Carbon tax

Some Q & A from a recent seminar on the SA Carbon market

As promised, we've been working on responding to all the questions that were asked during our Carbon Credits 101 webinar. Here they are:

Question Answer
Who defines the cap per country in these cap-and-trade type systems?
What does the panel think of the argument that the purchase of carbon offsets only masking the real problem of real reduction and not net reduction?
Governments set the emission reduction targets. Governments submit nationally determined contributions which set emission reduction targets. Countries will then introduce a policy – carbon tax, or power sector regulation, fuel standards, or a combination of carbon pricing and standards.
The accreditation standards ensure that emission reduction projects result in real and verifiable emission reductions, and some of the standards require additional benefits to communities such as job creation and upliftment in communities. It is a good way to incentivise emission reduction projects.
Question for Andrew/Olivia: Please give us an update of progress on the SA framework for accrediting SA carbon standards. Is it still sitting with the DMRE? What do you think is holding things up? The framework has been completed and submitted to the Department of Minerals and Energy. There is unfortunately no certainty as to when it will be finalized by the Department. We understand they have aimed to have it completed by the end of this year, but the timeframe might shift forward or backwards. DMRE are open to any requests or emails on this.
It is a relatively small department within the DMRE that is dealing with the SA Framework standard and this may potentially be the reason for the delay.
How much scope is there for farmers to sell carbon credits? Please discuss orchard farmers where trees are planted permanently, and grain farmers practicing no-till where carbon is captured in soil. Agricultural land management is an opportunity. A key requirement will be to assess when the project has been implemented to ensure that it is not a business-as-usual scenario. There is a significant impact on the viability for obtaining credits if it was recently implemented or many years ago. The more recent, the better chances for viability of credits.
What is the reason for no South African standard to date? The South African standard is in the process of being developed.
What would typical start-up costs be if you want to trade carbon credits? Costs are dependent on the scale and methodologies used. There are fixed costs associated with any project and therefore if you can spread those fixed costs across a greater number of carbon credits, then one can reduce the fixed costs. Economies of scale can significantly impact the costs. It really depends on a project-to-project basis.
Please can you provide more clarity on the "outside of the carbon tax net" reference? The carbon tax was implemented in such a way that a company is liable to pay on direct emissions (or Scope 1 emissions), any activity resulting in a direct emission is subject to carbon tax. For example: N2O destruction. A company produces nitric acid but has installed a catalyst to reduce its emissions significantly. From 1 June 2019 they will be paying carbon tax on this activity. They therefore cannot use any carbon credits from this project to benefit from the carbon tax allowance as it already directly reduces your carbon tax liability. Benefiting from both the allowance and directly reducing your tax liability is seen as a double benefit which is not allowed.
Are any credits available for sale in SA and price There are roughly 2.4 million credits listed in the Carbon Offset Registration System, however most of these are likely to already be contracted. It will be best to engage with potential suppliers of credits to assess how many are still available for purchase. The prices of the credits are dependent on the supplier, but WeAct are currently selling at R114 per credit.
What's the current going rate for one carbon credit in South Africa vs the rest of the world? Europe: 44 euro/tonne
Korea: 27 US dollars/tonne
Australia: 18 dollars/tonne
Columbia: 5 US dollars/tonne
Headline SA tax rate started at R120/tCO2e, 2021 R127/tCO2e next year it will be R134/tCO2e
Carbon offsets would trade at a discount to the tax rate. Companies can purchase offsets below the carbon tax price, depending on supply and demand. WeAct are currently selling at R114 per credit.
Can one claim the S12L and carbon tax credit for the same energy efficiency projects? No. A company must choose between claiming the Section 12L Tax Allowance Incentive (95c / kWh saved) or carbon offsets.
How does the high demand for these carbon taxes affect the price? Do you have an example of how much it would cost or is it completely dependent on market? A high demand for carbon offsets will drive the price up, not exceeding the South African tax rate.
if the carbon offsets earned within your carbon tax net is greater then the 10% incentive allowed, can you trade the balance? Yes, you can, you can choose to trade the credits or hold on to the credits to use at a later stage.
