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Carbon tax: What you need to know

Second round of tax return submissions coming up.
The emissions threshold could be lowered to pull more companies into the tax net. Image: Carla Gottgens/Bloomberg

South Africa’s largest emitters of greenhouse gas are entering the second round of their carbon tax returns in July this year. Teething problems during the first round have to a large extent been smoothed out.

However, not all companies embraced the concept of the carbon tax; from an estimated R3 billion, the South African Revenue Service (Sars) collected around R2.5 billion.

The tax has been in the making for many years and companies whose activities rely on 10 megawatts (MW)  and more of electricity, heat production and petroleum refining started paying the carbon tax last year.

Andrew Gilder, director at Climate Legal, says entities that are engaged in the listed activities had to register with Sars and license their emitting facility as a customs and excise warehouse.

The tax become effective on June 1, 2019 and companies submitted their carbon tax returns for the six months to December 31 in October last year after some reprieve was given due to the impact of the Covid-19 pandemic. The second tax return period extends from January 1 until December 31, 2020, and returns are due from the end of July.

Eckart Zollner, head of business development at Economic Development Solutions, says the tax is a big cost for large emitters.

“It can be anywhere between 5% and 10% of their gross profit if they are not mitigating their exposure.”

Companies faced some challenges when it came to the process of reporting to the Department of Environment, Forestry and Fisheries (DEFF) and converting the emissions into the tax liability.

“I think there is now a greater understanding [of] how to use the data for the tax calculation,” says Zollner. “The initial hurdles have been overcome and the forthcoming reporting period should be a whole lot smoother.”

The formula

Gilder agrees that the calculation of the tax liability is complicated, but not overly complicated to leave a professional tax practitioner flummoxed by it. “There is a formula and the Carbon Tax Act unpacks each of the symbols or values in the formula.”

It is important that the tax and air quality department responsible for collecting the emissions data for the DEFF engage with each other.

“The tax was deliberately introduced at a low level so that taxpayers could become familiar with the administrative processes before it is significantly ramped up,” says Gilder, who is member of the South African Institute of Taxation’s carbon tax work group.

The tax was introduced at a rate of R120 per ton of CO2 emissions. During phase one – which extends to the end of 2022 – it is set to increase by CPI plus 2%. It is currently at R134/t CO2.

During phase two, which starts in January 2023 and runs until 2030, the rate will increase by inflation annually.

Zollner says South Africa’s national determined contribution in terms of the Paris Agreement for the second phase is currently under discussion.

An initial draft was published in March, and all inputs are being compiled and must be approved by cabinet by August. It will be presented to the Intergovernmental Panel on Climate Change in November.

Review and adjustments

A review on the impact of the carbon tax will be conducted by 2022. “Adjustments to the tax design beyond this first phase will depend on the economic circumstances at that time and how effective the tax will have been in mitigating emissions,” Sars said in a discussion paper recently.

Gilder says the review will enhance, improve and make the tax more efficient in order to ensure that it achieves its objective, namely to change behaviour in terms of carbon emissions.

In other words, the tax teeth will become sharper.

As the tax will increase in intensity, so too will the need for mitigating measures. According to Gilder it is currently possible to reduce a heavy emitter’s carbon tax exposure by between 80% and 90%.

Mitigation measures

In terms of the current allowances the first 60% of reported emissions is tax-free.

Furthermore, companies are allowed a maximum of 10% for trade exposure, up to 5% for a performance allowance, and 5% for complying with carbon budgets as well as another 5% or 10% for carbon offset projects.

Zollner expects these allowances to be lowered.

He also expects that the current 10MW threshold will be lowered to pull more companies into the tax net. He foresees additional thresholds that could be based on other criteria that are not focused on the use of energy.

It is still unclear what the overall economic impact of the carbon tax will be on the economy.

Eskom is the largest polluter by far because of its coal-fired power stations and has been excluded from the first phase. It is likely to be included in phase two. What is not clear is how legislation will be framed regarding what Eskom will and won’t be allowed to do.

“If they are allowed to simply pass the additional cost on to the end consumer it will have a major negative effect on the economy,” says Zollner. “The intention is not to let that happen, but to incentivise them to move to renewable energy and other offset programmes sooner rather than later.”

Gilder adds that the announcement of the 100MW self-generation for companies is certainly a “game-changer”.

Read: Companies can produce up to 100MW of power – Ramaphosa

If companies are able to generate electricity by using renewable energy, it will reduce their tax liability by the extent to which they are able to generate renewable electricity.

“The company owns the infrastructure, can amortise it over 20 years, and is not beholden to Eskom for the next 20 years.”

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Another nail in the coffin of South Africa’s industrial competitiveness. As the fools ramp up the carbon tax, China laughs, waving their free pass they received from the Paris accord. All this nonsense is based on failed models that ignore the principal factors involved in climate change and thus grossly overestimate climate sensitivity to CO2.

The world was on the gold standard during the rule of the British Empire. Gold was money. The Boere discovered vast gold reserves at the Witwatersrand. This implied that the Boere were in fact, the “reserve bank” of the British Empire. This situation was intolerable of course and the Anglo-Boer War ensued. The world, and the USA, in particular, has been on the “oil standard” after the USA defaulted on the Bretton Woods agreement with the Nixon Shock in 1971. Coal and oil resources are a strategic advantage to many nations that compete with the old centres of power. The Carbon Tax is the modern-day Anglo-Boer war. You have to invent a suitable excuse to wage war. This is what the run-up to the War on Terror has taught us. A lot of scaremongering about weapons of mass destruction, yet none found to this day.

