There was some relief when last month’s budget did not include the massive new tax hikes which had earlier been feared, but it was not all good news – particularly for those companies which have been slow in taking action to curb their emissions.
As South Africa steps up its implementation of measures to meet international commitments on curbing greenhouse gases, such as the Paris Agreement, there is a hefty price to pay by those industries which are not reducing their emissions.
The government’s carbon tax was implemented in June 2019 with companies having to start filing returns in October last year. The financial impact of the tax is now painfully real.
As a result of measures announced in the budget, the scale of the carbon tax is now being increased – firstly, through the carbon tax fuel levy, then with an increased carbon tax rate on company emissions, and finally with the planned downscaling of allowances.
With Finance Minister Tito Mboweni wielding the stick, how does a firm minimise the impact of this carbon tax, the burden of which is going to increase through time?
One way is through carbon credits – the benefits a company earns by investing in greenhouse gas emission saving projects. These credits have yet to enjoy the hype currently surrounding cryptocurrencies – but they, too, can be traded, bringing in a financial benefit to the holder of the credits and helping to balance out the overall impact of the carbon tax.
For some time, companies had been registering eligible projects, so they could earn carbon credits, but the price for carbon credits crashed in 2008, and as a result, some claimants did not follow through on their projects, and the credits never materialised.
In contrast, the carbon tax – though initially delayed – has proved to be unstoppable.
With the carbon tax certain to increase in intensity, there is a new realisation of the potential benefits of these carbon credits. They are a reward for environmental prudence and could swing the balance in favour of your new project – if the system can be understood, and the correct methodology can be selected.
There is a fair amount of ignorance about who can benefit from carbon credits, and even on how to proceed. If you are a company doing an eligible project, you might not even realise that you may qualify as a project developer, and thus could jump on the carbon credit bandwagon.
Any project that enhances energy efficiency, which involves renewable energy or biogas, as an example, could potentially qualify for carbon credits – if there is to be a reduction in emissions, and it is big enough.
The bureaucracy is intense, but once you have overcome this hurdle, understood what is required, and geared yourself up to meet all the requirements and do all the paperwork, the credits are easily attainable.
We are still awaiting planned umbrella environmental laws such as the Climate Change Act, which will build on the existing carbon tax legislation and solidify the government carrots which will be offered to those who undertake greenhouse gas saving projects. This will assist in the understanding of and should boost applications for, carbon credits.
If all goes ahead as expected, the carbon credit market will be revitalised. We should see new local standards, as being developed by Food and Trees for Africa, and a local framework of local carbon credits.
However, there is no need to wait for all the legislative detail to be put in place. The opportunities are out there already, although proper planning will be vital if a firm is to successfully apply for – and to obtain – carbon credits.
A mistake we often see is that companies may launch a project without realising they might have been eligible to make it a carbon credit project.
The current rules say that it is highly unlikely a project will be eligible for carbon credits if it has already begun, so if the proper planning is not done, and the application has not been made in advance, the benefit may be lost. It may seem harsh, but this procedure is there to ensure that only new greenhouse gas mitigation projects are rewarded, and not those which were going to happen anyway.
The carbon credit opportunities are of particular relevance to companies embarking on renewable energy projects, as there are not any other specific incentives for renewables at present.
Too many companies seem to forget the scale of documentation and the level of detail that is required to secure carbon credits. The benefit is there, but the administrative burden is high.
Say you are saving natural gas. If it is delivered to your plant through a pipeline, there will be a meter, which will measure your consumption. That meter needs to be calibrated – verified to ensure it works properly – or you cannot use it to work out the scale of benefit which you can claim.
The pressure to go green has never been greater, shareholder activists are demanding action, and the government is adding to its armoury of sticks and carrots.
Too many companies still see carbon credits as a challenge, a problem, too much effort. It is high time they started to see them as a lucrative solution.
Sarah Goodbrand, assistant manager: Carbon Tax at Cova Advisory.