A brief overview of the Carbon Tax Act, which took effect on 1 June 2019

Provided by Bowmans

By Melissa Strydom & Carmen Bradfield

Topics Energy & Environmental Law | Government, Politics & Policy | Tax Law

06 Jun 2019

Carbon tax is South Africa’s most far-reaching and substantial response to climate change to date.

The Carbon Tax Act 15 of 2019 (Carbon Tax Act or Act) was gazetted on 23 May 2019, and came into effect on 1 June 2019.

The Carbon Tax Bill (Bill) followed a lengthy parliamentary process. Over the last nine years numerous industry and public representations were made and two iterations of the Bill were published for public comment. The final draft of the Bill was debated within the houses of parliament, and submitted to the President for assent on 29 March 2019. The President assented to the Bill on 22 May 2019.

Taxes to be levied

The carbon tax is set to be implemented in phases (the first phase is from 1 June 2019 to 31 December 2022), in order to assist in the transition to a low-carbon economy and minimise the impact on businesses and electricity prices. In terms of the Act, carbon tax will be levied at a rate of ZAR 120 per ton of carbon dioxide equivalent of greenhouse gas (GHG) emissions of a taxpayer.

The tax will be levied on emissions from fuel combustion, industrial processes and fugitive emissions, where the set thresholds of GHG emissions are exceeded. Certain allowances will also apply in the first phase, to be revised thereafter.[i] During the first phase the rate of ZAR 120 per ton will be adjusted each year by the consumer price inflation (CPI) plus 2%. Thereafter, it will increase annually by CPI (i.e. from 1 January 2023 onwards). [ii]

A taxpayer is liable to pay carbon tax where it conducts any activities set out in Schedule 2 of the Carbon Tax Act and emits GHG emissions above the listed thresholds.

The Act accordingly sets out the activities in respect of which the tax is levied and provides thresholds in respect of these activities (see Schedule 2). Where the GHG emissions of a taxpayer exceed the thresholds, the taxpayer is liable to pay tax. This liability may be reduced through using the various allowances available and in some instances the tax is only payable where the allowances are exceeded.

Allowances

In the first phase, allowances are available to taxpayers to reduce the amount of tax payable. This is linked to the nature of the activity resulting in GHG emissions. These allowances include basic tax-free allowances for fossil fuel combustion emissions (which excludes liquid fuels used in combustion processes) [iii] and industrial process emissions.[iv] These allowances and the additional allowances available in respect of each of the different activities, such as trade exposure allowances, carbon offset allowances etc. are set out in Schedule 2 of the Carbon Tax Act.

The percentages of allowances in respect of some activities have been amended from the Bill to the Act. For example, the Carbon Tax Act provides an increase of the basic tax free allowance for process emissions for the production of ferroalloys, aluminium, magnesium, lead and zinc, (from 60% in the Bill to 70% in the Act) and a reduction in the carbon offset allowance (from 10% to 5%) in respect of these activities.[v]

Section 14 of the Bill allowed for a maximum of 95% in allowances, whereas Schedule 2 to the Bill provided a maximum of 100% in some instances. This ambiguity has been rectified in the Act, which now provides for a maximum 100% allowance where stipulated in Schedule 2. Where a 100% allowance is not available the maximum sum of allowances applied is 95%.[vi]

As an example, an entity undertaking glass production (activity 2A3) would calculate its tax liability based on the formula set out in Section 6 of the Act, taking into account the cumulative allowances. The threshold in respect of this activity is ‘none’ and so the tax is calculated based on all GHG emissions from glass production.

In calculating the tax there are ‘tax free allowances’ to consider. Schedule 2 provides for a basic tax free allowance for process emissions of 70% (effectively emissions below this percentage will not be taxed). [vii] Additional allowances available in respect of this category are a maximum of 10% trade exposure allowance, [viii] a 5% performance allowance, [ix] 5% carbon budget allowance [x] and a 5% carbon offsets allowance. [xi] Therefore if a glass manufacturing company for example, participated in the voluntary phase of carbon budgets, obtained a 3% trade exposure allowance, achieved a maximum 5% allowance due to its performance, its tax liability would be reduced by 83%.

The complete regulatory framework envisaged by the Carbon Tax Act has not been finalised. For example, the Draft Carbon Offset Regulations published for comment in November 2018, have not yet been promulgated. These regulations relate to the carbon offset allowance, being an allowance of 5-10% where stipulated in Schedule 2, and is provided to entities who invest in approved carbon offset projects that reduce, avoid or sequester emissions. [xii]

Tax period and GHG reporting

The first tax period will be from 1 June 2019 to 31 December 2019 which presents some practical difficulties as the GHG Reporting Regulations provide for emissions reporting for a calendar year (i.e. from 1 January to 31 December). Taxpayers will accordingly have to measure and report on emissions separately for the period of 1 June to 31 December. The following tax period will accord with the GHG Reporting Regulations and run from 1 January 2020 to 31 December 2020.[xiii]

The tax will be levied in terms of Section 54 A of the Customs and Excise Act 91 of 1964 (Customs and Excise Act) as an environmental levy. This is imposed by Schedule 3 to the Carbon Tax Act, and will also come into effect on 1 June 2019. An additional amendment to the Customs and Excise Act was published on 23 May 2019 relating to the implementation of the environmental levy and requires that a taxpayer obtain a manufacturing licence for each premises where emissions subject to the Carbon Tax Act, are emitted. This licence is obtained in terms of Section 54 E of the Customs and Excise Act as environmental levy goods may only be manufactured in a customs and excise manufacturing warehouse.[xiv]

