carbon tax regulations
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Following the coming into effect of the Carbon Tax Act, National Treasury is seeking public comment into the draft regulations with an imposed deadline of 17 January 2020.

“The National Treasury has published for public comment two further sets of regulations, namely Draft Regulations for the Trade Exposure Allowance for purposes of section 10 and Draft Regulations for the Greenhouse Gas (GHG) Emissions Intensity Benchmarks for purposes of section 11 in terms of section 19(b) and (a) of the Act, respectively,” it said on Monday.

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The Draft Regulations for the Trade Exposure Allowance gives effect to the sector-based allowance and provides a list of sectors and subsectors and their respective trade exposure allowances.

The regulations also outline an alternative approach to calculate the trade exposure allowance for companies.

In addition, the Trade Exposure Allowance aims to assist companies that potentially face competitiveness pressures while the performance allowance seeks to encourage firms to reduce the carbon intensity of their production processes relative to their peers and promote the competitiveness of local products.

Next step: Public comment on the carbon tax regulations

This follows on an extensive stakeholder consultation process on the design of the carbon tax and tax free-allowances since the publication of the Carbon Tax Policy Paper in 2013 and the 2015 version of the Carbon Tax bill.

Earlier this year, President Cyril Ramaphosa signed into law the Carbon Tax Act in May 2019. The Act came into effect from 1 June 2019.

The Carbon Offsets Regulations—which were developed jointly by the National Treasury, the Department of Minerals Resources and Energy and the Department of Environment, Forestry and Fisheries—were gazetted on Friday.

The regulations outline the eligibility criteria for offset projects and set out the procedure for claiming the offset allowance.

Companies are allowed to use carbon offsets of either 5 or 10% of their total GHG emissions to reduce their tax liability.

On Monday, Treasury said it will ensure that the final regulations are gazetted by the first quarter of 2020. This is to align the regulations with the greenhouse emissions reporting period of the Department of Environment, Forestry and Fisheries.

“The carbon tax is an integral part of government’s package of policy measures to mitigate climate change as outlined in the National Climate Change Response Policy, National Development Plan and its Nationally Determined Contribution commitments under the 2015 Paris Agreement.”

As such, Treasury provides for the introduction of the carbon tax in a phased manner at a relatively low rate initially. This will allow businesses time to make the necessary structural adjustments to their production processes and practices and to ensure a just transition to a low carbon, climate-resilient economy.

“To ensure a cost-effective transition, the design of the tax provides for the recycling of revenues through the electricity generation levy credit and energy efficiency savings tax incentive, and significant tax free-allowances of up to 95% of the total greenhouse gas emissions to firms, consisting of a basic tax free allowance of 60 % for direct, scope 1 emissions and allowances for sectors that are trade-exposed up to a maximum of 10% and a performance allowance up to a maximum of 5%.”

Draft Trade Exposure Allowance Regulations

Section 10 of the Carbon Tax Act sets out the methodology for calculating the trade intensity of a sector which informs the level of the trade exposure allowance that a sector or subsector will qualify for, as determined by the Minister of Finance by Regulation.

In the 2013 Carbon Tax Policy paper the trade exposure allowance was initially designed as a company based allowance. Following consultations on the 2015 Draft Carbon Tax Bill, the proposals from business were accepted and the allowance was changed from a company to a sector-based allowance. Stakeholders were of the view that a sector-based allowance will be more equitable and simpler to administer than the company based approach.

In collaboration with Business Unity South Africa, the allowance was redesigned and key industrial sectors such as mining and iron and steel are likely to qualify for the full trade exposure allowance of 10 per cent, mitigating possible adverse impacts due to the carbon tax. There were also proposals for an alternative qualitative approach to determine the allowance for taxpayers that may not qualify for a certain level of allowance.

The Draft Regulations for the Trade Exposure Allowance gives effect to the sector-based allowance and provides a list of sectors and subsectors and their respective trade exposure allowances and outlines an alternative approach to calculate the trade exposure allowance for companies.

Get involved in discussions on business decisions around climate change at the African Utility Week and POWERGEN Africa conference in Cape Town in May 2020.

Draft GHG Emissions Intensity Benchmarks

Section 11 of the Carbon Tax Act sets out the formula to be used by taxpayers to calculate the applicable performance allowance. For a tax period, taxpayers that perform better than an approved sector or subsector emission intensity benchmarks will qualify for a performance allowance.

In 2015, the National Treasury requested that stakeholders develop benchmark proposals for purposes of the performance allowance. To help facilitate the development of greenhouse gas emission intensity benchmarks, the National Treasury commissioned a study through the World Bank and a report entitled “Emissions intensity benchmarks for the South African carbon tax” was published in 2014 followed by a stakeholder consultation workshop.

During 2016 to 2019, benchmark proposals were developed by the liquid fuels, gas and coal to liquid fuels, mining, cement, iron and steel, paper and pulp, ferroalloys, titanium, chemicals (nitric acid), sugar and clay brick sectors. Fourteen benchmark proposals, mainly based on the average emissions performance of a sector, were submitted to the National Treasury. The Draft GHG Emissions Intensity Benchmark Regulations sets out the emissions intensity benchmarks for these sectors and subsectors.

Written comments on the 2019 Draft Regulations must be submitted to carbontax@treasury.gov.za  by close of business on 17 January 2019.

Sources: SAnews.gov.za and National Treasury