Carbon tax: Will allowances, after 2022, be reduced or removed?

South Africa is one of the first developing countries to introduce a comprehensive carbon tax system in its fight against climate change.  When introduced in 2019, the rate of the tax was set at a relatively low rate of R120 per tonne to minimise the impact of the tax on industry.  

To provide industry with certainty on future carbon tax liabilities, the rate of increase of the tax was included in the legislation. For the first phase of carbon tax (2019 to 2022), the rate will increase with consumer price index (CPI) plus 2%, and thereafter with CPI. 

Worldwide consensus is that a carbon tax rate of at least $50 per tonne or higher is required to minimise emissions and climate change. South Africa’s carbon tax rate after taking into account tax free allowances is roughly $3.5 per tonne.  

From a worldwide perspective, South Africa’s carbon tax rate will need to increase substantially in future years. Two methods can be used to increase the carbon tax rate. One is to simply remove the clauses dealing with rate increases. The other is to remove the tax-free allowances that are allowed. For example, allemitters benefit from a 60% tax-free allowance.  The allowance can be reduced or removed.  

It is understood that during the second phase of the carbon tax, after 2022, that the allowances will be reduced or removed. However, to get to a carbon tax rate of $50 per tonne or R750 per tonne, allowances will need to be removed andsignificant rate increases will be required.  It is unlikely that the rate will increase to R750 per tonne in the short-term or medium-term, as industry will not be able to afford it. 

It is not expected that significant changes will be made to the carbon tax during the 2021 Budget Speech.  Some direction might be provided on what to expect in the future after 2022 when the second phase of the carbon tax will be implemented, which includes a carbon budgeting system.