1 Why the sudden flood of carbon tax news?
The eagerly awaited Carbon Tax Policy Paper – Reducing Greenhouse Gas Emissions and Facilitating the Transition to a Green Economy was published by National Treasury on 2 May 2013. This was an update to the Discussion Paper for Public Comment – Reducing Greenhouse Gas Emissions: The Carbon Tax Option (December 2010) as well as information provided in the budgets of 2012 and 2013.
2 When will carbon be taxed?
The policy paper sets out two phases for the maturity of a future carbon tax in South Africa. The immediate period (Phase 1) is from 1 January 2015 to 31 December 2019. Phase two runs from 1 January 2020 to 31 December 2025. The 2nd phase will see a revised tax rate and the inclusion of previously excluded sectors, among other changes.
3 Will my company be liable to pay tax?
It is imperative that companies understand their status and liability. Companies in the following sectors will be liable:
- Petroleum (coal / gas to liquid)
- Petroleum – oil refinery
- Iron & steel
- Glass & ceramics
- Pulp & paper
- Fugitive emissions: coal mining
One of the major unknowns in the policy paper is that the policy includes an ‘Other’ category in the list of liable sectors. This remains a source of confusion and uncertainty as to which sectors may find themselves falling into this category. Entities in agriculture, forestry, land use and waste are technically liable but will receive 100% tax-free thresholds, essentially absolving any tax liabilities. This will change in Phase 2 (from January 2020).
4 If my company is not in one of the liable sectors do I have anything to be concerned about?
Sectors not covered include retail; commercial property; consumer products; food & beverage and construction.
However, it is unclear if companies in these sectors will fall into the ‘Other’ category. The key take-home message is twofold: Understand your status, and secondly identify the risks and opportunities associated with the incoming carbon tax in South Africa.
Further, your suppliers are going to try to pass the tax effect on to you, and your ability to further pass on that cost to customers may be limited. It is important to draw up an inventory of your entire supply chain and understand if they fall into the liable tax sectors and if so, what their estimated tax may be.
An important development is that a mandatory reporting scheme will be coming into effect for installations emitting over 100 000 tonnes CO2 annually or that consumes electricity that results in over 100 000 tonnes CO2 in annual emissions.
5 Will all my emissions be taxed?
No. Only Scope 1 emissions, which are considered the direct emissions of an entity, will be liable. These are the direct greenhouse gas emissions that occur from sources that are owned or controlled by the company. However, mention of mobile fuels (a direct Scope 1 source) is non-existent in the current policy paper and it remains uncertain whether this was an error or if emissions from mobile sources will actually be exempt.
6 What will the price of carbon be?
he headlines to date have been that carbon will be taxed at R120 a tonne CO2. But one must delve into the details to better understand how the carbon tax infrastructure will work. The SA government has clearly put significant thought to this and has come up with a fairly complex tax structure.
Companies will pay tax on between 10% and 40% of their direct emissions between 2015 and 2020. The provision of a percentage-based tax-free emissions threshold mirrors the “free issue” of emission allowances in European and Japanese mandatory emission trading schemes and aligns the proposed tax with international practice.
The foundation of this tax is that companies will pay R120 per tonne CO2 on between 10% and 40% of their Scope 1 direct emissions. For example a company burning 50 000 tonnes of coal per annum would pay R120 per tonne on 40% of 120 000 tonnes of CO2 emitted (burning 1 tonne of coal results in roughly 2.4 tonnes CO2 emissions).
This equates to an extra tax burden of almost R6m for this company increasing at 10% p.a. until 2019, assuming this company does not qualify for any of the extra tax-free thresholds! (see next question).
This sets the effective tax rate at R48 per tonne but can be as low as R12 per tonne for certain trade-exposed sectors such as the Iron & Steel sector.
7 What are the thresholds?
Besides an across-the- board basic 60% tax-free threshold, the following additional tax-free thresholds are available in varying degrees based on sector categorisation:
- Additional 10% relief for certain sectors to allow for technical or structural limitations to reduce emissions (process emissions).
- Up to an additional 10% relief for emissions intensive and trade intensive sectors to take into account the risk of carbon leakage and competitiveness concerns, e.g. iron and steel, cement, glass.
- Carbon offsets may be used by firms to reduce their carbon tax liability by up to limits of 5 or 10%, depending on the sector.
- Some sectors will be able to qualify for a tax-free threshold of up to 90% during the first phase.
8 Will tax rebates be available?
While this paper was still in its original format, the elephant in the room was the question: What will the money be spent on?
Is this purely a revenue-raising exercise from government that will be spent on other, non-environmental endeavours?
Gladly treasury seem to have responded positively and seem to have done a bit of a turnaround but time and detail will tell how committed they are to the green economy. Originally they took a strong stance against revenue neutrality and ring fencing. This means they wouldn’t be obliged to invest the money collected on low emission/green economy interventions. This updated paper now introduces the concepts of revenue recycling and tax shifting which means that there is a good chance that the money collected will indeed be invested in the green economy.
A number of instruments are available to reduce an entity’s tax burden with the cost of such rebates coming from government’s collected tax revenues (see further information in the policy paper on page 69).
They are as follows:
- Renewable energy depreciation allowance (s12B)
- Depreciation allowance for biofuels production (s12B)
- Tax exemption for certified emissions reductions (s12K)
- Biodiversity conservation and management expenses (s37C)
- R&D tax incentive (s11D)
- Industrial policy incentive (s12l)
- Energy efficiency savings (s12L)
9 What will be the reporting framework? Equity vs Control?
Unfortunately this is still one of the key unknown factors and we are still uncertain about many of the ‘nuts and bolts’ workings of the carbon tax and supporting reporting scheme.
Carbon emissions may be reported under two different methodologies:
- The equity share and the operational/financial control framework.
- An entity’s direct emissions may be very different based on the reporting framework used.
We assume that one of these approaches will be selected for all reporting companies liable to the tax. Also, specific emission factors to be used are to be communicated from government in due course.
10 What are the main ambiguous points requiring further clarification?
An example of increased ambiguity from the last discussion paper is that the 100 000 tonne CO2 threshold for a company to be eligible seems to have been removed which means that the net of carbon tax payers may have widened.
The paper does however state that all companies with Scope 1 emissions or emissions from grid connected energy above 100 000 tonnes CO2, will be subject to mandatory carbon measurement, reporting and verification. No lower limit has been expressed, below which the tax would not be payable. This could mean that companies would be liable for a carbon tax even if their emissions are low enough to exempt them from mandatory greenhouse gas reporting.
There also seems to be no mention of mobile fuels included in the paper. The absence of mobile fuels is either an error or a concession to the transport industry who may feel unable to absorb further price pressures. Clarity is still sought on a number of aspects particularly around benchmarking, accounting, reporting and auditing. Expect further communication from government during the course of the year in this regard.
10 Is this all just another rip-off from government or will there be any benefits to come out of a carbon tax?
Right now, the most immediate action that any business can do is firstly to understand the impact this tax may have on its operations and bottom line. Secondly, to become vocal in lobbying government to ensure that this positive initiative remains true to what it was intended for – helping transform South Africa into a truly green, efficient and innovation-driven economy.
For Carbon Tax Advice or Risk Profile, contact Kevin James at email@example.com