A carbon tax had been on the cards for some time. After all, National Treasury and the South African Revenue Service (Sars) were at their wits’ end in finding another tax source. Pressed for time, the short, shoddily written Carbon Tax Act (CTA) came into effect on June 1, 2019.
The Act should be piggybacking onto the regulations that brought the National Greenhouse Gas (GHG) Inventory into being. It doesn’t. The CTA provides that the taxpayer is only liable to register carbon tax if its resulting greenhouse gases are above a specified threshold.
Incomprehensibly, the threshold for many activities is expressed in megawatt capacity.
Herein lies the contradiction – while the operative section of the CTA imposes an obligation to register only if greenhouse gas emissions exceed the given threshold, the thresholds themselves do not have anything to do with the measurement of GHG emissions. Instead, in many instances, they use technical terms that denote capacity to burn fuel, but without even mentioning that it is capacity that is being referred to.
The threshold for registration cannot be based on capacity
The CTA provides for a carbon tax to be imposed on a taxpayer (as defined in the CTA) if the taxpayer conducts an activity (not defined), and that activity results in greenhouse gas emissions “above the threshold”. The CTA includes a list of activities per the Intergovernmental Panel on Climate Change (IPCC) code, next to “thresholds” per activity.
For a commercial/institutional “activity”, the GHG emission threshold is “10 megawatt thermal”. How does a 10 megawatt thermal diesel engine result in gaseous emissions? Surely this will only occur when fuel is injected into the combustion chamber, mixes with oxygen, and ignites?
Similarly, the GHG emission threshold for brick manufacturing is one million bricks a month. Not all bricks are fired in a kiln. A cement brick comprises a mixture of a binder, sand, aggregate and water. Where are the GHG emissions?
Logically, any registration threshold must be based either on the minimum amount of fuel used/consumed/combusted in the activity, or the GHG emissions (which would be more difficult to compute).
But what Sars has done is to conflate the aforesaid types of outputs, with a metric for measuring theoretical input capacity.
It’s like saying the threshold for the activity of driving a car is a prescribed number of kilometres, as set out in the threshold section – but the threshold section refers to the size of your car’s engine, measured in cc’s.
So based on the wording of the CTA, it is unclear if you must register if you own a car with a big engine, even if the car stands in the garage all year.
Must taxpayers close their eyes to the fact that a capacity cannot be equated with an output of emissions, and register to pay carbon tax based on that fallacious assumption?
Background to the carbon tax
South Africa ratified the Paris Climate Agreement in November 2016, requiring it to maintain a National Greenhouse Gas Inventory.
The Department of Environment, Forestry and Fisheries (Deff) is responsible for updating and maintaining the Greenhouse Gas Inventory, as well as enforcing the National Environmental Management: Air Quality Act, 2004.
The Deff has structured the South African National GHG emission technical guidelines for the calculation of emission sources on the IPCC guidelines. It published an excellent document, the Technical Guidelines for Monitoring, Reporting and Verification of GHG by Industry, in April 2017.
The National Greenhouse Gas Emission Reporting Regulations (NGERs) came into effect on April 3, 2017, making it mandatory for reporting parties (later clarified to be data providers), to submit GHG emission data that exceeds a predetermined threshold, in the required format, to the South African Air Quality Information System (SAAQIS).
Amendments to the GHG emission regulations were published on September 11, 2020.
The NGERs must be read with section 12 of the Air Quality Act.
It was obvious that once GHG emissions had to be reported to a national database that the next step would be to introduce a carbon tax.
The carbon tax does not fall under the Income Tax Act, but must be read together with the Customs and Excise Act, and will be collected as an environmental levy in terms of the Customs and Excise Act.
The CTA gives a nod to the IPCC source codes, but not to the Deff, the Air Quality Act, the various regulations, nor to the technical guidelines published by the Deff.
The National Treasury Guidelines on the CTA published in November 2018 ignores most of what has been published by the Deff, and refers to the 2011 National Climate Change Response Policy document.
The guidelines do refer to the IPCC emissions measurement methodologies, but do not give an explanation for Treasury/Sars to have invented a capacity threshold requirement.
The confusion continues …
The guideline also confusingly states that “companies will have to use the same methodology to report their emissions to both [the] Deff and Sars.…”
Had Treasury studied the reporting regulations issued by the Deff it would have noted that the reporting entity of the GHG emissions, defined as the data provider, would be the group (filing on behalf of all its subsidiaries et cetera) – whereas the taxpayer, under the CTA, is not a group.
The CTA defines the taxpayer responsible for paying the carbon tax as a ‘person’, which includes an individual and a company, but never a group, and for purposes of the CTA would also include a partnership, trust, municipal entity, and a public institution.
Essentially, it is intended that the group will file GHG emissions as the data provider to SAAQIS, and the individual companies to Sars (depending on the threshold requirement).
Just another tax
It would have been helpful if National Treasury and Sars had worked together with the Deff to introduce a carbon tax that used the same definitions as the Deff, where the Sars data could be reconciled with the data collected by the Deff, and had as its objective reducing national GHG emissions.
But why should government departments work together?