Experts in the field agree: carbon tax is coming, possibly this financial year or the next, and companies must ready themselves for this extra burden. But what will it entail and how ready is Treasury for implementation? Kyle Mandy, partner at PricewaterhouseCoopers, examined these issues at a recent RéSource seminar .Yanna Erasmus reports.

National Treasury has stated its intention to increase the contribution of environmental taxes and levies to total tax revenues. Mandy says: “The implementation of this policy commenced with the introduction of the electricity levy in 2009 and continues with numerous environmental taxes at a national level having been introduced since then. In 2009, environmental taxes contributed R26.4 billion, around 4.2%, to total tax revenues and in 2013 it is expected to contribute R61.6 billion, some 7.4%.”

Environmental taxes are viewed as a mechanism to encourage responsible environmental practice and to mitigate the negative impacts economic activity has on the environment. To achieve this within an economic or business environment, Mandy says that market-based instruments are generally viewed as the most efficient and likely to result in least-cost abatement. However, this must be combined with complementary regulatory measures. Market-based instruments comply with the polluter-pays principle by imposing the cost of pollution on the polluter, whereas subsidies result in paying a polluter not to pollute and are only appropriate in conjunction with other instruments. Carbon tax and tradable permits, says Mandy, are both market-based instruments; however, the latter is not generally viewed as “appropriate for South Africa”.

Guiding principles

How would such a tax be structured? There are issues, says Mandy, of horizontal or vertical equity, whereby those who can most afford to pay, pay more than those who can least afford to pay and those in an equal position pay the same amount. The matters of certainty in being able to determine the tax liability and of course simplicity are vital considerations, along with administration and compliance costs. The environmental effectiveness of these types of taxes is probably the most important tenet. The use of the actual revenue is also a matter which must be resolved. Complementary measures and the impacts of the competitiveness of companies must also be considered. Thus, says Mandy: “We are nowhere near yet and carbon tax is likely to be implemented only in the next three years.”

Current environmental taxes

Mandy summarised the current environmental taxes in place in South Africa and how effective they have been. The plastic bag levy – introduced in June 2004 at three cents a bag and since July 2009 at four cents a bag – brings in around R150 million in revenue, but the recycling initiatives that were introduced were a failure. Had it not been for the accompanying regulations on minimum thickness of plastic bags and the agreement with large retailers to charge for these, the environmental effect would likely have been nil. The electricity levy now stands at 3.5 c per kWh and will contribute some R8.6 billion to tax revenues by the end of the 2012/13 financial year. However, none of this money has been applied to environmental objectives. Filament lamp levies are currently at R3 a lamp and contribute R105 million, also with no environmental application. Finally, there is the environmental levy on carbon dioxide emissions of motor vehicles. Introduced on 1 September 2010 to passenger vehicles and extended to double cab pick-ups on 1 March 2011, the tax is calculated on emissions as per test report or proxy based on engine capacity. The revenue stands at R1.6 billion. This is, in essence, a carbon tax on potential emissions. The implementation of carbon tax, however, can potentially have a duplicating effect on this tax.

The carbon tax proposal

Announced in the 2012 budget by finance minister Pravin Gordhan, a phased approach has been suggested. The first phase, from 2013/14 to 2019/20, suggests taxes to be levied on actual emissions. The design features of this phase include a percentage-based exemption threshold at 60%, set higher for certain process emissions and trade exposed sectors. The rate has been suggested at R120 per tonne of carbon dioxide emissions above the said thresholds. Offsets are allowed up to a maximum of 10% and there is also the possibility of additional relief for reduced carbon intensity. Revenues currently have not been earmarked, but there is the possibility of some of this being directed to environmental spend. Thresholds are to be reduced in Phase 2 (from 2020 to 2025) and following this, absolute emissions thresholds may be possible.

As mentioned, a 60% threshold has been set for the country’s sectors in the first phase. However, this threshold can be increased or decreased for relative carbon intensity and will be measured at the end of the year. This removes the element of certainty and knowing your liability, which is so essential in taxation. The overall tax-free threshold is to be capped at 90% of emissions.

Trade exposure relief currently stands at 10%, but it is not certain whether this is enough. There are difficulties in classification of firms into sectors as well as the distinction within the given sectors. In addition – and this may be the most difficult challenge of them all – there are complex interactions between electricity and the other sectors.

According to Mandy, the core concerns on the latest tax proposal include “whether the tax is to be levied on all emitters or only the large emitters, the possible lack of relief for consumers from tax on scope two or indirect emissions, the lack of border adjustments on imports and tax neutrality, the absence of mitigation agreement provisions and the lack of consideration of structural issues in the energy sector, particularly with regards to electricity”.

In his conclusion, Mandy listed possible future environmental taxes that may become a reality in South Africa. These include wastewater discharge levies, air pollution charges, levies on waste products, landfill taxes, traffic congestion charges, motor vehicle licence fees and a review of taxation of transport fuels based on environmental impact and energy content.

As can be seen, it is clear that a lot of work must still be done before carbon tax can efficiently be introduced into South Africa. While the red tape and structure thereof must still be hashed out, so to speak, this is not a measure to be ignored. Unless tangible long-term plans to reduce greenhouse gas emissions become part and parcel of industry across the world, the effects will prove to be disastrous on the climate and, consequently, economics. The global carbon market is central towards this shift because money talks and drives change.