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South Africa is the first African nation to implement a carbon tax, with the first carbon tax submissions due on 31 July 2020.

This move raises many questions, such as whether carbon pricing mechanisms such as the carbon tax are effective in reducing emissions, which businesses are likely to perform well on this new playing field, and what lies beyond compliance, writes Henk Sa from EcoMetrix Africa.

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In line with basic economic principles, carbon pricing aims to address a significant market failure: individual and company activities emitting greenhouse gases (GHGs) impact everyone globally through the well-documented and extensive effects of climate change.

In other words, the dire consequences of high GHG emissions are not borne by the emitters alone, but are unfairly suffered by the entire global community.  

Why carbon pricing?

One way of addressing this market failure is to put a price on carbon to incentivise reductions: either by putting a cost on the emission of GHGs; or a reward for the reduction of emissions.

There are two main types of carbon pricing: carbon tax; and cap and trade, also called emissions trading systems (ETS). A carbon tax is implemented by a government imposing a tax on the emissions of GHGs, which means the less you emit, the less tax you pay.

In a cap and trade system or ETS, a limit is placed on the total level of GHG emissions allowed over a period of time. Entities in industries with low emissions will have a surplus of emission ‘rights’, called carbon credits, which can be sold to larger emitters.

What is the price of carbon?

The World Bank Group State and Trends of Carbon Pricing 2019 report show that the price of carbon ranges from $1 to $127 per tonne of carbon dioxide equivalent (tCO2e), although around half of the emissions covered are priced at less than $10/tCO2e.

The South African effective carbon tax rate at around R46/tCO2e is extremely low.

While this seems fortunate given our current economic climate, it is just the starting point. It is the stated intention of our government to increase the tax rate and expand the scope of taxable emissions going forward.

An increase of 5.6% for the 2020 calendar year has already been announced, which will raise the carbon tax rate from R120/tCO2e to R127/tCO2e. If over time the local carbon tax is followed up by a carbon budgets system, the anticipated flat rate is R600/tCO2e when exceeding the limit.

This will not only spur companies to investigate and implement emission reduction strategies as a matter of priority, but will also make the return on investment in low emission technologies increasingly attractive.

Does carbon pricing work?

According to the World Bank Group’s report, “there is a growing consensus that carbon pricing—charging for the carbon content of fossil fuels or their emissions—is the single most effective mitigation instrument”. Carbon pricing has fast gained popularity worldwide. Since 1990 when there were only two, the number carbon pricing initiatives implemented has grown to 57, with 28 emission trading systems (ETSs) and 29 carbon taxes.

Many more countries can be expected to bring initiatives online in the future. Just in 2018, governments raised approximately $44 billion in carbon pricing revenues. Here in South Africa, Finance Minister Tito Mboweni’s budget speech mentioned expected revenue from local carbon tax at R1.75 billion over the next few months.

Given the already-increasing tax rates, the cost of carbon emissions will motivate urgent action among companies to reduce their emissions. For example, companies in sectors that utilise heat or steam can relatively easily convert from using coal, which is fully taxed, to sustainable biomass, which attracts almost no tax. Once a company has converted its operations to carbon-neutral, its tax exposure is zero.

Beyond compliance

The companies that will be truly successful in a world of carbon pricing are those who take immediate action, going beyond ticking compliance boxes or reducing their tax liability, to future-proofing their businesses for the inevitable transition to a low-carbon global economy.

Ongoing, monthly monitoring and proactive management of emissions not only streamlines regulatory compliance and minimises tax exposure, but also monitors an organisation’s environmental impact continuously to identify reduction and mitigation opportunities as well as areas for enhancement of company performance.

It is also important to realise that this carbon tax forms part of South Africa’s international climate change mitigation commitments. A carbon-intensive country, South Africa ranks no. 15 in the world (World Resources Institute, 2016; Climate Watch Data, 2016).

Carbon tax can accelerate the urgent efforts and actions required here—and around the world—to reduce GHG emissions sufficiently to attain the goals of the Paris Agreement to mitigate the dangerous impacts of global climate change.