Tax and grant incentives to pave the way for the automotive sector’s green transition – developing a NEV industry.

Considering the anticipated announcement of support measures aimed at assisting the automotive industry transition from producing Internal Combustion Engine (ICE) vehicles to a dual platform of New Energy Vehicles (NEVs) and ICE vehicles, the automotive sector is expected to come out with a ‘win’ from the 2024 National Budget Speech.  

The pressure is now on South Africa to create a conducive environment for the manufacturing, export and adoption of NEVs - by the transport sector as well as by motorists – to stave off the decline of the automotive sector.  

The UK is already imposing penalties for car manufacturers whose ICE sales exceed 78% of total sales, starting from this year – 2024. This is after having imposed a 22% minimum electric car sale requirement as a percentage of all car sales. The UK expect that by 2035¹, all their motor vehicles sales will be electric cars.  

Similarly, the European Union (EU) also aims to eliminate vehicle CO2 by 2035, with registration of ICE vehicles permitted only if those vehicles use carbon-neutral fuels.  The EU represents a significant market of South Africa’s exports, with 63% of total automotive production (2.9% of GDP) being exported.² Thus if South Africa does not respond adequately to the global decarbonisation of transport, this will contribute to the de-industrialisation of  South Africa’s economy, given the current dominance of the South African automotive production in markets that are leading the drive to restrict or /ban the sale of ICE vehicles. 

A common feature among countries that have embarked on an automotive industry green transition is the provision of incentives and public sector investment.  The US’s Inflation Reduction Act, seen as the most significant climate legislation in US history;³ was introduced in 2022 - a US$386 billion⁴ package of incentives and public investment for climate and energy.  This package gives comprehensive support in the form of tax credits, grants, loans, and state investment for production of NEVs. The package also covers the production of components as well as the processing of critical minerals used in batteries and fuel cells for NEVs. Infrastructure for charging stations, consumer incentives to generate demand, upgrading of ports to promote use of zero emission technology and a broad programme to reduce greenhouse gas emissions in the transport sector.  

The EU has also introduced financial support for NEVs in the form of public investment in charging infrastructure, public procurement of NEVs for government fleets and public transport as well as indirect consumer incentives that include exemption from tolls as well as regulatory incentives such as sales targets for NEVs.⁵   

South Africa’s BRICS partners are also following a similar trend of public investment to spur the market for NEVs, with China having introduced subsidies from as far back as 2019, and now leading the global market. The rapid growth of China's NEV sector has exceeded many people's original expectations, with the country producing 51% of the NEVs and 90% of global medium and heavy truck NEVs in 2021.⁶  South Africa’s EV whitepaper also highlights the need for incentives to support adoption of NEVs, and notes some of the benefits that have been introduced by other countries in the continent. These include Rwanda, Kenya, and Uganda as well as other vehicle producing countries such as Morocco and Egypt. Thus, South Africa’s fiscal response to this global industry trend is long overdue. 

Currently South Africa spends a significant part of the incentive budget in support of the automotive sector. In 2020/21 alone, government relinquised R26.2 billion in automotive tax incentives. Our expectation is that in the short - to - medium term the National Treasury will focus on recapitalising existing programmes in the automotive sector, ensuring that the South African automotive industry can still compete for future global Original Equipment Manufacturer (OEM) supply contracts.  

It is expected that the National Treasury will provide additional funding for the Automotive Investment Scheme so as to facilitate private sector investment in production capacity of NEVs. This is a grant incentive that currently gives automotive assemblers a benefit of up to 25% of their investment costs in getting plant and machinery for new and replacement vehicle models. National Treasury has already indicated in the Medium-Term Budget Policy Statement, that R728.8 million of the AIS budget will be for NEVs.

The Department of Trade, Industry and Competition has made a commitment to revise this scheme to accommodate new energy vehicle assembly and component manufacturing. There is also an opportunity to revise this scheme to facilitate commercialisation of sustainable fuels like green hydrogen.  From a tax incentive perspective, it is expected that the Automotive Production Development Programme, supporting local automotive production, value addition and exports, will also be revised to include NEVs. This includes a possible reduction of import duties on batteries, until South Africa can develop a regional value chain with other countries in the continent, for  production of batteries. 

With the budgetary constraints on the fiscus, it is expected that the Presidential Climate Commission will play a pivotal role in facilitating the automotive sector’s green transition. Through the Just Energy Investment Plan, there are already indications that part of the funding required for creating an NEV industry will come from the US$ 8.5 billion committed by the Just Energy Transition Partnership, South Africa’s collaboration with France, Germany, UK, US and the EU to facilitate transition to a low carbon economy.    

Our expectation is that this funding will be made available to South Africa and will largely be used for developing the NEV market, including such interventions such as establishing charging infrastructure, supporting increased grid capacity to support NEV uptake in the local market as well as developing a green hydrogen value chain. 

One of the other factors that is thought to have driven growth in the three largest global NEV markets (China, the EU and the US) is strict emissions standards.⁷ The carbon tax legislation has provided a framework for disincentivising greenhouse gas emissions through a fuel levy, an environmental levy for new vehicles and a tax on process emissions.  Although our carbon tax is low relative to many countries that have imposed carbon pricing, it is expected that it will continue to increase as it aligns with global pricing (US$20-30 per tonne carbon dioxide equivalent). 

Policymakers have been slow in outlining policy for NEVs however, there is now some policy certainty following the publication of the EV White Paper in November last year. We do hope that despite the balancing act that the National Treasury has to strike each budget year, it is able to introduce support measures of sufficient scale and quantum to allow South Africa to play catch-up with the rest of the global automotive market. 

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¹ Forbes, 22 October 2023
² NAAMSA Export Manual data
³ United States Environment Protection Agency
⁴ Committee for Responsible Federal Budget
⁵ European Environment Agency – European Environment State and Outlook Report
⁶ Deloitte (EV)olution – Electric Vehicle Trends
⁷ Deloitte (EV)olution – Electric Vehicle Trends