Carbon Tax Bill reviewed

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The tax will force consumers to reduce fuel consumption, use cleaner fuels and adopt new technologies and methodologies within their businesses. Economists believe that taxes on polluting emissions reduce environmental harm in the least costly manner, by encouraging changes in behaviour by those businesses that can reduce their pollution at the lowest cost.

The South African government has identified carbon tax as an important deterrent in the fight against climate change. In May 2013, the National Treasury published a white paper on the prospective implementation of a carbon tax. In the 2015 budget speech, Finance Minister Nhlanhla Nene confirmed that a draft carbon tax bill will be introduced in 2015, before legislation in terms of Section 12L of the Income Tax Act is passed to implement the green tax in 2016.

How it works

The tax will be divided into three sections or scopes:

• Scope 1 emissions are the burning of fossil fuels onsite or used in equipment and vehicles. These will be taxed at a rate of R120 per metric tonne of carbon dioxide equivalent. This rate will be raised by 10% a year until 2019. Treasury will be providing exemptions for the first 60 % of Scope 1 emissions, with taxpayers liable for the remaining 40%.
  
• Scope 2 are the emissions from the generation of electricity
  
• Scope 3 emissions are emissions that result from activities such as business travel.

Incentives for compliant consumers

In 2013, a regulation came into operation stipulating that there must be a tax deduction for those consumers who are energy efficient. The regulation sets out the process for determining the quantum of energy efficiency savings and the requirements for claiming a deduction. Affected taxpayers have to compile energy saving reports and have their savings certified by the South African National Energy Development Institute (SANEDI) through the issuing of a certificate.

Any taxpayer can claim this tax deduction for energy efficiency savings. This in effect means that the deduction is not restricted to any industry, sphere of business or any project or energy efficiency initiative. If you are paying carbon tax, you can claim the deduction.

Accelerated depreciation deduction

This is an incentive being offered for a deduction for those taxpayers investing in renewable energy. This comes in the form of an accelerated depreciation deduction, which is subject to requirements, exceptions and limitations. Hydropower generation and solar photovoltaic renewable energy are two examples where accelerated depreciation deductions will be considered.

Carbon offsets

There will be an incentive for those taxpayers that carry out carbon-friendly projects. These activities are known as carbon offsets, an economic tool proposed in the White Paper two years ago. A carbon offset is an investment that presents a cheaper option than direct investment into its existing infrastructure.

Offsets are generally achieved by financially supporting projects or organisations that reduce the emission of greenhouse gases or lead to the prevention of future greenhouse gas emissions. Types of carbon offsetting projects range from carbon sequestration through reforestation, renewable energy, energy efficiency, methane recovery and fuel switch.

• Reforestation: One of the most popular ways to offset carbon emission is through forestation. Deforestation is responsible for between 15 and 20% of global carbon emissions. Trees absorb or soak up CO2 from the atmosphere through photosynthesis and release O2 into the atmosphere.
  
• Renewable Energy: Investment in renewable energy projects, such as wind energy, solar or hydropower may displace fossil fuels for energy production.
  
• Energy Efficiency: Investments in energy efficiency projects reduce the amount of energy required to deliver the same service and so result in reduced emissions from fossil fuels. These can include the subsidising of fuel-efficient cook stoves in impoverished communities. Electric cars powered by solar energy are an example of a fuel-efficient alternative to the current status quo.
  
• Fuel switch: Another way that carbon emissions can be reduced is through projects that switch from one fuel source to another fuel that emits less carbon. Switching to renewable sources of biomass not only prevents the release of CO2 from fossil fuels, it avoids the ecological damage associated with mining, drilling and transportation of these fuels.

Pressure from big business

There has been a fair amount of concern from big business that the implementation of the carbon tax could have a very negative impact on the South African economy. Business Unity South Africa (BUSA) argues that although a green tax can play a role in achieving the transition to a low carbon economy, these commitments and aspirations should also take into account the possible negative economic and social impacts of the carbon tax over the short-term and hence the need for a more gradual transition toward a low carbon economy.

BUSA has questioned whether the tax is necessary at a time when South Africa is experiencing an electricity crisis and a poor economic outlook. It argues that in the short term, there will be no material increase in the GHG emissions, that is until Medupi and Kusile come online. Furthermore, the proposed increase in the electricity levy will increase the cost of electricity, which will further undermine the competiveness of the economy relative to other countries, particularly those that do not put a price on carbon emissions. The increased cost of electricity would have a severe impact on the competiveness of the mining and manufacturing industries.

Therefore, BUSA has welcomed the Davis Tax Committee's (DTC) decision to include a review of the scope and design of the proposed carbon tax. In this regard, BUSA has made submissions to the DTC laying out its concerns and reservations about the carbon tax, ensuring that legislation will not easily be passed without proper consideration by government and Treasury as to its pros and cons.

Conclusion

Whilst the introduction of a green tax is inevitable, there are still questions surrounding the proposed scope and effect of the tax. Many expect that it will have devastating effects in its current form. Although the concept is worthy, hopefully the DTC will recommend - and the legislature will consequently implement - a more 'economy friendly' version of the green tax that allows consumers to soften the blow that the introduction will ultimately cause.