The South African Institute of Chartered Accountants [SAICA] has urged all South African businesses to participate actively in the consultation process around the government’s proposed carbon tax, due to be introduced in January 2015. Their concern is the tax’s potential knock-on effects, which could retard economic growth and hamper the fight against poverty, unemployment and income inequality. With annual reports now replaced by the integrated report, which includes analysis of a company’s environmental footprint, SAICA members now have to familiarise themselves with the relevant environmental laws and best practices. They are also in a position to recommend action that best balances the needs of business stability and environmental protection.

Carbon tax vs cap and trade

As a signatory of the Kyoto Protocol, South Africa is obliged to enact legislation aimed at reducing its carbon emissions. 80% of those emissions are produced by just three primary sources, namely the electricity, metals and transport industries. The electricity sector alone produces 45% of SA’s emissions. A government white paper in 2010 evaluated two approaches to carbon reduction: “cap and trade”, and a carbon tax.

A “cap and trade” system sets maximum emissions targets, allowing businesses that produce lower-than-target emissions to amass carbon credits, which can then be sold to businesses that exceed their permitted targets. The net result is a financial incentive to businesses that adopt carbon-reduction policies, which provides direct capital for more carbon-friendly innovation. In effect, it promotes environmental protection as a tool of sustainable growth. The objections to a cap and trade system are that it is difficult and costly to police, and that it is almost impossible to standardise carbon pricing across all industries.

Carbon tax, as the name implies, is a direct tax on carbon emissions.  It was selected as the best option because, among other reasons, it provides price certainty and can be governed by the revenue authorities more easily and less expensively than a cap and trade system. Earlier this year, Finance Minister Pravin Gordhan announced proposals to launch a carbon tax in January 2015. It is proposed that an initial rate of R120 per ton of CO2 emissions will be charged.  This rate is likely to increase by 10% per annum.  This rate was confirmed via the revised carbon tax discussion paper (“the discussion paper”) recently issued by National Treasury.  The deadline for comment on this discussion paper is 2 August 2013.

“According to the latest research, South Africa produces approximately 500 million tons of CO₂ emissions per annum,” says Somaya Khaki, SAICA’s project director: Tax Suite. “At a rate of R120 per ton, this would equate to additional revenue of R60 billion. The Finance Minister proposed that a tax-free threshold of 60% be applied during an initial phase from 2015 to 2020.  Simply put, if this threshold is applicable, only 40% of CO₂ emissions will be taxed at R120 per ton, which reduces the potential tax revenue to R24 billion.”

Based on Eskom’s emissions alone, applying a rate of R120 per ton with a tax-free threshold of 60% would make Eskom liable for carbon taxes of about R11-billion per annum. This calculation assumes that Eskom’s CO₂ emissions are 225-million tons per annum, being approximately 45% of the South African average of 500 million tons. “The discussion paper”, however, notes that there will be other relief available as well depending on the industry and other factors.  Due to the tax-free threshold and the additional relief, the carbon tax rate would most likely equate to between R12 and R48 per ton.  Affected parties would need to consider the factors involved to determine the effective impact of the tax on their business.

Flaws in the carbon tax model

A primary objection raised over the years by critics of the proposal is that it evaluates SA’s emissions and formulates a policy based on the standards of developed economies in Europe.  Although SA is ranked in the global top 20 in terms of emissions, it has a much smaller carbon footprint than China or India, both of which are classed as developing economies. By trying to compete with the emissions standards of developed nations, it is argued, we risk sabotaging economic growth at a time when we can least afford it.

The proposal also intends to levy this tax upstream, again for ease of revenue collection. In other words, tax will be collected at source from electricity producer Eskom, metals producers like ArcelorMittal, and fuel producers like Sasol. The costs will be passed on to consumers via price increases. Higher electricity and fuel prices in turn will threaten the stability of marginal businesses, especially SMEs, which are the main engine of job creation. “Should transport and electricity costs climb due to the proposed carbon tax,” Khaki warns, “there is a significant risk that many businesses would not be sustainable in the current economic environment. South African mining companies and global concerns operating here would struggle to compete against international competitors who do not face these additional costs. If the affected businesses close their doors, this will result in job losses, increased poverty and income inequality – the opposite of what government has set out to achieve with the carbon tax.”

However, National Treasury emphasises in “the discussion paper” that the primary objective of a carbon tax is to change future behavior and not to increase revenue.  According to “the discussion paper”, perhaps the outlook is not as bleak as initially envisaged.  National Treasury has indicated that the impact on competitiveness and the economy in general will be lessened as a result of the additional relief to be provided, as well as a potential reduction of other taxes (for example, electricity levies) which will counteract the overall effect of carbon tax on business and the economy in general.  The carbon tax will also be phased in to alleviate the impact on business.  It is left to be seen what the actual impact will be once the tax has been implemented.

Another objection is that the carbon tax proposal does not include ring-fencing of carbon-tax revenues. In order to fulfill its objective of reducing greenhouse gas emissions, the revenue collected should be dedicated to projects that incentivise carbon-reduction strategies. At present, whilst a portion of the tax may fund energy- efficiency tax incentives, the remaining tax collected is likely to be paid into the general fiscus, to be used on whatever government considers “necessary spending”. “Whereas in other countries carbon taxes are clearly allocated to supporting cleaner energy mechanisms,” Khaki points out, “in South Africa the challenge is to motivate government against using it merely as a new tax revenue stream.”

Business engagement crucial

Most stakeholders agree that reducing CO2 emissions is an international imperative. However, in a developing economy such as ours, battling to prevent further job losses and sustain growth, a very fine line needs to be walked if we are to avoid environmental success at the expense of economic disaster. “Given the many uncertainties and lack of alternatives, the timing may not be right for the introduction of carbon tax in its current form. Government should continue engaging with business to identify a more sustainable model to encourage behavioural changes rather than penalising companies for non-compliance,” Khaki concludes. If a carbon tax is inevitable, input from all businesses likely to be affected – and all businesses will be affected – is needed urgently, while consultation is still ongoing, to correct any flaws in the current proposal. Given the due date for comment as 2 August 2013, time is running out, consult with experts in the field today by logging onto www.taxsuite.co.za – Everything Tax At Your Fingertips.