Carbon tax rate increase

– Extension of phase 1, and change of implementation date for phase 2

In the 2022 Budget, the first phase of the carbon tax was extended by three years from 01 January 2023 to 31 December 2025. In this current year’s budget speech, it was proposed that the utilisation period of the carbon offsets, as provided for in the Carbon Offsets Regulations, also be changed to align it with the extension of the first phase of the carbon tax. These amendments took effect on 01 January 2023.

The Carbon Tax Act sets out how the tax will be managed for Phase 1 but no information of specifics of Phase 2 (01 January 2026 to 31 December 2030) are known as yet.

Taxpayers will continue to benefit from large tax-free allowances which reduces their carbon tax liability. Along with the extension of phase 1 of the carbon tax, the SA government introduced increases in the rate of the carbon tax, which will not only increase the carbon tax liability of all SA carbon taxpayers but will also have knock-on effects on the fuel and electricity prices in SA, which will influence the pockets of individuals as well.

Carbon tax rate increase

The Act specifies that the initial rate of a carbon tax of R120 per ton will increase by consumer price inflation (“CPI”) +2% per year until 31 December 2022, whereafter the rate of tax will be increased only by CPI. The carbon tax rate increased from R144 per ton of carbon dioxide equivalent (CO2e) to R159 per ton of CO2e for the 2023 calendar year.

The following carbon tax rates per tonne are applicable for the period 2024 – 2030

2024 R190
2025 R236
2026 R308
2027 R347
2028 R385
2029 R424
2030 R462

From the above figures, Eskom will certainly add these taxes to future prices increases after 2025.

Carbon Tax – Aligning the fuel emission factors with the methodological guidelines and regulations

In October 2022, the Department of Forestry, Fisheries, and the Environment gazetted the amended methodological guidelines for quantifying greenhouse gas emissions.

The amendments include updated carbon dioxide emission factors for domestic (tier 2) emissions reporting for existing fuel types and added fuel types. The updated emission factors took effect in the department’s 2023 reporting period, covering emissions during 2022.

To align the Carbon Tax Act (2019) with these guidelines, it was proposed that a new table be inserted into Schedule 1 of the act to provide the tier 2 emission factors. Further changes to the emission factors may be added to the Tax Laws Amendments Act (2023) if the department publishes further updates. In addition, certain emission factors were added in Schedule 1 for country-specific tier 2 carbon dioxide reporting.

The amendments took effect on 01 January 2023.

Adjusting the formula for fugitive emission factors

Section 4(2) of the Carbon Tax Act provides the formulas to be used to calculate total greenhouse gas emissions. In 2019, changes were made to the formula for fugitive emissions to provide for converting the unit of the emission factors for the different greenhouse gases from volume to mass by multiplying by a density factor, followed by multiplying by 1 000 to convert to tonnes.

Impact on SA consumers

Fuel price
South Africans are currently paying R0.10 and R0.09 per litre at the pump for diesel and petrol respectively. The proposed increases to the carbon tax rate could increase these rates to R1.07 and R0.97 per litre for diesel and petrol respectively by the year 2030.

Electricity price
In the first phase of the carbon tax, the Carbon Tax Act makes provision for a special tax deduction for electricity generators in the form of a renewable energy premium and a levy on electricity generation. This is known as neutrality on the electricity price. This was designed to cushion the impact of high electricity prices on energy-intensive users and the entire country at large. It also allowed time to increase the share of renewable energy in electricity generation.

The neutrality on the electricity price expires at the end of 2025, which is when electricity generated by Eskom will be subject to a carbon tax. This carbon tax liability will be passed on to its consumers.

We are all aware of the horde of levies built into fuel pricing; it is not always known to the general public precisely how these are calculated but they form part of a large chunk of what we pay for fuel at the pumps (and also for Illuminating Paraffin (IP) Tracer Dye levy). Below is a snapshot of the South African state of taxation on energy usage published by the OECD (The Organisation for Economic Co-operation and Development) as of April 2021.

OECD’s Summary for South Africa

“Taxes on energy use and greenhouse gas (GHG) emissions”

The twenty-foot equivalent unit (TEU) is an inexact unit of cargo capacity, often used for container ships and container ports. It is based on the volume of a 20-foot-long intermodal container, a standard-sized metal box that can be easily transferred between different modes of transportation, such as ships, trains, and trucks.

As of 1 April 2021, the main taxes on energy use and GHG emissions in South Africa were the following:

  1. The Fuel Levy, classified as a fuel excise tax in TEU, applies to gasoline, diesel, and its biofuel equivalent, as well as to kerosene. The Road Accident Fund (RAF) Fuel Levy and the Customs and Excise Levy, equally classified as a fuel excise tax, apply to gasoline and diesel, and the latter’s biofuel equivalent. Diesel consumed for domestic navigation, and fishing purposes benefit from a full refund of the Fuel Levy and the RAF Fuel Levy. Diesel consumed for agriculture, forestry, as well as on-land mining purposes, and open cycle gas turbines electricity generation plants used for peaking demand benefit from a partial refund on the Fuel Levy, as well as from a full refund on the RAF Fuel Levy.137 Freight rail and harbour vessels benefit from a full refund on the RAF Fuel Levy.
  2. The Demand Side Management Levy (DSML), classified as a fuel excise tax in TEU, additionally applies to gasoline (95 unleaded petrol in the inland area).
  3. The Illuminating Paraffin (IP) Tracer Dye levy, classified as a fuel excise tax in TEU applies to diesel to avoid its mixing with kerosene for use in primary production activities.
  4. The Petroleum Pipelines (PP) Levy, classified as a fuel excise tax in TEU, applies to gasoline and diesel, and the latter’s biofuel equivalent (biodiesel).
  5. The Fuel Levy on the sale of aviation fuels is the only fuel excise tax applicable to aviation fuels.
  6. A carbon tax is in effect since 01 June 2019. The nominal 2021 rate is R134/tCO2e (~EUR 7.8). The gradual implementation of the tax provides for the first phase from 1 June 2019 to 31 December 2022 (since changed) and the second phase from 2023 to 2030 (since changed). The carbon tax rate increases annually by inflation plus 2 percent until 2022 and annually by inflation thereafter. Significant activity -specific tax-free emissions allowances range from 60 percent to 95 percent apply for energy combustion, industrial process, and fugitive emissions, and 100% tax-free allowances apply for certain emitters including agriculture, forestry, and other land use and waste sectors, implying that effective carbon tax rates are substantially lower. Emissions covered by the carbon tax are those that need to be reported in terms of the Department of Forestry, Fisheries and Environment’s Mandatory Reporting Regulations.
  7. The Environmental Levy on electricity generated from fossil fuels and nuclear in the Republic, classified as an electricity excise tax according to the TEU methodology, applies to electricity consumption. The final consumption of electricity is taxed, unless the electricity was generated from renewable energy sources, from power plants with an installed capacity of not more than 5 MWh, or from combined heat and power cogeneration (CHP). The fuels used to generate electricity are generally not subject to fuel excise taxes. The carbon tax will also not have any impact on the price of electricity in the first phase.

South Africa does not have an emissions trading system for GHG emissions.

Quoting the US Statesman, Benjamin Franklin in a letter to Jean-Baptiste Le Roy, 1789; “Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”

Leave a Reply

Your email address will not be published. Required fields are marked *