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 South African National Treasury has taken initial steps towards the implementation of carbon taxation over emissions trading. While Treasury¡¦s progress towards carbon taxation is in keeping with its primary role in financial matters, a dichotomy exists between Treasury¡¦s view on how revenue raised from carbon taxation should be applied and the view of the Department of Environmental Affairs (which is the custodian of the national climate change policy). This article explores these and related issues with the purpose of giving a flavour and the status quo of the debate around carbon taxation and emissions trading in South Africa.
I. IntroductionSouth African climate change policy has been developing apace for some years, and is finally at a point where esoteric discussion on options is being replaced with slightly more concrete realisation of the national ambition of contributing to the international climate response. This is not to say, however, that a clearly articulated climate change legal regime has emerged in the country. Rather, the regime is still emerging with a number of competing policy options currently vying for the attention of the law maker. Such options (from the perspective of mitigation) range from greater attention to renewable energy and energy efficiency to a fast-developing Carbon Capture and Storage (CCS) programme.
Given the multiplicity of options that may coalesce into a future regime, the purpose of this article is not to provide a detailed analysis of the entire scope of South African climate change policy development, but rather to consider the more limited issues of how carbon taxation and emissions trading fit into the broader scheme. In order to do so, this article provides a brief overview of the evolving policy landscape before proceeding to dealwith the tax/trading status quo, which status is, itself, merely another marker on an already well-traversed road. Put another way, after a series of twists, turns, double-backs and detours, the country seems finally to have fallen onto a straighter path towards a hybrid tax and trading future.[1] It still remains to be seen whether this future will be realised in its currently anticipated form, or whether further obstacles lie ahead, particularly in light of an apparent difference of opinion between two responsible government departments on the application of the revenues raised from carbon tax.
II. Climate Change Policy DevelopmentSouth Africa has long prided itself as a key developing (and African) country player in the international climate negotiations and as a responsible corporate citizen willing to contribute to the global response to climate change. An early indication of this combined ambition was provided by the (then) Minister of Environmental Affairs and Tourism during the high-level plenary at the Climate Change Convention held in Bali, in November and December 2007.[2] The (then) Minister was clear that ¡§as a developing country (South Africa) willtake ambitious mitigationaction¡¨ and ¡§will contribute its fair share towards our common responsibility for the future.¡¨[3]
By the time this Ministerial statement was made, the country had (for some years) been embarked on the process of developing a national climate change policy. By way of illustration, the more prominent milestones in this policy development process are listed below, up to and including the most recent, formal developments:
¡P National Climate Change Response Strategy (September 2004)[4]
¡P South Africa National Climate Change Conference (November 2005)
¡P Long Term Mitigation Strategy Scenarios (2008)[5]
¡P South African Climate Change Policy Summit (March 2009)
¡P Green Economy Summit (May 2010)
¡P National Climate Change Response Green Paper (November 2010) (Green Paper)[6]
¡P National Climate Change Response White Paper (November 2011) (NCCRP).[7]
In the immediate aftermath of the publication of the NCCRP and as further illustration of the country¡¦s (perceived) elevated role in the negotiations, the South African Minister of International Relations took on the mantle of COP17 President and presided over the process which gave birth to the Durban Platform for Enhanced Action.[8] Along the way, and flowing from the outcome of COP15 (Copenhagen, Denmark, November and December 2009), the country submitted a national pledge to the UNFCCC.[9]This emissions-reducing ambition was used by President Zuma as the basis for the strongest (yet) statement of the national intention made, both prior to and at COP15, when he reiterated that with ¡§financial and technological support from developed countries, South Africa ... will be able to reduce emissions by 34% below ¡¥business as usual¡¦by 2020 and by 42% by 2025¡¨.[10]This expression of national ambition informs the mitigation aspects of the NCCRP,the objectives of which are rather broadly stated as being for South Africa to:
¡§Effectively manage inevitable climate change impacts through interventions that build and sustain South Africa¡¦s social, economic and environmental resilience and emergency response capacity.¡¨
and
¡§Make a fair contribution to the global effort to stablise (greenhouse gas) GHG concentrations in the atmosphere at a level that avoids dangerous anthropogenic interference with the climate system within a timeframe that enables economic, social and environmental development to proceed in a sustainable manner¡¨.[11]
All of the abovementioned policy development, including compilation of the listed instruments and arrangement of the listed conferences, has been driven by the Department of Environmental Affairs (DEA). This is understandable, given that DEA is the national focal-point for climate change and the UNFCCC, and the custodian of the country¡¦s ambition to reduce its greenhouse gas emissions.
