South Africa: Revenue use planning for South Africa’s carbon tax
In early 2019, the South African carbon tax was passed into law. This process was the culmination of an extensive history of debates that saw the publication of various papers inviting public comment, including a carbon
tax discussion paper (South Africa National Treasury 2010), a carbon tax policy paper (South Africa National Treasury 2013), and a paper on carbon offsets (South Africa National Treasury 2014).
The legislation includes a tax of ZAR 120/tCO2e (US$ 10/tCO2e), which will increase at the rate of inflation plus 2 percent yearly until 2022, and applies to all combustion, process, and fugitive GHG emissions.
This design includes various tax-free allowances to do the following:
• Account for competitiveness concerns in the forms of a maximum 10 percent tax-free allowance for tradeexposed sectors, based on emissions intensity benchmarks
• Ease the transition with a 60 percent basic tax-free threshold and an additional 10 percent tax-free allowance for process and fugitive emissions
• Incentivize investment in mitigation technologies (companies would be allowed to claim an emissions intensity based performance allowance up to a maximum of 5 percent, compared to an appropriate sectoral benchmark),
with a 5 percent or 10 percent allowance for mitigation actions
• Foster broad-based participation with a tax-free allowance of 5 percent for complying with carbon budget information requirements (Government of South Africa 2017)
The legislation caps the use of offsets at 10 percent of the carbon tax liability of covered entities. The national treasury estimates the effective carbon tax rate to be R 6–48/tCO2e (US$ 0.5–4.0/tCO2e) with tax-free allowances of 60–95 percent of the total liability.
South Africa usually applies a strict rule whereby fiscal revenues are not earmarked. However, several soft revenue recycling options were discussed for the carbon tax, including an energy efficiency savings tax incentive
(implemented since 2013 and due to be extended beyond 2020 to align with the first Phase of the carbon tax), support for the installation of solar water heaters, improved free basic energy for low-income households, improved
public passenger transport, and support for shifting freight from road to rail (Government of South Africa 2015).
The legislation also includes credits for payment of the electricity generation levy and the renewable energy premium against a company’s carbon tax liability to ensure a neutral impact on electricity tariffs during the first Phase of the carbon tax (until 2022).