SOUTH AFRICA CARBON TAX

1. SOUTH AFRICA CARBON TAX Carbon Pricing in Africa series: Carbon Pricing 101 CPLC Webinar 3 October 2019 Dr. Memory Machingambi Environmental and Fuel Taxes

2. Outline • Policy context • National Climate Change Response White Paper; and • National Development Plan • Environmental Fiscal Reform process • Options for Government Intervention and the rationale for a carbon price / tax • Overview of the Carbon tax design • Rates and allowances • Revenue recycling measures • Options for addressing competitiveness concerns • Challenges faced and lessons learned • Conclusions

3. Carbon Tax Policy Context • South Africa voluntary committed (at COP 15 in 2009) to curb GHG emissions by 34% by 2020 and 42% by 2025 below the BAU trajectory subject to support from developed countries - climate finance, capacity building & technology transfers. • South Africa ratified the Paris Agreement in November 2016 and endorsed the submission of its Nationally Determined Contribution (NDC) which requires that emissions peak in 2020 to 2025, plateau for a ten year period from 2025 to 2035 and declines from 2036 onwards. • South Africa’s emissions by 2025 and 2030 will be in a range between 398 and 614 Mt CO2-eq, as defined in national policy. • Paris Agreement will require sizable reductions in energy-related greenhouse gas (GHG) emissions by large emitting countries, including in developing economies. The NDC noted carbon tax as an important component of our mitigation policy strategy to lower GHG emissions. • Carbon tax forms an integral part of climate change response policy package under the National Climate Change Response Policy (NCCRP) of 2011, and in National Development Plan (NDP) as an important cost-effective instrument • The Carbon Tax Policy gives effect to the polluter-pays-principleand helps to ensure that firms and consumers take these costs into account in their FUTURE production, consumption and investment decisions. Assists in reducing GHG emissions and ensuring SA will meet its NDC commitments as part of its ratification of the 2015 Paris Agreement.

4. SA ranked 14th in absolute GHG emissions – 2015 GHG Inventory

5. Carbon Tax Consultation Process - timeline

6. Carbon tax policy framework for SA • Tax Base • Electricity generation and fuel combustion • Industrial processes – cement, iron and steel, glass, ceramics, • Fugitive emissions – e.g. methane emissions from mining • Direct (Scope 1) stationary emissions • Direct (Scope 1) non- stationary emissions – as an add on to the fuel tax regime. • Marginal tax rate • R120/tonCO2e • Recycling measures • Reducing other taxes and providing tax incentives • If revenues left over, on budget support for pro poor programmes in energy, transport sectors • Phased approach • Phase 1: 2019 to 2022 • Starting off the tax at a relatively modest rate, coupled with generous tax-free allowances, adjusted over time to facilitate a structural transition to a low carbon, climate resilient economy in a cost effective manner.

7. SOUTH AFRICA’S CARBON TAX DESIGN FEATURES: Rate, Tax-free Allowances and Recycling Measures

8. Carbon offsetting under the carbon tax • In 1st phase, permitted carbon credits should be developed under: • Clean Development Mechanism (CDM); • Verified Carbon Standard (VCS); and • Gold Standard (GS). • Allowance for potential domestic standard to cover project types not well catered for under international standards e.g. AFOLU. • Specific eligibility criteria for carbon offset projects for effective implementation of the offset mechanism in South Africa includes: • Project activities must occur outside the scope of activities subject to the carbon tax. • Only South African based credits will be eligible for use within the carbon offset scheme. • Carbon offset projects registered and / or implemented before the introduction of the carbon tax regimewill be accepted subject to certain conditions.

9. Revenue Recycling – Energy Efficiency Savings Tax incentive (Section 12L of the Income Tax Act) • The Energy Efficiency Savings (EES) Tax incentive was introduced in November 2013 to complement the proposed carbon tax. This measure was specifically introduced as one of the options for potential revenue recycling, even though the carbon tax had not yet been introduced. • The incentive allows businesses to claim deductions against their taxable income for energy efficiency saving measures implemented – measured in kWh equivalent at a rate of at 95 c/kWh, increased from 45c/ kWh in 2015.  • The mining and manufacturing sectors are the largest beneficiaries of the incentive; • Initial analysis shows the monetary value or subsidy for energy efficiency investments is about R3 billion (US $196 million) and 5 934 GWh saved; • EES tax incentive will be extended to 31stDecember 2022 to align with the first phase of the carbon tax.

10. Socio-economic impacts of the carbon tax • Under the World Bank Partnership for Market Readiness Project, a carbon tax modelling study was completed and the report was published in 2016. • The results of the carbon tax modelling shows that the carbon tax will have a significant impact in reducing the country’s emissions, and that these emissions reductions could be delivered while realising sustained growth in the economy. • The results of the simulations show that the tax would lead to an estimated decrease in emissions of 13 to 14.5 per cent by 2025 and 26–33 per cent by 2035 compared with business-as-usual. • The tax is expected to lead to a marginal reduction in the annual average growth rate of the economy of just 0.05–0.15 percentage points compared to business as usual.

11. Challenges faced – concerns on: • Double taxation and the interaction with existing energy related taxes such as the excise tax on electricity generation - carbon tax serves as an explicit price on emissions; • Industry competitiveness - special targeted tax-free allowance of a maximum of 10 per cent for trade exposed sectors; • Not having adequate human and institutional capacity as well as political will at some stage; • No explicit earmarking or ring-fencing the carbon tax revenues – stakeholders felt the revenue should be used for environmental priorities; • Growing rate of unemployment especially among the youth in South Africa - manage the transition to ensure just transition to a low carbon, climate resilient economy.

12. Lessons learned (1)…. • Most of the resistance to the tax which resulted in delays in the implementation was due to lobbying – educate decision makers i.e. Parliamentary officials, Ministers, company CEOs on climate change; • Focusing on key principles guiding the proposals and design of the instrument during the consultations including economic and environmental analysis as a way to push back on lobbying; • Ensuring balanced representation of stakeholders during the consultation process to prevent a one-sided dialogue; • Allay fears on how the transition to a low carbon economy will be handled to minimize impact on jobs and employment.

13. Lessons learned (2)… • Beneficial to have joint processing of the bill through “Joint Parliamentary committee” of Finance and Environment ministries - helped to get buy-in especially in Parliament and to “nullify” the effects of lobbying; • Instead of focusing only on the costs give attention to the benefits also - help change the narrative, include carbon pricing benefits studies; • Providing opportunities for countries to share experience can play a vital role in getting buy-in on carbon pricing - developments in other countries can help shape the domestic policy process; • Piggyback on existing systems as this helps with transitioning and an administratively easy process e.g. the carbon tax relies on the existing GHG reporting framework and tax administration system.

14. Concluding remarks • A business-as-usual scenario is no longer an option and we must take appropriate action to help transition our economy onto a low carbon growth path as articulated in our National Development Plan. • The ratification of the 2015 Paris Agreement emphasises the reality that we will have to prepare to operate in a carbon constrained economy over the medium to long term. • The carbon tax is, and will continue to be, an important instrument as part of the broader package of mitigation policy measures under the National Climate Change Response Policy to help achieve our NDC target in a cost effective manner and nudge our economy onto a sustainable growth path.

15. Thank you