However, it is from DEA¡¦s role as climate change focal-point that a dichotomy arises in the context of carbon taxation and emissions trading (it is worth noting that the Green Paper and the NCCRP refer to both of these as options for greenhouse gas mitigation). The dichotomy stems from the (unsurprising) fact that it is the authority of the National Treasury and not that of DEA that takes precedence when dealing with matters so intimately related to the fiscus as taxation and emissions trading. This hierarchy of authority is acknowledged in the NCCRP which indicates that it will be the Treasury that will explore the feasibility of a carbon tax and emissions trading and take steps towards the implementation of these financial mechanisms for greenhouse gas mitigation. Effectively, therefore, the role of the DEA is usurped by the Treasury when it comes to utilising financial instruments to achieve a climate change objective. While this approach seems reasonable on the face of it, the contrarinessre-asserts itself when one realisesthat the Treasury¡¦s notion of the underlying purposes of these financial instrumentsis sometimes at odds with that of the DEA. Against this contrary background, the remainder of this article sets out the Treasury¡¦s position (as the national financial authority) on carbon taxation and emissions trading in juxtaposition to that of the DEA.
III. Carbon Tax vs. Emissions TradingThe South African discussion on the use of financial instruments to achieve environmental objectives had itsfirst comprehensive articulation in a document issued by Treasury in 2006, entitled A Framework for Considering Market Based Instruments to Support Environmental Fiscal Reform in South Africa(the Environmental Fiscal Reform Paper).[12] The aim of the Environmental Fiscal Reform Paper was inter alia to:
¡P ¡§outline the role that market-based instruments, specifically environmentally-related taxes and charges, could play in supporting sustainable development in South Africa, and to outline a framework for considering their potential application¡¨;
¡P explore how environmentally-related taxes and charges could assist in progressing towards the achievement of environmental goals and objectives in a cost effective and efficient manner; and
¡P explore how environmentally-related taxes are able to contribute to revenue-raising requirements. [13]
While the use of financial mechanisms, such as the application of environmentally-related taxes, to achieve environmental objectives is a well-documented course of action, the application of the revenues raised via such mechanisms is the subject of much discussion and debate.[14]Against this background the Environmental Fiscal Reform Papersets out the view that, generallyspeaking and in relation to the utilization of the funds raised via the application of environmentally-related taxes and charges, ¡§there are no clear-cut criteria to dictate when revenue hypothecation is appropriate or not¡¨. The Environmental Fiscal Reform Paperexpresses the view that ¡§full earmarking¡¨ of selected tax revenues is ¡§not a preferred option due to the constraints placed on the budget process and the rigidities that tend to follow from earmarking can lead to the inappropriate allocation of resources¡¨; and indicates that earmarking practices may also ¡§limit the extent to which environmentally-related tax revenues can be used as part of a possible tax shifting exercise¡¨, before concluding that requests for earmarking will be evaluated on a case-by-case basis.[15] Among a suite of taxes linked to greenhouse gas emissions, the Environmental Fiscal Reform Paperrefers to the potential for ¡§electricity consumption taxes¡¨ or ¡§fossil fuel input taxes¡¨.[16]
Over time, and flowing from the Environmental Fiscal Reform Paper, a number of carbon-related taxes have been implemented;[17]however, these taxes tend to be levied on the purchase of products with greenhouse gas-heavy manufacturing processes, e.g., motor vehicles / fuel / incandescent light bulbs, rather than on the underlying processes themselves. The Green Paper of November 2010 takes a positive stance on the issue of financial mechanisms that can be used in the national response to climate change, e.g., carbon taxes or activities that result in the generation of carbon credits, such as the Clean Development Mechanism (CDM), while deferring to the Treasury¡¦s authority in regard to financial mechanisms.
