SANEDI is delighted to observe that the recent carbon tax phase 2 proposals announced in the budget are less severe than those published in the 2024 discussion paper by National Treasury. Phase 2 initially proposed a 10% reduction in the minimum allowance beginning in 2026, followed by a 2.5% annual reduction thereafter. This reduction would have had a significant impact on carbon taxpayers. Fortunately, the present proposal recommends that the minimum allowance be preserved until 2030.

The decision by the National Treasury to extend the section 12L Energy Efficiency Tax Incentive until 31 December 2030 is also welcomed by SANEDI. This extension will result in ongoing investment in energy efficiency measures. In addition, the proposed modifications to the carbon offset allowance and standards will generate additional opportunities for project development that are consistent with the Government’s objectives of reducing greenhouse gas emissions and enhancing the domestic supply of carbon offsets in the market.

In an endeavor to enhance the efficiency of the administration for the Section 12L Tax Incentive applications, SANEDI will double its efforts. The review of the implementation of the Tax Incentives from its inception in November 2013 demonstrates that the Tax Incentive has proved to be a successful tool for participating businesses to promote energy efficiency, improve energy productivity, and reduce emissions.

The 12L Tax Incentive is a component of South Africa’s comprehensive tax system, which is entrenched in the national policy context. South Africa has been working assiduously to establish the groundwork for a sustainable energy future, environmentally and economically sustainable development since the implementation of the Constitution in 1996.

In order to attain Environmental Sustainability, the National Development Plan (NDP) has allocated a chapter. This chapter is designed to enhance and protect our natural resources and environmental assets, as well as to invest in institutional capacity, technology, and skills. The implementation of these measures is indispensable for the development of a more sustainable society and the transition to a low-carbon economy.

The following is a summary of the Carbon Tax adjustment that the Honourable Minister of Finance, Mr. Enoch Godongwana, has announced.

Increased Carbon Tax Rate:

• The carbon tax rate increased from R190 to R236 per tonne of CO2e from 1 January 2025.
• The carbon fuel levy will also increase from 2 April 2025, with petrol rising by 3c/litre to 14c/litre and diesel by 3c/litre to 17c/litre.
• Extension of Section 12L: The energy-efficiency tax incentive (Section 12L) to be extended until 31 December 2030.
• Electricity Price Neutrality: The commitment to electricity price neutrality is extended to 31 December 2030, to shield consumers from higher costs. The proposal includes removing the electricity generation levy from 1 January 2026 and applying the carbon tax to electricity generation emissions. Electricity generators to continue deducting part of the renewable energy premium from their carbon tax liability, aiming for the carbon tax on electricity generation to be revenue neutral.
• Carbon Offset Allowance Increase: From 1 January 2026, the carbon offset allowance to be increased by 5 percentage points, to an offsets allowance of up to 10% for fugitive and process emissions and up to 15% for combustion emissions. Future carbon offset allowance increases may be considered.
• Trade-Intensity Threshold: The 30% trade-intensity threshold for the trade exposure allowance to be retained to allow a longer transitional period for hard-to-abate sectors.
• Basic Tax-Free Allowance: The basic tax-free allowance to be maintained until 31 December 2030, with future reductions to the allowance to be considered from 1 January 2031.
• Carbon Budget Allowance: The voluntary carbon budget allowance to be extended until 31 December 2025.
• Electricity Sector Benchmark: Under the carbon tax, companies may qualify for a performance allowance if they outperform an approved sector intensity benchmark, which does not yet exist in the electricity sector. A greenhouse gas emission intensity benchmark of 0.94 tCO2e/MWh for the electricity sector to be introduced from 1 January 2026.
• Carbon Offset Utilisation: The utilisation period for carbon offsets generated from approved projects before the introduction of the Carbon Tax to be extended to 31 December 2028.
• Other additional tax amendments proposed for the upcoming legislative cycle:
• Emission Factor Alignment: Schedule 1 of the Carbon Tax Act (2019) emission factors for natural gas and coal will be aligned with DFFE-approved Tier 2 emission factors from 1 January 2026.
• Fugitive Emissions Formula: The fugitive emissions formula in Section 4(2)(b) of the Carbon Tax Act will be clarified, with the oil and natural gas formula applied to solid fuel transformation activities.
• Sequestration Deduction: The sequestration deduction for the paper and pulp sector to be extended to third-party timber sequestration from 1 January 2026.
• Additional Carbon Offset Standards: Additional carbon offset standards to be evaluated for inclusion under the carbon tax.

About SANEDI:

The South African National Energy Development Institute (SANEDI), established by the Government to directs, monitors, and conducts applied energy research to develop innovative, integrated solutions to catalyse growth and prosperity in the green economy. It drives scientific evidence-driven ventures that contribute to youth empowerment, gender equity, environmental sustainability, and the 4th Industrial Revolution, within the National Development Plan (NDP), through consultative, sustainable energy projects. For more information, visit www.sanedi.org.za.