The carbon tax will be paid to, and administered by, the South African Revenue Service (SARS). SARS will have access to the Department of Environmental Affairs’ GHG emission database to collaboratively administer the carbon tax and to verify the information submitted.[xv]

Concluding remarks

The pressure is increasing to transition to a lower-carbon economy. Carbon Tax and Climate Change regulation is an area receiving more attention and developing rapidly. There is uncertainty in respect of the implementation of the complete regulatory regimes, and how the various strands of the regulatory framework will be cohesively integrated for effective implementation. The Carbon Tax Act’s implementation certainly draws attention to the changing landscape and will have both financial and administrative consequences for companies manufacturing in South Africa.

[i] Explanatory Memorandum on the Carbon Tax Bill dated 20 November 2018, at page 5.

[ii] Section 5 of the Carbon Tax Act 15 of 2019.

[iii] Section 7 of the Carbon Tax Act 15 of 2019. See also Explanatory Memorandum on the Carbon Tax Bill, 2018 published on 20 November 2018, at page 24. The emissions emanating from liquid fuels is excluded in this allowance as a deduction for these emissions is provided for in the calculation of carbon tax payable in terms of section 6 of the Carbon Tax Act 15 of 2019.

[iv] Section 8 of the Carbon Tax Act 15 of 2019. This allowance recognises that emissions from chemical processes that occur in fixed stoichiometric ratios (e.g. coal gasification, crude oil cracking and the production of cement, iron, steel, glass, ceramic and certain chemicals, such as calcium carbide and titanium dioxide) have limited potential for mitigation over the short term (see Explanatory Memorandum on the Carbon Tax Bill, 2018 published on 20 November 2018, at page 24).

[v] See Schedule 2 of the Carbon Tax Bill B46-2018, which was amended by the Standing Committee on Finance and which amendments are reflected in the Carbon Tax Bill B46B-2018 and the Carbon Tax Act 15 of 2019. The Schedule 2 of the Bill provided for a 60% a basic tax free allowance for process emissions, whereas Schedule 2 of the Act provides for a 70% allowance. Schedule 2 of the Bill provided for a maximum 10% carbon offset allowance whereas Schedule 2 of the Act provides for a maximum of 5% in respect of a carbon offset allowance.

[vi] Section 14 of the Carbon Tax Act 15 of 2019: “A taxpayer other than a taxpayer in respect of which the maximum total allowance stipulated Schedule 2 constitutes 100 per cent, must only receive the sum of allowances contemplated in Part II in respect of a tax period to the extent that the sum of those allowances does not exceed 95 per cent of the total greenhouse gas emissions of that taxpayer in respect of that tax period as determined in terms of the column “Maximum total allowances %” in Schedule 2.”

[vii] Explanatory Memorandum on the Carbon Tax Bill, 2018 published on 20 November 2018, at page 24.

[viii] Section 10 of the Carbon Tax Act 15 of 2019. See also the Explanatory Memorandum on the Carbon Tax Bill, 2018 published on 20 November 2018, page 25 which indicates how the trade exposure allowance is calculated based on trade intensity exposure in respect of imports and exports.

[ix] Section 11 of the Carbon Tax Act 15 of 2019. Explanatory Memorandum on the Carbon Tax Bill, 2018 published on 20 November 2018, at page 26. The performance allowance is aimed at rewarding entities which have proactively implemented GHG mitigation measures and is based on the taxpayer’s performance relative to the sector or sub-sector’s performance.

[x] Section 12 of the Carbon Tax Act 15 of 2019. This allowance is available to taxpayers who participated in the voluntary carbon budget program which required participants to provide extensive GHG reporting information to the Department of Environmental Affairs (see Explanatory Memorandum on the Carbon Tax Bill, 2018 published on 20 November 2018, page 26).

[xi] Section 13 of the Carbon Tax Act 15 of 2019. This allowance is provided in respect of a certified and registered carbon offsets project which reduce, avoid or sequester emissions.

[xii] Explanatory Note for the Draft Carbon Offset Bill: Draft Regulations made in terms of clause 19(c) of the Draft Carbon Tax Bill, November 2018, at page 3.

[xiii] Section 16(2) of the Carbon Tax Act: “A tax period in relation to a taxpayer is – commencing on 1 June 2019 and ending on 31 December 2019; and
subsequent to the period contemplated in paragraph (a), the period commencing on 1 January of each year and ending on 31 December of that year.”

Regulation 7(1) of the National Greenhouse Gas Emission Reporting Regulations published under General Notice 275 in Government Gazette 40762 of 3 April 2017 provides for reporting in respect of emissions for a calendar year.

[xiv] See the insertion of section 54AA in the Customs and Excise Amendment Act 13 of 2019 published under Government Notice 797 in Government Gazette 42480 on 23 May 2019. See section 54E of the Customs and Excise Act 91 of 1964 in terms of which section 54E(1) states “…no environmental levy goods may be manufactured in the Republic except in a customs and excise manufacturing warehouse licensed in terms of this Act.”

[xv] See the Report of the Select Committee on Finance on the Carbon Tax Bill [B46B-2018] (National Assembly – section 77), dated 19 March 2019.