Don’t make your business pay: The four most important things about carbon tax

Don’t make your business pay: The four most important things about carbon tax

Across a wide range of sectors beyond heavy industry, businesses should be preparing for the carbon tax submission deadline on 31 October 2020. Lodewijk Nell, partner at EcoMetrix Africa provides some insights.

The Carbon Tax Act is part of South Africa’s commitment to the Paris Agreement to reduce Greenhouse Gas (GHG) emissions. The carbon tax rate for phase one is R120 per tonne of carbon dioxide equivalent emissions (tCO2e), with an annual rate increase by the consumer price index (CPI) plus 2% until 2022, thereafter at the CPI rate. The deadline for the first carbon tax payment is 31 October 2020.

Who is liable for Carbon Tax?

Entities that conduct activities resulting in GHG emissions and exceed certain production capacity threshold are liable for carbon tax. In general, entities with a combined installed capacity of 10 megawatts or more must report their emissions to the Department of Environmental and Fisheries and pay the carbon tax levy to SARS. These are energy-intensive businesses such as industrial and manufacturing facilities with GHG emitting activities including fossil fuel combustion equipment; industrial processes and product use; and fugitive emissions. For some activities, different or no capacity threshold applies. Check against the tax-free threshold approved by National Treasury (Schedule 2 of the Carbon Tax Act) to verify if your business is liable.

Do Carbon Tax Allowances apply?

During the first phase, the Carbon Tax Act provides a basic tax-free emissions allowance of 60% to 75% across sectors. In addition, tax-free allowances including fugitive emission allowances (up to 10%), performance allowances (up to 5%) and trade-exposure allowances (up to 10%) apply. Depending on the sector, there is also a Carbon Tax Offset (CTO) allowance of 5% to 10%. Overall, businesses could reduce their carbon tax by up to 95%, with an effective discounted rate of between R6 and R48 per tonne of CO2e.

What are the pros and cons of carbon tax?

A carbon tax ensures carbon intensive businesses consider the environmental costs of their operations and are incentivised to invest in renewable energy and other low-carbon measures. While it is an added administrative and financial burden, without the Carbon Tax Act even more drastic and more expensive interventions will be necessary in future to mitigate the effects of climate change.