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South Africa has a rapidly evolving climate change policy environment, which is in-keeping with the country¡¦s view of itself as a developing country leader in the climate change arena. Part of the policy environment includes attention to financial mechanisms that can be marshaled in support of the response to climate change. Flowing from the notion of using financial mechanisms in this manner, the National Treasury has taken initial steps towards the implementation of carbon taxation. A number of tax measures have been implemented or are in the process of formulation, primarily with environmental (and in certain cases climate change) objectives in mind. These include taxes on (non-renewable) electricity generation, motor vehicle emissions, incandescent globes and the soon to be implemented carbon tax. Adopting a carrot and stick approach a number of tax incentives (the ¡§carrot¡¨ to taxation¡¦s ¡§stick¡¨), have been or are in the process of being introduced, or currently exist and are being considered for extension. These include the tax exemption for revenues earned from Certified Emission Reductions (CERs - the carbon credits generated by Clean Development Mechanism projects), the accelerated depreciation allowance for renewable energy generation and biofuels production, the 150% research and development tax incentive and the energy efficiency savings tax allowance. The 2012 National Budget Review optimistically stated that the carbon tax will encourage the uptake of cleaner-energy technologies, energy-efficiency measures and research and development of low-carbon options. However, insufficiently large tax incentives may achieve little change in behaviour. It may not be worthwhile for taxpayers to take account of tax incentives in making environmental technology decisions if the tax incentives are too small to justify the costs of changing established decision-making structures. For instance, a notable omission from the current suite of tax incentives is Carbon Capture and Storage (CCS) - the idea that carbon emissions can be captured and sequestered (usually in underground geological formations) rather than released into the atmosphere. At the moment, CCS costs are relatively high and there exists no incentive in the form of, say, an accelerated depreciation allowance to encourage taxpayer behaviour in this direction. South Africa has a rapidly developing CCS programme due to the abundance of coal and its use in, particularly, Eskom¡¦s and Sasol¡¦s operations. (For more on CCS see www.sacccs.org.za). The carbon tax will, according to the 2012 Budget Review, apply to carbon dioxide equivalent emissions. It is conventional to convert the warming potential inherent in the emissions of various greenhouse gases to ¡§CO2 equivalent" (¡§CO2e¡¨) ¡V effectively to determine how much CO2 would need to be emitted to have the same warming effect on the global climate system as a specified volume of another greenhouse gas. Of importance here is that, unlike the 2010 Carbon Tax Discussion Document¡¦s singular focus on carbon dioxide emissions, the more recent notion is for the carbon tax to apply not only to actual carbon dioxide emissions but also to emissions of other greenhouse gases (hence the more recent usage of "equivalent"). It is likely that the carbon tax will be calculated based on the carbon content of fossil fuels such as coal, crude oil and natural gas. This is significant because the carbon tax will create a price differential among fossil fuels depending on their carbon content. It will also lower the relative price of non-fossil-fueled electricity compared to that of fossil-fueled electricity. The 2010 Carbon Tax Discussion Document proposed a flat rate of R120.00 per tonne of carbon dioxide emitted, without a threshold below which the tax would not apply, i.e., the 2010 idea was for the tax to apply to all emissions of carbon dioxide. By contrast, the 2012 Budget Review proposes a percentage-based emissions threshold permitting tax-exempt status for less harmful emitters, and a higher tax-free threshold for process emissions, while giving due consideration to the limitations of certain industries, e.g., cement, iron and steel, aluminium and glass, to mitigate process emissions. The 2012 formulation of the carbon tax also includes the use of ¡§offsets¡¨ by companies to reduce their carbon tax liability and a phased implementation of the tax regime.[1] It is currently not clear what is meant by the term "offset" or how these will apply to a carbon tax liability. However, discussions with senior officials within the Treasury¡¦s Tax Policy Unit indicate that the term ¡§offset¡¨ (as used in the 2012 Budget Review) is likely to mean a carbon credit in the nature of a CER. All companies subject to the carbon tax will be entitled to utilise the basic tax free threshold below which no carbon tax will be payable during the first phase (2013 to 2019). A formula is proposed to adjust the basic percentage tax-free threshold to take into account efforts already made by firms to reduce their emissions and to encourage firms to invest in low-carbon alternatives. The basic percentage threshold below which the tax will not be payable may be adjusted using a carbon emissions intensity factor for output compared to an agreed overall sector benchmark. A formula is proposed to calculate a factor ¡§Z¡¨ which will then be used to adjust (increase of decrease) the basic percentage tax-free threshold. The 2012 Budget Review provides an indication of the expected levels of the carbon tax rate as being R 120.00 / tCO2e emitted above certain thresholds. The tax rate will increase by 10% a year, reaching R 210.00 / tCO2e by 2019/2020 (the first phase of the carbon tax). Depending on the nature of the emitter, a basic tax-free threshold of up to 60% of the tax liability will apply, with the maximum use of ¡§offsets¡¨ set at 5% or 10% of the tax liability, during the first phase. Tax-free thresholds will be reduced during the second phase, which will run from 2020 to 2050, and will likely be replaced with absolute emission thresholds after 2050. Please refer to the table below, drawn from the 2012 Budget Review, which sets out the proposed emissions for the carbon tax. The tax is currently expected to commence during the 2013/14 budgetary year. SectorBasic tax free threshold(%) below which no carbon tax payable during the 1st phase (2013 to 2019)Maximum Additional allowance trade exposureAdditional Allowance for ¡§process¡¨ emissionsTotalMaximum Offset percentage Electricity60%--60%10% Petroleum (coal to liquid)60%10%-70%10% Petroleum ¡V oil refinery60%10%-70%10% Iron and steel60%10%10%80%5% Aluminium60%10%1080%5% Cement60%10%10%80%5% Glass & ceramics60%10%10%80%5% Chemicals60%10%10%80%5% Pulp & paper60%10%-70%10% Sugar60%10%-70%10% Agriculture, forestry and land use60%-40%100%- Waste60%-40%100%- Fugitive emissions: coal60%10%10%80%5% Other60%10%10%70%10% Table: Proposed Emissions Thresholds for Sectors[2] Environmental and climate change policy have been transformed over the past decade by the use of taxes and tax incentives. Taxpayers would be well advised to consider all the applicable tax incentives at their disposal when making decisions in this area. A new carbon taxation discussion document has apparently been prepared for imminent release by the Treasury [1] Ibid. [2] Ibid., at 186.