The aim of this article is to provide a detailed exposition of carbon tax as fiscal environmental reform measure; the historical development of the Draft Carbon Tax Bill, 2015 as well the content of the document as such. It is submitted that, from the central assumption, fiscal reform measures (e.g. carbon tax) can be applied successfully as a national instrument to mitigate climate change. This assumption is based on the international mandate for climate change mitigation contained in the United Nations Framework Convention on Climate Change, 1992 and the Kyoto Protocol, 1997.
In accordance with the research aim mentioned, the methodology employed is a literature review focusing on certain core themes. First, fiscal reform is introduced as a measure to help mitigate climate change, after which carbon tax as a specific manifestation is discussed. This is followed by an investigation of the historical development of the existing South African policy framework for carbon tax as well as an overview covering the content of the most notable policy documents on this issue. Finally, the Draft Carbon Tax Bill, 2015 is analysed by focusing specifically on aspects such as tax liability, the design of carbon tax and income distribution.
This analysis is aimed at assessing the true mitigating potential of the proposed South African carbon tax (as described in the draft bill) through fiscal reform. The finding is that the draft bill seeks to address two distinct fields of law simultaneously, namely environmental law and tax law. In addition it is found that the financial impact of the proposed carbon tax as an eco-centric fiscal reform measure is reduced considerably by the prescribed tax-free thresholds and tax exemptions. Nevertheless, the mere drafting of the policy document is a dynamic step towards developing the first and only legislation in South Africa that regulates climate change explicitly.
The 13th Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) was held in Bali in 2007. At this conference, South Africa made its intention clear when stating its role in climate change mitigation: “As a developing country we will take ambitious mitigation action; South Africa will contribute its fair share towards our common responsibility for the future; and our actions will be measurable, reportable and verifiable.” At COP15 in 2009 in Copenhagen, South Africa made a voluntary pledge that they will contribute to efforts aimed at mitigating global climate change. This pledge entails the reduction of South African greenhouse gas (GHG) emissions by 34% from a business-as-usual emissions trajectory by 2020, and 42% by 2025. It was specified that these laudable mitigation objectives could be achieved on the condition that South Africa as a developing country receives adequate support from developed countries.
Between 2006 and 2010 the National Treasury released a series of discussion papers for public comment that referred to a proposed carbon tax as a strategy to reduce GHG emissions. In December 2010 the National Treasury, furthermore, released for public comment a discussion document titled Reducing Greenhouse Gas Emissions: The Carbon Tax Option. This document focuses on the role of the proposed carbon tax as a measure to help mitigate the effect of climate change by reducing emissions. The added recommendation was that carbon pricing in South Africa should include a carbon tax. Following the discussion document in 2011, the Department of Environmental Affairs (DEA) released the National Climate Change Response White Paper (2011), which is largely aligned with the discussion document.
The White Paper expressly states that South Africa’s primary mitigation potential lies in the reform of its coal-based electricity sector, and also highlights the importance of fiscal reform measures in this regard. It maps out the route of South Africa’s planned mitigation and adaptation towards achieving a socio-economic transition to a climate-resilient and low-carbon economy. This authoritative report comprises the overarching policy framework document outlining what actions should be taken to reach the socio-economic transition in the short, medium and long term. The present article also describes the role government should play in developing and implementing policies and strategies aimed at mitigation of and adaptation to climate change. In this regard the White Paper explains the role of South Africa as follows (par. 2):
Mak(ing) a fair contribution to the global effort to stabilise GHG concentrations in the atmosphere at a level that avoids dangerous anthropogenic interference with the climate system within a timeframe that enables economic, social and environmental development to proceed in a sustainable manner.
The market mechanisms for mitigation of climate change as suggested in the White Paper are combined with the introduction of environmental fiscal reform in the form of a national carbon tax. The National Development Plan, 2012 lays down the transition to an ecologically sustainable low-carbon economy as conditio sine qua non for the eradication of poverty and inequality in South Africa. The main drive and objective of the carbon tax is to induce behaviour change through the mechanism of pricing. The aim is to curb GHG emissions and promote sustainable development. Thus the tax is used as a market-based measure to internalise the external costs of climate change.
Fiscal policy, through fiscal instruments such as taxes, helps create economic enabling environments. These instruments can be used to bring about environmental fiscal reform that prompts the desired behaviour change. Current environmentally related taxes can be reviewed to cater for ecological issues as well. New taxes can be introduced to broaden the tax base and through pricing deal with externalities in the price of goods and services, a matter that is unaccounted for otherwise. Environmental taxes as fiscal instruments can also be used to reform non-environmental-related tax laws with environmental incentives. Lastly, fiscal incentives can also promote environmental fiscal reform by encouraging investments in certain economic activities.
