In a move likely to invite criticism from environmental tax proponents, Finance Minister Pravin Gordhan announced to Parliament on Wednesday that, while a “package” of measures – including a carbon tax – was required to address climate change and reduce carbon emissions, the implementation of these interventions had been postponed by a year to 2016 to “allow for further consultation”.
“Following public consultation, the National Treasury and the Department of Environmental Affairs (DEA) agreed on the need to align the design of the carbon tax and the proposed desired emission-reduction outcomes (DEROs).
“To allow for this process and [to] ensure adequate time for consultation on draft legislation, implementation of the carbon tax is postponed to 2016,” he said during his 2014 National Budget speech.
The DEROs, as mentioned in the National Climate Change Response Policy, considered [industrial] sectors that played a vital role in the country’s emissions space and identified possible interventions that could bring about an emissions adjustment in these sectors.
A “package” of climate-change mitigation measures could include limiting the future growth of greenhouse-gas (GHG) emissions as well as pricing carbon, with the proposed carbon tax and incentives, such as the energy efficiency tax incentive, providing “price signals” to “encourage” the economy onto a path of low-carbon growth over the long term.
“Interventions could include additional environmental regulations, the development of renewable-energy projects and other targeted support programmes,” the Budget Review document outlined.
The National Treasury received over 100 written comments in response to its 2013 Carbon Tax Policy Paper, after which two public workshops and a number of bilateral meetings were held.
“Overall, the comments acknowledged the need for a carbon pricing mechanism to reduce greenhouse-gas emissions and address climate change, with 94% of respondents supporting the policy intent; over half were in favour of the carbon tax, [while] some suggested changes to improve its effectiveness and reduce negative economic consequences,” noted Gordhan.
Government intended to implement the carbon tax and reduce the electricity levy, with the net tax burden remaining “low” in the first five years of implementation, rising slowly, thereafter, and more steeply after ten years.
Following consultations, several adjustments to the policy package would be proposed, including reducing energy utility Eskom’s tax liability with a credit for the renewable-energy premium and limiting the potential effect of the tax on electricity prices.
Further proposals would include lowering the current electricity levy, addressing concerns about international competitiveness – including using a formula to adjust the basic percentage tax-free threshold to reward overperformance – and refining the research and development tax incentive to provide for related green technology.
In addition, it would be proposed that firms be able to use their carbon offsets to reduce their carbon tax liability by between 5% and 10% of actual emissions, as outlined in the soon-to-be-published carbon offsets policy paper.
“[The policy package] would also be amended to decrease the effect of the carbon tax on households by providing subsidies to install solar water geysers and improve public transport,” noted Gordhan.
Moreover, a portion of the revenue generated from the carbon tax would be used to fund the energy efficiency tax incentive, which began operating on November 1, while the reporting and classification of GHG emissions for tax purposes would be aligned with mandatory emissions reporting to the DEA.
“Government will take into account the range of factors mentioned above when finalising the design of the carbon tax to ensure that households and firms are not unnecessarily disadvantaged,” the Budget Review stated.
South Africa made a voluntary commitment at the 2009 Copenhagen climate change talks to reduce GHG emissions from projected “business-as-usual levels” by 34% in 2020 and 42% in 2025.
Commenting on the postponement of the carbon tax, financial services firm Deloitte on Wednesday said the complexity of creating the required linkages between the various government departments involved in this pricing mechanism could not be underestimated and had clearly contributed to the delay in implementation.
“The move by government to create better linkages between the proposed DEROs and the carbon pricing mechanism is indicative of efforts to reinforce the carbon tax as a policy instrument that is robust and definitive, as opposed to purely being a means of collecting additional revenue for government coffers,” the firm noted.
In spite of the above, government was still to provide certainty regarding the long-term pricing strategy of the carbon pricing mechanism, which would require South African-specific benchmarks to be established for several local sectors.
“These benchmarks would be integral in establishing the DEROs for these sectors,” Deloitte said.