extension of this incentive for carbon offset project development.