By Izak Swart, Associate Director, Tax Management Consulting, Deloitte
Johannesburg, 11 April 2012- The South African National Treasury has for some time been considering placing a price on carbon. A discussion paper for public comment, Reducing Greenhouse Gas Emissions: The Carbon Tax Option, (“the Discussion Paper”) was released during December 2010. The February 2012 Budget documentation surprised many with the details of a proposed carbon tax for 2013 /2014.
Convincing, but flawed arguments were made for a carbon tax in the Discussion Paper. The Budget documentation revealed the current thought process around the design of a carbon tax. The proposed carbon tax will have the following design features:
• Percentage-based rather than absolute emissions thresholds below which a carbon tax will not be payable;
• A higher tax-free threshold for process emissions;
• Additional relief for trade-exposed sectors;
• The use of offsets by companies to reduce their carbon tax liability;
• A phased implementation;
• The tax will increase by 10% per annum until 2020;
• The revenues received from the tax will not be earmarked for climate change initiatives; and
• The CO2e emissions will be calculated using agreed methods.
A basic tax free threshold of 60% will apply during the first phase of the tax (2013-2019) where after it will be phased out. Further relief for trade exposed industries and process emissions will be allowed.
South Africa will be one of the first developing countries to implement a comprehensive carbon tax. Other developing countries are considering carbon tax systems. However, in the majority of cases the introduction of a carbon tax will only take place once other policy considerations have been finalised and implemented, e.g. climate change policies and renewable energy policies and are years away from being implemented.
In South Africa’s case we also believe that a comprehensive incentive scheme that incentives a change in behaviour should be in place well before a carbon tax is introduced. South Africa’s economy and its industrialisation were built on cheap and readily available coal resources which will last another 200 years. South Africa, unlike developed countries that have implemented a carbon tax system and developing countries that are planning a carbon tax system is heavily reliant on coal for its energy use. South Africa does not have cleaner alternative energy sources such as natural gas unless it is imported at great cost. Changing South Africa’s energy mix away from coal will be costly and will need a major policy change. Consequently a carbon tax will do little to change behaviour given South Africa’s energy mix.
A carbon tax as being proposed by National Treasury will wreak havoc on the South Africa economy and will make it uncompetitive. Per the Budget documentation a rate of R120 per tonne of carbon dioxide (CO2) emissions is suggested as a carbon tax. A tax free threshold of at least 60% will apply. At the current rate Eskom will pay R11 billion per annum when the carbon tax is implemented, with escalations of 10% until 2020. The above number does not take into account the implicit carbon tax already built into the electricity price for renewal energies and energy efficiency incentives administered by Eskom for which the country is already paying. Eskom in terms of its current pricing model will pass the additional tax onto consumers and thereby increase the price of electricity even further.
We believe an incentive approach to change behaviour will be most beneficial to South Africa’s circumstances where job creation and economic growth must be prioritised. Currently very little incentives are available to change behaviour. With electricity prices raising significantly most businesses need to find alternative ways of doing business. Currently Eskom’s Energy Efficiency Demand Side Management (EEDSM) programme offers the most incentives. However, stringent rules apply which sometimes make it difficult to access the incentive available in terms of the EEDSM programme. Depending on the programme, electricity users can expect to receive a cash payment of 43 cents per kWh saved which is a significant benefit and will help pay for the changes that are required.
No other real incentives are currently available. During the 2009 budget speech a new tax deduction was introduced for energy efficiency in terms of section 12L of the Income Tax Act. The section has not yet become operational. Regulations to the section were released in 2011 and hopefully it will become operational in 2012. Very disappointingly the February 2012 budget was silent on the implementation date of section 12L. We expect an announcement of the implementation date later in the year. However, the section 12L benefit in its current format is not a significant incentive and will only allow a tax deduction of 28 cents per kWh of energy saved if the last lowest REFIT tariffs are used. The after tax benefit is 8 cents per kWh saved. Given the administration required to obtain the deduction it will not be economically viable to pursue unless significant energy savings can be achieved. Also if the energy savings relate mainly to electricity, the EEDSM programme will be much better suited as similar rules and regulations apply and the benefit is much greater.
Going forward much more research should be done on a carbon tax system for South Africa before implementing it. We are of the view that the current fact base is not robust enough to understand the economic implications on the various sectors in the economy. It may transpire that a carbon tax is not necessary and that other policy mechanisms could be used to reduce South Africa’s carbon emissions. Incentives in this regard will play an important role. We believe that the current limited group of energy efficiency incentives available need to be restructured significantly. The benefits from these incentives need to be increased dramatically if South African wants to seriously change behaviour.
The National Treasury is due to release a new policy on carbon taxes sometime this year. Companies should calculate their carbon footprint to understand their exposure to a new carbon tax. Furthermore, companies should study the policy and be part of the carbon tax debate.