However, it is a December 2010 document released by the Treasury that really set the proverbial cat among the greenhouse gas pigeons. A Discussion Paper for Public Comment, titled Reducing Greenhouse Gas Emissions: The Carbon Tax Option (the Carbon Tax Discussion Paper),[18] purports to argue the case for both carbon taxation and emissions trading and, eventually, to come down on the side of imposing a carbon tax, ostensibly shutting the door on emissions trading. The Carbon Tax Discussion Paper created a storm of controversy in the country, [19] which controversy persists notwithstanding a recent re-visioning of the carbon tax which supersedes some of the thinking set out in the Carbon Tax Discussion document.[20]
IV. Carbon Tax + Emissions Trading
Notwithstanding the National Finance Minister¡¦s promise, during his Budget Speech in February 2011, that the architecture for the carbon tax would be elaborated during the following year¡¦s Budget Speech, the architecture was not forthcoming in 2012. Instead, the Budget Speech 2012 contains what appears to be a revised approach to the carbon tax including a tantalising whiff of emissions trading.
The 2012 Budget Review indicates that a "modest carbon tax will begin to price carbon dioxide emissions so that the external costs resulting from such emissions start to be incorporated into production and consumer costs. This will also create incentives for the changes in behaviour and encourage the uptake of cleaner-energy technologies, energy-efficiency measures, and research and development of low-carbon options."[21]While this was not news, given the 2010 Carbon Tax Discussion Document and expectations that the 2012 budget would include reference to the carbon tax, the structure of the tax outlined in 2012 was unexpected.
The 2010 Carbon Tax Discussion Documentproposed a flat rate of South African Rand (ZAR) 120.00 per tonne of carbon dioxide emitted, withouta 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 2012Budget Reviewproposes 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 notion 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.[22]
It is currently not clear what is meant by the term "offset". 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 offset in the nature of a Certified Emissions Reduction from a CDM project activity. However, the jury is currently out on this issue and on the practical and functional aspects of the use of offsets against the carbon tax liability, although a new carbon taxation discussion document has apparently been prepared for imminent release by the Treasury.
Perhaps of even more interest is the implication, in the 2012 Budget Review, that the carbon tax will apply to carbon dioxide equivalent (CO2e). The importance here is that, unlike the 2010 Carbon Tax Discussion Document¡¦s 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, measured against the base climate change impact of carbon dioxide - hence the usage of "equivalent".
The 2012 Budget Review provides an indication of the expected levels of the carbon tax rate as being ZAR 120.00 (approximately US$16.00) per tonneof CO2eemitted above certain thresholds. The tax rate will increase by 10% a year, reaching ZAR210.00(approximately US$28.00) per tonne by 2019/2020. The end of the decade also marks the end of 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 2012Budget 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[23]
Returning to the dichotomous theme of this article, the NCCRP clearly articulates DEA¡¦s view on the application of revenue raised via the imposition of a carbon tax. The NCCRP, perhaps naively, indicates that the Treasury¡¦s tax policy ¡§will seek to primarily stimulate behaviour change through the price mechanism, and as a secondary benefit, generate a revenue stream that may allow fiscal decisions over time that support climate change policy and broader sustainable development.¡¨[24] By contrast to this position, it is notable that while, in 2012, the Treasury articulated a vision of the carbon tax that is fundamentally different (and far more complex) than that set out in the 2010 Carbon Tax Discussion Document, one view has not altered, namely that of the Treasury retaining the discretion to apply tax revenues as it sees fit, including subsuming such revenues into the general fiscus, i.e., not to commit to using the revenue raised from this environmentally-related tax for environmentally beneficial purposes. There is some concern that without such a commitment, the carbon tax becomes merely another fund-raising tool rather than an instrument that will, in the words of the NCCRP, support climate change policy and broader sustainable development.
