Member Article

The Paris Agreement (the “Agreement”) was signed on Friday, 22 April 2016 in New York. This adds further impetus to the international response to climate change and, for the local economy, it re-emphasises the importance of South Africa’s national greenhouse gas mitigation actions, including the carbon tax.

Paris Agreement – entry in force

If 12 December 2015, the day on which negotiations on the Agreement were concluded, will go down in history as the date on which humanity finally took the threat of climate change seriously enough to warrant a comprehensive (if still flawed) global response, then 22 April 2016 will likely run a close second in terms of significance. On Friday (22 April 2016), the United Nations Secretary-General, Ban Ki-Moon, convened a high-level signing ceremony of the Agreement in New York to mark the official commencement of the steps required to implement the future climate change legal regime. At the last count, some 156 countries, including all of the world’s largest emitters (save the Russian Federation) have indicated an intention to sign.

After 22 April 2016, the Agreement will be open for signature in New York until 17 April 2017 and will enter into force when at least 55 country Parties to the United Nations Framework Convention on Climate Change (“UNFCCC”), together representing at least 55% of global emissions, have ratified, accepted or approved the Agreement or acceded thereto. The timing of the Agreement’s coming into operation is important because the operation of the Kyoto Protocol (the Agreement’s predecessor and part of the suite of international climate change law, including the UNFCCC), was subject to the same pre-conditions (ratification, acceptance, approval or accession of 55 countries, together representing at least 55% of global emissions). Given the state of international economics and geopolitics of the time (1997 to 2005) it took eight years for Kyoto to be brought into operation. The period was marked by waxing developing country greenhouse gas emissions and a concomitant waning in the political will of developed countries to comply with their Kyoto-enshrined obligations to curtail industrial greenhouse gas emissions. These geo-political and economic factors ultimately led to a breakdown in the Protocol’s approach to greenhouse gas mitigation and spurred concern over weakening international climate response and ultimately, to the revival of ambition that drove the successful negotiations on the Agreement.

Global climate change response

In a clear indication of the momentous shift in international climate change ambition, the number and combined emissions on the list of currently anticipated signatories implies the strong likelihood that the Agreement will come into operation in the near future.¹ While this willingness to work on the global climate response is heartening, there are indications that the planet is not waiting for humanity to get its collective act together. The World Resources Institute (“WRI”) recently reported on six climate change milestones that have been achieved since COP21 was held in Paris in November and December 2015, namely:²

· the confirmation of 2015 as the warmest year on record;

· record levels of warmth experienced each month, so far, in 2016;

· record lows in the peak levels of Arctic sea ice;

· a strengthening of the connection between extreme weather events and human-induced climate change;

· confirmation that the West Antarctic Ice Sheet is at significantly greater risk of rapid melting than was previously thought; and

· confirmation that the negative impacts of carbon-intensive behaviour might be more pronounced than previously thought.

South Africa’s climate change response and the carbon tax

The WRI’s last mentioned milestone speaks directly to the continuing evolution of the measures being marshalled to curtail industrial greenhouse gas emissions, including economic measures such as carbon pricing. With a view to deepening our understanding of the role that carbon pricing can play in the climate response, the International Emissions Trading Association (“IETA”) has analysed the 188 Intended Nationally Determined Contributions (“INDCs”) that were submitted by UNFCCC country Parties to the UNFCCC Secretariat (including South Africa) in anticipation of the COP21 negotiations. Among IETA’s findings are that:³

· 90 INDCs indicate that achieving the respective country’s climate goals will require access to a carbon market; and

· several INDCs mention that higher national ambition in responding to climate change would be possible were carbon market access, carbon pricing and climate finance to become more easily available.

IETA’s findings provide a convenient reason to consider the latest developments in South Africa’s most prominent process to price greenhouse gas emissions in this economy, namely the National Treasury’s proposed carbon tax on direct industrial greenhouse gas emissions. It is worth reiterating some of the reasons underpinning Treasury’s actions, including:

· The ubiquity of the international impetus towards pricing carbon – in addition to IETA’s abovementioned findings, a World Bank report of September 2015⁴ records that, by that date, some 40 national and 23 cities, states and regions, representing approximately 7-billion tonnes of carbon dioxide, or 12% of global greenhouse emissions, were using or considering using carbon pricing schemes, for example emissions trading and/or carbon taxes. Developing countries involved in these activities include Mexico, China, Thailand, Chile and China. This means that contrary to a regularly repeated, but erroneous, argument against the imposition of the carbon tax, South Africa is not a leader, even among developing countries, in seeking to price carbon in its economy.

· South Africa’s greenhouse gas emissions are the largest on the African continent and, if not curbed, will continue to grow exponentially. When considered per capita, South Africa’s emissions are regularly placed in the top 20 of global emissions, and its emissions intensity – the ratio of emissions to Gross Domestic Product – is above the world average and on par with very industrialised countries such as Japan.