Why not have a single flat Transitional Tax for everything with a Tax Credit procedure.
It will require less effort to administrate and be cheaper whilst forcing everyone to pay the same % regardless of the purchase item, then if you or the business wishes to make a claim a request can be sent with back up.

In the case of this article, the flat tax rate should be 22%.
Actives where there are alternative environmentally safer production methods to be incentivised to receive credits between 50%-75%,

Simply put if your total cost paid is R100 you would pay R22 Tax then claim back R16.5 Tax Credit which mean total tax paid is R5.50.
Whereas a dirty polluter would pay R22 and not be entitled to claim anything back.

This would put an end to the bad actors, whilst i do not foresee it as the ultimate solution it is a step in a cleaner form of administration.

Please stop with the common sense. Remember this government is full of —- on the job trainees.Clueless from the word go.They are so broke they can’t pay attention.

Now ask what is being done with all of this additional tax money?

Sorry but I am finding it very difficult to believe that this tax is about concern for the environment. Why would a government that is concerned for the climate build Medupi and Kusile on top of all the coal powered stations we already have. Maybe they wont tax themselves with our money. When I look at the faces in a parliament sitting it is clearly evident that climate change is a priority many of our esteemed leaders have in fact passed out presumably from CO2 gasses.

It would not surprise me to see a ‘frame work’ being developed for a fart tax seeing as this has a methane component.

52% unemployment and we focus on name changes and carbon taxes.

What about the NEW 425 coal fired power stations being built world wide??????? China has about 200 of them. This is systemic redistribution of wealth on a FAKE PREMISE!! DON’T FOLLOW THE PRESSTITUES IN THE MEDIA. DO YOUR HOMEWORK THAT’S NOT CENSORED BY GOOGLE, Facebook & TWITTER,

Just like Columbus is credited for discovering America or the “New World”, which was always there so too has climate change been there since the beginning of creation. There have been times of extremes in the weather before, think of the ice age or the times when the water levels in the great lakes were much lower than at present. Throughout the ages, there have been many changes in the carbon levels in the atmosphere, none of which can be attributed to industrial emissions or the burning of fossil fuels. In 1994 there was considerable controversy around the colours chosen for the new Sanai base in Antarctica. The reason for the new base was due to the old one being buried under thirty meters of snow.

Now let’s just think about this for a minute. Nature never destroys itself completely. If snow is allowed to accumulate at the pole indefinitely it would have dire consequences for the entire planet. It would therefore be normal for nature, which is always in balance, to reverse this trend some time. Nature will do it without the need for your carbon tax!

Nature is working on it. It will probably be called the Omega Variant.

@ Yourhighness. Climate change is not bad for the Earth, in fact the earth will thrive with more CO2. Humans will also survive but get ready for the biggest migration of humans in earth history from coastal areas. Get ready for less land due to flooding and desert formation. Sad thing is its not even us that will be affected but our kids. So who cares.

I just have one question for all these Climate Change alarmists and Gretha Thunberg groupies: Why is neither the Netherlands nor the Maldives underwater and why hasn’t the polar ice cap melted as predicted by Vice –Pres Al Gore in his 2006 film “An inconvenient truth”? Then while you are at it, can please prove also to me how much of global warming is attributable to Co2 emissions and how much is the result of other factors like heat absorption by concrete buildings?

Thats some really backwards logic youre using. Thats like saying “everyone told me my bath will overflow if I leave the tap on but look after 3 mins its hasn’t overflowed.” so that means the people giving the warning are wrong.

Now I am generally open to cristism but that is really a stupid remark. Perhaps the tap isn’t even on and there is no chance of any overflow to begin with….? Just because everybody say it is so doesn’t make it so. Maybe the emperor is naked but nobody wants to tell him?

I think most sane people agree that things need to change. Just not sure this is the fastest way to the greatest impact.

1. This revenue goes into a general pool funding more wasteful expenditure. Mboweni is not planting a billion trees with this extra income.
2. The cost is simply passed on down the line, it has no penalty impact on the polluter.

I would rather the world first rid the world of plastic packaging. Make plastic packaging that is not fully compostable so expensive that only a total idiot of a consumer would choose to buy the product in bad plastic. Literally start off saying that there is an extra R3 tax on bad plastic (at manufacture, at import) and R3 refund for good plastic or an alternative to plastic. Ring-fenced fund pays the incentive from the penalty. Eventually the fund will run down and it becomes R5 tax and R1 refund

Thank you, Al Gore and Company for this lie.

Carbon emissions are the easiest thing to tax, yet the impact in comparison to Methane (We need flowmeters attached to Bovine nether regions?)and water vapor (Tax the sun?)

It was also interesting that they had a BBC Commentator/Celebrity present the Global ‘catastophe’ to the G7 Summit instead of a Scientist who would be deemed as a World Authority on Climatology.

I still believe the Jury is out on this one. What about the Co2 the flora require to exist?

How do Man-Made carbon emissions compare to Volcanic eruptions?

Is it that Africa now apparently has the largest reserves of fossil fuels in the world that this might not be part of the plan to have it develop and put a multi-billion Aid industry at risk?

Just asking.

Every so now and then you get this BS circulating the globe, stuff like Y2K, SAP, Global Warming, ANC corruption fighting, and so forth.

End of comments.

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