V. Conclusion
While a myriad questions and speculations are currently circulating in the South African carbon market in relation to whether the ¡§carbon tax + emissions trading¡¨ (use of ¡§offsets¡¨) approach described in the 2012 Budget Review might provide a much-needed boost for local developers of carbon offset projects, there is, at present, no clarity on these issues.
[1]By way of background, it is necessary to note that this article works from a fairly expansive notion of emissions trading. The South African National Treasury, which retains authority over the State¡¦s financial matters, has indicated that it favours the implementation of a carbon tax over a formal emissions trading scheme. This is not to say that implementation of formal emissions trading is inconceivable in South Africa. On the contrary, Treasury has indicated that it will, in due course, undertake a study into the advisability of implementing emissions trading in South Africa. However, Treasury¡¦s first choice, particularly over the short to medium term is for carbon taxation. Having said this, it is interesting to note that Treasury¡¦s carbon tax design includes the notion of using ¡§offsets¡¨ to comply with a portion of the carbon tax liability. This element of the carbon tax design has the potential (apparently unintended, on Treasury¡¦s part) to incentivise in-country carbon transactions between producers of carbon credits and entities with carbon tax obligations. Certified Emissions Reductions (CERs) generated under the Kyoto Protocol¡¦s Clean Development Mechanism (CDM) represent the largest pool of South African carbon offsets and while it is currently unclear (due to lack of detail, from Treasury, on the practical implementation of the carbon tax design) whether the term ¡§offsets¡¨, when used in the context of the carbon tax, refers to / implies CERs, this is a strong likelihood. There are a number of factors underpinning the view that the carbon tax design might incentivise carbon deals. Firstly, given the currently deflated state of the international carbon market, South African CDM project developers are casting about for other options to realise a carbon revenue stream other than through sales of CERs to the usual-suspect carbon buyers. Secondly, implementation of the carbon tax potentially creates a demand of 30 million tonnes of carbon dioxide equivalent (tCO2e ) per year against annual South African CER generation of approximately 614 294, which would represent a substantial supply gap for generators of offsets (Sa, H., and Naicker S.L., EcoMetrix On: Utilising South African CERs under the South African carbon tax, 28 August 2012, EcoMetrix Africa,www.ecometrix.co.za/publications, last accessed on: 16 January 2012). Thirdly, during its initial phase the carbon tax is set at South African Rand (ZAR) 120.00 / tCO2e (approximately US$ 16.00) which, given the currently very bearish prices for CERs, would make the purchase of CERs for use against a carbon tax obligation an attractive proposition for South African emitting industries.
[2]The Thirteenth Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC COP13).
[3]Country Statement made by the South African Minister of Environmental Affairs and Tourism to the COP13 High-Level Plenary, Bali, 12 December 2007.
[4]Department of Environmental Affairs and Tourism, ¡§A National Climate Change Response Strategy for South Africa¡¨, September 2004, available on the Internet at (last accessed on 8 January 2013).
[5]Department of Environment Affairs and Tourism, Long Term Mitigation Scenarios for South Africa (Pretoria: DEA, 2008).
[6]Department of Environmental Affairs, ¡§National Climate Change Response Green Paper¡¨, November 2010, available on the Internet at (last accessed on 8 January 2013).
[7]Department of Environmental Affairs, ¡§National Climate Change Response White Paper¡¨, November 2011, available on the Internet at (last accessed on 8 January 2013). Notwithstanding this formal citation, this document will, for convenience and due to the convention adopted in-country, henceforth be referred to as the National Climate Change Response Policy (NCCRP).
[8] Decision 2/CP.17, Establishment of an Ad Hoc Working Group on the Durban Platform for Enhanced Action, UN Doc. FCCC/CP/2011/9/Add.1, 15 March 2012.
[9] The pledge is stated as follows: ¡§In accordance with the provisions of Article 12 paragraph 1(b) as well as Article 12 paragraph 4 and pursuant to the provisions of Article 4 paragraph 1 of the Convention, South Africa reiterates that it will take nationally appropriate mitigation action to enable a 34% deviation below the ¡¥Business As Usual¡¦ emissions growth trajectory by 2020 and a 42% deviation below the ¡¥Business As Usual¡¦ emissions growth trajectory by 2025.¡¨ Department of Environmental Affairs, letter to the UNFCCC Secretariat, 29 January 2010.
