By Tim De Wet and Coldron Denichaud

All the indications are that it is not whether, but when, the carbon tax will be imposed. The imposition of the tax was originally set for 2015 and subsequently postponed to January 1, 2016, but this date may be postponed again. Clearly, those that will fall within the carbon tax net cannot wish it away.

Steelmaker ArcelorMittal South Africa was quoted recently as saying the carbon tax, if implemented in its current form, would cost it between R630-million and R650-million a year, prompting the company to say it should be entitled to special carbon tax treatment. In its published 2013 annual financial statements, cement maker PPC indicated that its carbon tax liability would be in the vicinity of R150-million.

These are not insignificant amounts and, on the face of it, the carbon tax could pose a significant threat to the future competitiveness and financial wellbeing of so-called energy-intensive users (EIUs) if this impact is not carefully managed.

Initially, the full impact of the tax will be softened by the 60% threshold offered to all companies that fall within the carbon tax net. Further rebates will be offered to some industries that face challenges posed by technical or structural impediments to emissions reductions, that face the possibility of reduced competitiveness owing to exposure to international trade and investment, and that qualify for carbon offsets. EIUs may initially be able to avoid 70% to 90% of their carbon tax liability, depending on their circumstances and entitlement to rebates in addition to the general 60% threshold for all EIUs falling within the carbon tax net. Naturally, EIUs should position itself so that they can claim all these rebates.

However, a central tenet of the carbon tax as a climate change mitigation strategy is that it should in some way encourage behavioural change in those affected by it. In theory, those who proactively integrate climate change mitigation strategies into the way they do business should, in the long to medium term, benefit from having been firmly guided into a more sustainable business model that is in keeping with altered world trends.

It can be expected that the carbon tax will weigh heavily on companies that perpetuate a reactive mindset and whose main focus becomes mere avoidance of the carbon tax, without embracing initiatives that are in keeping with overall climate change mitigation.

How is it possible to find anything positive in yet another tax? Companies should be considering their mitigation options and taking active steps to explore the possible benefits embedded in these challenges. Closer scrutiny may well reveal opportunities that will benefit the company and its business in the medium to long term. Philosophically, climate change mitigation strategies are designed to incentivise appropriate behaviour. The key lies in identifying and maximising the incentives that are on offer.

An attractive mitigation option may lies in some form of engagement with renewable-energy projects, including captive small-scale renewable projects and projects currently under development in the Small Projects Independent Power Producer Procurement Programme. The 'green' energy they produce:
* can be bought by EIUs through the Eskom grid under a so-called wheeling arrangement, potentially lowering the cost of the EIUs' overall electricity bill over its entire sphere of operation;

* could give rise to reputational benefits, enhancing the EIU’s profile as a forward-thinking business committed to assuming the climate-change responsibilities that have to be shouldered as a solid corporate citizen.

Certain projects will be eligible to sell carbon credits and, as the market for these derivatives develops, it will create a separate income stream that did not previously exist.

In addition, carbon credits may be bought by EIUs as a way of offsetting their carbon liability. Unused resources, such as vacant or economically or technically 'unfeasible' land, may be harnessed to produce financial gains. For example, the renewables project being partnered with may be charged a rental for using the company’s unused land for the project. The carbon tax liability of EIUs doing business in countries and regions with existing carbon tax regimes, such as the European Union, may be lowered in recognition of the carbon tax being paid (or mitigation strategies being adopted) in South Africa, thereby enhancing international commercial competitiveness.

Companies with a proactive and open-minded approach to these challenges will find that they are able to craft solutions that not only limit their carbon tax obligations, but also create thought-leading initiatives that will set them apart from their competitors in the future.

* De Wet and Denichaud are director and associate respectively at law firm Norton Rose Fulbright