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South Africa’s carbon tax: Changes and implications for taxpayers

Published: 1 February 2023

As the 12th largest greenhouse gas (GHG) emitter in the world, South Africa (SA) has an obligation to help curb the effects of climate change. The carbon tax is one of the mechanisms that the SA government has put in place to help achieve its Nationally Determined Contributions as communicated under the Paris Agreement. While the pricing per tonne of carbon dioxide equivalent in SA is low, relative to other countries’ policies, and to effect any meaningful change in behaviour, the introduction of the tax in SA is being done in three phases to ensure that industry is prepared for when the tax is equivalent to that of global carbon pricing ($20-$30).

The starting date of the second phase, however, was pushed from January 2023 to January 2026. Taxpayers will now continue to benefit from large tax-free allowances which reduces their carbon tax liability. While the reasoning behind the extension has not been clear from National Treasury, it is possible that it was done to grant taxpayers more time to understand the intricate carbon tax system. 

Along with the extension of phase 1 of the carbon tax, the SA government has also recently introduced increases in the rate of the carbon tax, which will not only increase the carbon tax liability of all SA carbon taxpayers, but it will also have knock-on effects on the fuel and electricity prices in SA, which will influence the pockets of individuals as well.

It was initially proposed that these rate increases were linked to the US Dollar to better align SA’s carbon pricing with global pricing.

After public consultation, it was decided that the increases would be Rand-based due to the instability of the US Dollar- Rand exchange rate, which would lead to uncertainty for SA carbon taxpayers. The current rate for 2022 is R144 per tonne of carbon dioxide equivalent (tCO2e) and the proposed increases would look as follows:

Impact on SA companies

As evidenced in the example below (assuming company "X" emits 100 000 tonnes of carbon dioxide equivalent, which remains constant for 2023-2030), with the change in carbon tax rate and expected allowance reductions in phase 2, SA carbon taxpayers could expect drastic increases in their annual carbon tax liability, putting their existence in question, come 2030.

Impact on SA consumers

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. While South Africans have grown accustomed to drastic fuel price increases in recent months, these increases will be in addition to the normal escalation of the fuel price.

Eskom is the largest contributor to SA’s national GHG emissions and consequently results in high carbon dioxide emissions per unit GDP. 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 the renewable energy premium and the 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. 

Eskom is the largest contributor to SA’s national GHG emissions and consequently results in high carbon dioxide emissions per unit GDP. 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 the renewable energy premium and the 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. 

"Revenue recycling"

The carbon tax was designed so that all revenues collected would be recycled back into green initiatives. An estimated R1.6 billion in carbon tax revenue was collected in the 2022 payment period. While this amount makes up less than 0.2% of the total revenue collected in SA, it has the potential to become a significant contributor when the second phase begins in 2026, and large allowances begin falling away.

"Revenue recycling"The carbon tax was designed so that all revenues collected would be recycled back into green initiatives. An estimated R1.6 billion in carbon tax revenue was collected in the 2022 payment period. While this amount makes up less than 0.2% of the total revenue collected in SA, it has the potential to become a significant contributor when the second phase begins in 2026, and large allowances begin falling away.

"Revenue recycling"The carbon tax was designed so that all revenues collected would be recycled back into green initiatives. An estimated R1.6 billion in carbon tax revenue was collected in the 2022 payment period. While this amount makes up less than 0.2% of the total revenue collected in SA, it has the potential to become a significant contributor when the second phase begins in 2026, and large allowances begin falling away.

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i. Department of Forestry, Fisheries and the Environment (DFFE). (2021) Perspective on Advancing and Inclusive and Sustainable Green Economy in South Africa.

ii. National Treasury and SARS (2022). Draft Response on the 2022 Draft Taxation Laws Amendment Bill & 2022 Draft Taxation Administration Laws Amendment Bill; Presentation to the Standing Committee on Finance.

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