South African carbon tax rollout rate bad for business

A joint statement by Business Unity South Africa (BUSA) and others says that the rate of the Carbon Tax proposals of the Taxation Laws Amendment Bill (TLAB) will be too steep for businesses and the economy to accommodate.

It proposed that the government address areas of the Bill and make changes such as slowing the rate of price increases, only considering higher carbon prices post-2035, and expanding and retaining incentives and carbon allowances.

Happy Khambule, Busa’s Environment and Energy Manager, noted one of the issues of the tax proposal is that “when the government was looking at the carbon tax, they were making sure that they’re looking at international standards.”

“This may not be aligned with the needs of a developing economy such as South Africa’s, which must account for challenges faced in the country, including low economic growth, energy security and high unemployment,” he added.

The South African business organisations that are jointly proposing changes to the government’s plans alongside Business Unity South Africa are:

• The Energy Council of South Africa
• Minerals Council South Africa
• Business Leadership South Africa (BLSA)
• the South African Petroleum Industry Association (SAPIA)
• Energy Intensive Users Group (EIUG)

The group commended the government’s commitment to decarbonising and sustainably growing the economy’s low-carbon sectors. But, it wants the government to improve on its carbon tax proposals to “avert unintended consequences”.

Currently, the government plans to end a range of exemptions by 2025 and boost carbon taxes to $20 (R350) per ton of carbon dioxide equivalent by 2026 and $30 (R525) by 2030.

“The South African economy cannot accommodate the steepness of the carbon tax rate increase in the proposed short period of time,” the group said.

“This is compounded by the slow recovery from the devastating impacts of Covid-19 and an economic downturn, which has resulted in the closure of businesses, job losses and the exacerbation of poverty.”

The group’s recommendations

The group believes that key areas can be improved in the TLAB carbon tax proposals to avert identified unintended consequences, and their main joint recommendations are:

• A revised carbon tax rate proposal. The group proposes that the annual carbon tax increases continue to be based on the current Consumer Price Index (CPI)+2% structure until at least 2030 to allow for reviewing and aligning different policies. this is because they believe that the South African economy cannot accommodate the steepness of the carbon tax rate increase in the proposed short period of time.
• Retaining the currently enacted allowances to 2030 and introducing other supporting policies and measures to encourage decarbonisation and growth of low-carbon sectors. There is a need for greater policy certainty around the retention of allowances, as these mitigate the impact of the rapidly increasing carbon tax. The group believes that when the price is increasing rapidly, it should be counter-measured by some version of allowances and incentives, as in other jurisdictions. For South Africa, such support incentives are currently lacking, and the group propose that these be explored and introduced in support of decarbonisation.
• The revision of implementation timelines. The group proposes that a higher carbon price should only be considered post-2035, the exact date of which should be informed by a more detailed analysis of viable mitigation and socio-economic considerations. This is because they believe businesses cannot afford the proposed tax rates and simultaneously mobilise the capital needed to mitigate greenhouse gas emissions and grow or invest in new low-carbon products and services. The timing of the $20 by 2026 and $30 by 2030 carbon prices and the potential removal of the tax-free allowances will result in very high costs within a short timeframe for businesses to absorb, particularly given the limitation and costly nature of mitigation opportunities pre-2030. 
• A bottom-up analysis for hard-to-abate and vulnerable sectors. Different sectors have different carbon pricing signals against which they will switch to low-carbon energy and feedstock options and require varying lengths of time to transition. Therefore, such a study should also consider broader tax adjustments.
• A study on carbon tax pass-through. The group note the extension for electricity generators to continue, including the environmental levy as part of their carbon tax determinations. The proposed end date of 31 December 2025 poses a significant financial risk to members who rely heavily on electricity and energy-intensive users across various sectors. The pass-through of the carbon tax to electricity consumers and other input costs, such as construction material in the form of steel and cement, among others, leads to double taxation. Therefore, an evaluation of the financial impacts of a carbon tax pass-through from electricity generators and other industries that cannot pass a carbon tax onto customers needs to be considered.