The National Treasury circulated a comprehensive Policy Paper weighing up the various options and consequences of introducing a Carbon Tax in December 2010. We have keenly awaited an indication of what the National Treasury's thinking is on implementing such a carbon tax, if indeed such a tax is truly socially beneficial. When Cabinet approved its Climate Change Response White Paper, they did indicate that the need to price carbon emissions and to bring in a tax instrument for this purpose was accepted as a policy initiative.

In the tax proposals the Minister says that a "modest carbon tax" will begin to price carbon dioxide emissions so that the external costs resulting from such emissions start to be incorporated into production costs and consumer prices. He said that subsequent to the consultation following the previous paper, a further draft policy paper will be published for comment this year. However he does indicate that the design features of this tax that it will be on a percentage basis rather than absolute emissions thresholds, below which the tax will not be payable. It stipulates that a tax‑free threshold for process emission, will be involved in the tax, with consideration given to the industries of cement, iron and steel, aluminium and glass to mitigate the impact of the tax on them over the near term; there will be additional relief for trade exposed sectors. There will also be the ability to use offsets by companies to reduce their carbon tax liability. There will be a basic tax‑free threshold of 60% and maximum offset percentages of 5% or 10% until 2019/2020. They will look at additional relief for firms that reduce their carbon intensity during the first phase of the tax. The reduction in carbon intensity will be measured with reference to a base year or to an industry bench mark. The tax-free thresholds will be reduced during the second phase (that is from 2020 to 2025) and may be replaced with absolute emission thresholds thereafter. Treasury will seek to align the proposed carbon budgets as per the National Climate Change Response White Paper (2011).

Government is looking at pricing a carbon emission at a R120 per ton of CO², but of course the taxing only starts at above the suggested threshold of 60%. It is proposed that this will take effect during 2013/14, with annual increases of 10% until 2019/2020. They are not proposing to earmark the revenues derived from carbon tax, but they will give consideration on spending to address environmental concerns. Government commits themselves to support incentives such as energy efficiency and measures to assist low income households. The tax proposals have printed a table summarising the proposed emission thresholds for all sectors, with further adjustments to account for the trade exposure of a firm (up to a maximum) and indicating the allowances for sector process emissions. One can expect the figures in this table to change as Government seeks to ensure that all industries are shouldering the burden of carbon reduction.

Written by Alastair Morphet, Tax Director, Cliffe Dekker Hofmeyr