[10]Address by President Jacob Zuma at the Climate Change Convention, Copenhagen, 18 December 2009.
[11]NCCRP, supra, note 7, at 11. As implied by the last mentioned quotation (the words: ¡§within a timeframe that enables economic, social and environmental development proceed in a sustainable manner¡§), the NCCRP focuses on both mitigation and adaptation. This article deals with the narrow issue of a carbon tax and emissions trading and, consequently, does not discuss the NCCRP¡¦s approach to mitigation (beyond considering tax and trading) and adaptation.
[12]National Treasury, Tax Policy Unit, A Framework for Considering Market Based Instruments to Support Environmental Fiscal Reform in South Africa, Draft Policy Paper, April 2006, available on the Internet at http://www.cbd.int/doc/meetings/im/wscbteeb-mena-01/other/wscbteeb-mena-01-enviro-fiscal-reform-sa-en.pdf (last accessed on 8 January 2013).
[13]Ibid., at i.
[14]See, for example, ShantayananDevarajan et al., Tax Policy to Reduce Carbon Emissions in South Africa, World Bank, Policy Research Working Paper 4933 (Washington, DC: World Bank, 2009), at 5; Melanie Gosling, Plastic Bag Levy: Money for Nothing, 8 November 2006, available on the Internet at (last accessed on 8 January 2013). The former discusses issues relating to tax policy implementation in South Africa and notes that there is no uniformity, in other jurisdictions, in the application of tax revenue raised from the imposition of carbon tax. The latter news article deals with the perception, in South Africa, that a previously imposed environmentally-related tax, i.e., the so-called plastic bag levy which imposes a charge on consumers wishing to use plastic bags, has raised a large amount of revenue, but this revenue has simply been subsumed into the broader fiscus and not applied to achieving environmental ends. The news article is critical of this approach to utilisation of the tax revenue and argues that such revenue should be applied to deepen the environmental objective of the levy. Similar arguments have been raised (in South Africa) in relation to the proposed imposition of a carbon tax.
[15]Environmental Fiscal Reform Paper, supra, note 14, at x.
[16]Ibid., at 79.
[17]These include: general fuel levy for petrol and diesel purchases; non-renewable electricity generation tax levy (on non-renewable based electricity generation); renewable energy allowance intended to fund the purchase of renewable energy under the Renewable Energy Independent Power Producer Procurement Programme (REIPP); motor vehicle emissions levy for purchases of new motor vehicles; and, incandescent globe levy for purchases of incandescent light bulbs.
[18] National Treasury, ¡§A Discussion Paper for Public Comment ¡V Reducing Greenhouse Gas Emissions: The Carbon Tax Option¡¨, December 2010, available on the internet at (last accessed on 8 January 2013). It is this author¡¦s view that the Carbon Tax Discussion Paper is not particularly strong on empirical research in relation to the conclusions that it reaches, and that the tax vs. trading dynamic is not well presented or argued. This opinion is, however, redundant due to the more recent developments that have occurred in this area and which are discussed in the remainder of this article.
[19] See, for example: Agnieszka Flak, ¡§Analysis: South African Carbon Tax Plan Hurts Job Ambitions¡¨, Reuters, 6 October 2011, available on the Internet at (last accessed on 8 January 2013).
[20]It is an interesting anomaly that after the Treasury seemed to have closed the door on emissions trading by way of the Carbon Tax Discussion Document, the DEA ostensibly re-opened the door in the NCCRP, a year after Treasury¡¦s move, in a section of the NCCRP dealing with carbon markets (see: NCCRP, supra, note 7, Section 10.7.2, at 41).
[21] National Treasury, ¡§Budget Review 2012¡¨, available on the Internet at (last accessed on 8 January 2013), at 55.
[22]Ibid.
[23]Ibid., at 186.
[24],NCCRP, supra, note 7, at, at 41. |