· There are growing calls from a number of developed countries for the imposition of border tax adjustments, i.e., import fees levied by countries that price carbon in their economies on manufactured goods imported into that economy from countries that do not price carbon. Consequently, any potential revival of the South African manufacturing sector, with some hope of doing international business, can only occur if local production is subject to a future carbon price signal.

· Due to the need to control the economic impact of the tax, the sooner industry is able to grapple with this new reality of doing business, the sooner its positive effects, including drives towards greater efficiency and reduction in greenhouse gas emissions, can begin to permeate the economy.

During the week of 11 April 2016, Treasury held a series of stakeholder engagements to provide feedback on the round of consultation that followed the release for comment of the Draft Carbon Tax Bill, in November 2015 (the “Bill”).

The following clarifications emerged from the recent consultations:

· The Bill’s current provision identifying tax liable activities will be amended to refer to the schedules to the Bill itself, rather than to the draft Pollution Prevention Plan Regulations drafted in terms of section 29 of the National Environmental Management: Air Quality Act 39 of 2004.

· The schedules to the Bill will also need to be amended to align with the greenhouse reporting processes currently being managed by the Department of Environmental Affairs pursuant to the draft Greenhouse Gas Reporting Regulations, which feed into the National Atmospheric Emissions Inventory System (“NAEIS”). The intention is that the greenhouses gas reporting into the NAEIS will be the same reporting as that required by the South African Revenue Service in respect of the carbon tax. Treasury confirmed that the Bill’s reference to a calendar year for carbon tax reporting, as opposed to a financial year, will remain in order to align the timing of carbon tax reporting with that for NAEIS reporting. The intention is that the first round of carbon tax reporting will be in March 2018 and the draft Greenhouse Gas Reporting Regulations and the associated Technical Guidelines, read together, will inform carbon tax reporting.

· The anticipated impact of the carbon tax on the electricity price will be neutralised for the first period by a combination of the phase-out of the renewable energy levy (currently imposed on fossil fuel generated electricity) and the replacement (in the fiscus) of the revenue raised by this levy with that raised from the carbon tax and the advantage accorded to Eskom in the calculation of carbon tax payable in respect of fossil fuel generated electricity (section 6(2) of the Bill).

· There is also an intention to provide for a threshold of 10 mega-watts thermal capacity (estimated in volumes of emissions at around 30 000 tonnes of carbon dioxide equivalent) below which entities will not be tax liable. The point of this threshold is that it is high enough to exclude households and other, non-industrial activities from the carbon tax, but low enough to make the tax applicable to the majority of emitting industries in the country.

Business needs to take the promise of the carbon tax seriously

For those who might still be of the view that the carbon tax will not materialise, Treasury’s message is very clear: the carbon tax is coming and the timeframe for commencement, including progressing through the Parliamentary process, remains January 2017. Notwithstanding this determination, a recent article in the Business Day⁵ has indicated that there might still be some delay in taking the Bill through the Parliamentary process in 2016 due to the time limitation resulting from Parliament’s going into recess from May, ahead of the local government elections in August. Business is advised to caution against reading the article to mean that the carbon tax will not materialise. On the contrary, the messaging is clearly no longer “whether” the carbon tax will be implemented but rather “when”.

Opportunities currently exist for emitters of greenhouse gas to take strategic steps to ameliorate the impact of the carbon tax on their business, alternatively for entities that have the potential to generate carbon offsets for use under the tax scheme to take the strategic steps that will permit them to capitalise on this opportunity. A slight further delay in implementing the carbon tax occasioned by Parliament’s limited time in 2016 will simply be a short breathing-space which will afford proactive business the chance to consider the risks and opportunities that will arise when the tax is implemented.

Treasury expects to release draft offsets regulations by the end of May 2016, and a second draft Bill thereafter, both of which will be subject to further stakeholder consultation.

Previous articles in the series on the carbon tax can be found here. For more information, please contact:

Andrew Gilder climate change and carbon markets specialist environmental [email protected] +27 82 382 6279

Mansoor Parker executive tax [email protected] +27 83 680 2074

Olivia Rumble climate change and carbon markets specialist environmental [email protected] +27 82 788 0864

 

Footnotes: 1 For the list of anticipated signatories, see:http://www.un.org/sustainabledevelopment/blog/2016/04/parisagreementsingatures/ 2 See the WRI report at: http://www.wri.org/blog/2016/04/6-climate-milestones-cop21-paris 3 See the IETA report at:http://www.ieta.org/resources/Resources/Reports/Carbon_Pricing_The_Paris_Agreements_Key_Ingredient.pdf 4 See the World Bank report at: http://www.worldbank.org/en/news/feature/2015/09/20/state-and-trends-of-carbon-pricing-2015 5 See the Business Day article at: http://www.bdlive.co.za/national/science/2016/04/19/no-time-to-process-carbon-tax-bill-this-year