When can the market expect more clarity on the carbon tax & requirements in future, after 2022 (accepting that it will not go away). These may influence current decisions? There is no formalized clarity on the structure of the carbon tax for the second phase. National Treasury will implement a rigorous revision of the carbon tax during 2022, will we expect to have certainty by end of 2022. There is international pressure to create carbon markets and we therefore expect a market to be in place until 2030, and possibly even up to 2050.
What kind of carbon credit volumes from new projects can we expect to come onto the market in the coming years? We anticipate there to be a shortage in the market for at least 18 months to two years until new projects are registered and generating credits. However due to the significant emissions in South Africa, a shortage in credits is still expected in the medium term. If there is a significant uptake in land-use and forestry type projects generating credits, this could supply the market in the longer term.
Is there a cap on the amount of Carbon Credits that a business can purchase? The carbon offsets allowance is structured in such a way that you can offset 10% of total taxable emissions for fuel combustion activities and 5% for process or fugitive emission activities. Depending on the activities undertaken, a company could therefore roughly offset on average 7.5% of their total taxable emissions.
Which companies do we speak to re purchasing Carbon Credits You are welcome to speak to Loyd or Jenine from WeAct. Please contact us using the details at the end of this email and we will put you in touch.
What would Vera / CDM / GS charge for verification of a project? Costs are dependent on the scale and methodologies used. There are fixed costs associated with any project and therefore if you can spread those fixed costs across a greater number of carbon credits, then one can reduce the fixed costs. Economies of scale can significantly impact the costs. It really depends on a project-to-project basis. It also depends on availability of expertise required of the external auditors.
How would you know under which standard you should or could register a project and then also, go local or international? The best option is to undertake a feasibility assessment. The status is however that the Clean Development Mechanism is uncertain due to the negotiations on Article 6 not being concluded. Once concluded this should give rise to the Sustainable Development Mechanism. Now the most feasible option is the Verra standard, as they have a wide variety of methodologies and additional standards for additional co-benefits, such as the climate community and biodiversity standard which comes at a higher premium. At a minimum, companies require VCS type credits to benefit from the carbon offset allowance, therefore VERRA is the most viable choice.
A question for later: We have been using carbon footprint specialists to audit our credits (e.g. The Green House, Carbon Calculated, Urban Earth, C4ES). Under the SA Carbon Tax rules, we would need to use SANAS accredited auditors. Can you please explain the processes, SANAS requirements, costs, lead times? And does SANAS have the required skills and capacity to do the accreditation? The Draft Technical Guidelines for the Validation and Verification of GHG submissions state that there will be a requirement for GHG emission submissions to DEFF to be audited by a SANAS accredited body, but this will only occur as of January 2023. In terms of carbon credits in a local standard, we expect that it will become a requirement for an ISO14065 accredited company to audit these projects. But no standards or frameworks on this have been published yet. The costs and audit processes will be dependent on the project type and requirements. Cova is currently applying for this accreditation and we do believe that SANAS have the skills to accredit companies in this capacity.
What kind of projects are companies using to create allowances? Previously projects have been focused on nitrous oxide destruction, industrial efficiency and land-use to energy types of projects. Going forward there is an expectation for this to shift to land-use and forestry-based projects – the tax-exempt activities.
When trading credits, is this done on the COAS registry or on a VERRA registry? To benefit from the carbon offset allowance in South Africa, credits must be listed in the Carbon Offset Administration System. For this purpose, the credits must be listed in the SA system.
It sounds like you can you generate carbon offsets and use them yourself. I thought you had to generate and use in different organisations (tax entities), but perhaps I was mistaken? Companies can use own credits as long as they are generated from a project outside of your carbon tax net.
Remember, if you missed the webinar or would like to re-watch it you couldn't make it, you can access the recording and the slide presentation on LinkedIn.

Please get in touch if you'd like more info on engaging with Cova Advisory, WeAct or Climate Legal about Carbon Credits.

Zelda Burchell
+27 82 410 0750
Grant Whittaker
+27 72 853 6918
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