In the national budget review of 2011 the government announced that it was considering imposing a carbon tax based on the discussion document issued in December 2010. The government would also announce the design features and schedule for this introduction in the 2012 budget. In the national budget review of 2012 the government introduced the main design features of the carbon tax, and in the 2013 national budget review proposed that, with effect from 1 January 2015, the carbon tax would operate at R120 per tonne of CO2 equivalent. This rate was set to increase by 10% annually during the first phase of implementation, which would take five years, after which steeper rises in the tax would follow.
In the national budget review of 2014 the government stated that the implementation date of the carbon tax was to be extended by one year to 1 January 2016. This would provide time for National Treasury and the Department of Environmental Affairs to agree on the alignment of the carbon tax and the desired reduction outcomes (DEROs). National Treasury’s Carbon Tax Policy Document of 2013 indicates that it would be best if a direct levy could be charged on actual GHG emissions or CO2 equivalent, but adds that this option was not feasible at that time. The next step in the process of developing the policy took place in 2015. The National Treasury drafted and published the Draft Carbon Tax Bill, which was open for public comment in November of the same year. While approving the bill, cabinet acknowledged the proposed carbon tax as integral to achieving the policy objectives contained in both the White Paper of 2011 and the NDP by focusing on the mitigation of climate change. With regard to the overall objective of the proposed carbon tax, the bill in its preamble provides that a carbon tax will place a monetary value on carbon, which in turn will effectively internalise the externalities of carbon emissions. The document then lists and explains various technical and practical considerations. Of these considerations, the following aspects will be discussed in this article: design of the carbon tax, revenue recycling and administration as well as tax liability. Section 5 of the bill sets the initial tax rate at R120/tonne of CO2 or equivalent but couples this initial rate with a list of allowances, which are contained in sections 7 to 13 of the bill. These allowances entail:
- general tax-free exemption of 60%
- additional 10% allowance for process-related emissions
- additional 10% allowance for trade-related/-dependent sectors
- 5% allowance for early action initiatives aimed at beating the industry average
- 5% allowance for carbon offsets
- additional 5% allowance for companies participating in the carbon budget system.
A maximum tax-free allowance of 95% is prescribed (if the tax payer complies with all of the above-mentioned allowances). This will help reduce the initial rate to approximately R6 to R48/tonne of CO2 or equivalent. In considering the potential contribution the proposed carbon tax to revenue recycling in South Africa, the bill states in section 14 that the focus should fall on:
- funding for energy-efficiency tax incentives
- lowering the electricity levy
- additional tax exemptions for solar power generated by solar roof panels
- tax credit according to the premium payable for renewable energy activities (as stipulated by the IRP)
- financial assistance providing free basic electricity for low-income households
- additional contributions to public transport.
Regarding the test for tax liability, the bill lists the following criteria (as contained in section 3), which together form the basis for such liability as:
- conducting an activity
- Annexure 1 to the notice issued by the minister responsible for environmental affairs in respect of the declaration of greenhouse gases as priority air pollutants.
The first part of the test prescribes that the activity conducted has to impact negatively on the environment by causing air pollution. In order to ascertain whether this has indeed happened, sections 29(1) and 57(1) of the National Environmental Management Act: Air Quality Act 29 of 2004 must be read together. These provisions contain the list of gases the minister of environmental affairs indicated as priority pollutants. Therefore, if someone conducts an activity that leads to the emission of these listed priority pollutants, this individual is liable for carbon tax. No minimum emission threshold is confirmed, which indicates that the mere fact that a specific activity is listed will result in liability for carbon tax.
The industry’s responses to the carbon tax have ranged from cautious acceptance to clear rejection, each industry with its own reasons. The primary objection to the carbon tax is that it will limit economic growth in the country and also impact negatively on job creation. The steel industry cites Australia as a cautionary example where the government repealed carbon tax legislation in 2014. This was done to lower the general cost of living and electricity costs, promote economic growth and lower the cost of foreign investment. Other general responses from the business sector on the carbon tax include a sceptical assertion that these measures will have a minimal effect on the problem of climate change globally and may make it difficult for the country to compete in the global marketplace. With reference to criticism, particularly on the text of the draft bill, practitioners are of the opinion that the multi-disciplinary content of the bill is troublesome. The bill’s exposition includes aspects of tax law, carbon markets, environmental law as well as financial and operational strategy. This situation presupposes either extensive knowledge of all fields of law, or seeks cooperation among experts in each field mentioned. Therefore it can be inferred that, despite the positive environmental impacts the proposed carbon tax may potentially facilitate, the bill contains some deficiencies which require some revision. The public comments stemming from the legislative process (which is still ongoing) should inform any possible revisions.
Keywords: carbon tax; climate change; environment; fiscal reform; mitigation