South Africa to phase in carbon tax from 2015

Tax to increase at 10 per cent per year; draft policy sets relief limits

By Uthra Radhakrishnan
Published: Wednesday 08 May 2013

South Africa has proposed a carbon tax of 120 Rand (about US $13) per tonne of emission of carbon-dioxide equivalent in the second draft of its carbon tax proposal, titled Reducing greenhouse gas emissions and facilitating the transition to a green economy. This follows an earlier announcement made by its finance minister Pravin Gordhan to implement a carbon tax by 2015 during the annual budget speech this year. The national treasury released the report for the second and final round of comments on May 2, which could well be the last step before the policy is drawn up as government draft legislation.

According to the national treasury report, in order to ensure that industries are not negatively impacted, the carbon tax will be applied in a phased manner. For the first five years, from 2015-2019, carbon-intensive sectors such as cement, steel and aluminum, will have to pay a carbon tax of R120 per tonne of CO2e. The tax will increase at the rate of 10 per cent per year during this phase. Owing to the intense lobbying from industry that complained of being disadvantaged by such a tax against those countries which do not price carbon, the treasury has revised the carbon tax rates. In an initial draft, the national treasury suggested taxes ranging from R75/tonne of carbon dioxide emitted to R200/ tonne, depending on the severity. The second draft also proposes providing higher levels of relief to sectors that would be more heavily impacted by the proposed carbon tax (see key features of tax).

Key design features of the Carbon tax proposal
  • The first phase (introductory) will be for five years, effective from January 1, 2015, to December 31, 2019, followed by Phase 2 of another five years, from 2020 to 2025. Follow up phases may be explored at a later stage
  • An across-the-board basic 60 per cent tax free threshold of actual emissions below which the tax will not be payable
  • Up to an additional 10 per cent relief for emissions intensive and trade intensive sectors, e.g. iron and steel, cement, glass, etc. to take into account the risk of carbon leakage and competitiveness concerns
  • Offsets could be used by firms to reduce their carbon tax liability up to limits of 5 or 10 per cent, depending on the sector
  • Emissions from agricultural and waste sectors will be exempt during the first phase. This complete exemption will be reviewed during the second phase
  • The electricity sector will qualify for a tax-free threshold of up to 70 per cent and some sectors will be able to qualify for a tax-free threshold of up to 90 per cent during the first phase

Source: The Carbon Tax Policy Paper, National Treasury, South Africa (2013)
The report also states that when the tax-free threshold and additional reliefs are taken into account, the effective tax rate will range between R12 and R48 per tonne of CO2e. There is a concern that this effective price of carbon, once all the revenue recycling is taken into account, may be too low for any significant reduction in emissions. There are other concerns such as the revenue not being earmarked for specific sustainable development or climate-related activities.

In 2009 in Copenhagen, South Africa pledged a voluntary target of reducing its emissions by 34 per cent below a business-as-usual (BAU) scenario by 2020 and 42 per cent below BAU by 2025. While there have been several other policies that may have an indirect impact on how South Africa would achieve this target, the carbon tax will bring more sectors under the national climate change policy and is expected to provide a strong and clear signal to industries and “will encourage a shift in production and consumption patterns towards low carbon and more energy efficient technologies.”

An analysis by the Stockholm Environment Institute in 2011 found that developing countries had pledged more than their developed country counterparts on mitigation actions for 2020. Since then, developed countries have not increased their targets. On the other hand, South Africa moving ahead with the carbon tax can be taken as an indication of developing countries not just pledging more, but also moving ahead and taking actions to match their pledges.

Around the same time last week, 160 parties to the UN Framework Convention on Climate Change gathered in Bonn, Germany to discuss the design elements for a global deal on climate change in 2015. Not surprisingly, a key area of contention was whether a differentiation between developed and developing countries should remain; whether countries such as South Africa, belonging in the developing world should take on more emissions reduction, reflecting their new “emerging economy status”; whether developed countries that have historically contributed more should take on emissions reduction that reflect the size and magnitude of their historical responsibility. While these questions will be continually discussed in successive rounds of talks, what countries such as South Africa are doing will become increasingly relevant to the answers that are yet to be found. 

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