The carbon tax policy paper makes it clear that carbon tax will be a reality — and executives need to start understanding and preparing for it, write Duane Newman and Joslin Andrews
THE South African government plans to implement new fiscal measures to curb greenhouse gases, and a new carbon tax is on the horizon. What does this mean for business? The mines are already facing financial pressure and yet mining and smelting are likely to be hard hit by a new carbon tax. As is Eskom.
Businesses had until the beginning of this month to comment on new, draft carbon tax proposals, but will still need to keep a close eye on the process as it goes through the system and need to be on red alert in case the new green taxes lead to ruin.
So what should corporate South Africa be worried about? In May, the Treasury released a carbon tax policy paper outlining the framework for a carbon tax, which it intends implementing from January 2015 — less than 17 months from now. Companies need to communicate with legislators and take a careful look at the planned new tax, as it could prove ruinous — especially for companies that are heavily exposed to trade and have no option but to obtain their electricity from coal-based sources.
While large corporations and utilities are generally well briefed on the issue, it is concerning that many medium-sized and small businesses are not only unaware of the looming carbon tax, but often have no clue about their carbon profile. They are therefore in no position to calculate the potential effect of the planned tax on their business, or to try to shape the final policy and budget discussions in the run-up to the implementation of the carbon tax.
The only good news is that it isn’t all that complicated. The measurement of greenhouse gases released by a company over a year is called the carbon footprint of the company and is calculated using an internationally recognised standard. The release of significant volumes of greenhouse gases into the atmosphere as a result of human activity is said to be the cause of climate change. The word "carbon" is used as an all-encompassing word for greenhouse gases — which include carbon dioxide, methane and nitrous oxide. The most common of these is carbon dioxide, which is released by burning fossil fuels. All greenhouse gases can be converted to a carbon dioxide equivalent using their global warming potential.
There are different categories of emission, depending on whether fossil fuels are burnt onsite or used in equipment and vehicles — known as Scope 1 emissions — whether they are associated with the use of electricity (Scope 2), or if they result from activities such as business travel (Scope 3).
It is vital to understand where carbon taxes will hit. Under current plans, the Treasury aims to introduce a carbon tax on stationary Scope 1 emissions. The tax will initially be levied at a rate of R120 per metric tonne of carbon dioxide equivalent. This rate would be raised by 10% a year until December 31 2019, after which a new tax regime would be introduced. To soften the blow, the Treasury would allow tax-free thresholds, which means every company would start off with an exemption for the first 60% of its Scope 1 carbon emissions, and it would be necessary to pay tax only on the remaining 40% — an effective tax rate of R48/tonne.
There is potential to boost the tax-free threshold beyond this 60%. Sectors that are exposed to competition from foreign rivals would be able to get an additional 10% on their tax-free threshold.
Meanwhile, some industries have processes that can only be conducted if they produce carbon dioxide emissions, such as the calcination process in the cement industry. These sectors would be entitled to an additional 10% on their tax-free threshold. Additional relief in the form of a higher tax-free threshold is also available for those companies that can balance their carbon-guzzling activities by also carrying out carbon-friendly projects, which reduce overall emissions. These environmentally friendly activities are known as offsets.
It is important to note that companies will be paying a direct carbon tax on Scope 1 emissions and they will also be exposed indirectly to carbon taxes resulting from their suppliers who face carbon taxes. Suppliers of products and services who cannot absorb the carbon tax will be forced to pass it down the line to their own customers.
An important example is the electricity sector. Eskom will be taxed on its coal use, which is categorised as Scope 1, and this will be passed on to customers, for whom their purchase of Eskom power is classified as Scope 2. All this will mean further rises in electricity prices. The government’s carbon tax policy paper proposes a benchmark of 0.91 tonnes of carbon dioxide equivalent per megawatt hour of electricity consumed. Given the proposed tax rate and design, the planned carbon tax could result in a price increase of R43.68/MWh.
Finally, and crucially, businesses need to understand how to reduce the effect of the looming carbon taxes. If a company can reduce its Scope 1 emissions, it can directly reduce its carbon tax burden. In addition, if companies are able to reduce the carbon intensity of their operations they may be entitled to an additional 5% increase in their tax-free threshold.
The use of offsets could also increase the tax-free threshold — by as much as 10%. As explained earlier, a company that invests in emission-reducing activities outside of its traditional operations — when these would not have occurred without this investment — is notching up offsets. The creation of projects that could qualify for carbon credits through mechanisms such as the clean development mechanism or the voluntary carbon standards could also count as offsets.
The Treasury says offsets (or carbon credits) from agriculture, forestry and other land uses, waste, community-based and municipal energy efficiency, and renewable energy, electricity transmission and distribution efficiency, small-scale renewable energy (up to 15MW) and transport projects will be eligible under the carbon tax regime. Carbon credits from large-scale renewable energy projects may also become eligible, depending on the outcome of consultation.
Companies can also apply for incentives for energy-efficiency projects. Section 12L of the Income Tax Act offers an energy efficiency tax incentive that has been on the cards for more than three years — but is not yet operational. When this incentive kicks in, it will allow companies to cut their carbon tax burden.
With no time to waste, companies need to immediately look at their carbon footprint — an exercise that will be more difficult if they engage in more than one activity, some of which may be highly polluting, others not.
They must also look at the situation of their offshore competitors, some of whom may not be facing similar carbon taxes. If this is the outlook, then they should engage with policy makers to ensure that the effect of the impending tax is not to close down profitable local business, opening the floodgates for imports from countries that are not as committed to the environment.
There is no time to lose. Companies should start to investigate how best to engage with the Treasury so they can understand the potential effect impact at company level rather than at a macroeconomic level.
The carbon tax policy paper makes it clear that carbon tax will be a reality — and executives need to start understanding it, preparing for it and reducing the effect it will have on their businesses.