On 29 November 2019, the Minister of Finance gazetted the long-awaited Regulations on Carbon Offsets under Section 19 of the Carbon Tax Act, 2019 (Carbon Offsets Regulations). This sees the first material mechanism which allows companies the discretion to reduce their carbon tax liability between 5 to 10% of their total GHG emissions through investment in a carbon offset programme and has retrospective effect to 1 June 2019.
In addition, two sets of draft regulations relating to the Carbon Tax Act, 2019 (the Carbon Tax Act) were published by National Treasury for public comment on 2 December 2019 (comment must be submitted by 17 January 2020):
- the Regulations on the Allowance in Respect of Trade Exposure in Respect of Carbon Tax Liability under Section 10 of the Carbon Tax Act (Draft Trade Exposure Allowance Regulations); and
- the Regulations on the Greenhouse Gas Emissions Intensity Benchmarks Prescribed for the Purpose of Section 11 of the Carbon Tax Act (Draft GHG Emissions Intensity Benchmarks).
One major change from the previous drafts is that the Carbon Offsets Regulations now include renewable energy projects, allowing Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) projects approved from bidding window 3 and other renewable energy projects up to 50 MW installed capacity to be eligible for offsets as follows:
- all small-scale renewable energy projects up to 15 MW contracted and installed capacity respectively for both REIPPPP (from bid window 3 i.e. signed on or before 9 May 2013) and non- REIPPPP projects are eligible as carbon offsets to provide an incentive for the uptake of such projects; and
- for projects greater than 15MW, REIPPPP projects from the third bidding window and non-REIPPPP projects, except for technologies with a cost less than ZAR1.09/ kWh, will be eligible as carbon offsets.
The welcomed inclusion of renewable energy projects in the Carbon Offsets Regulations presents additional opportunities and support in the renewable energy space, particularly to those entities captive power players.
Regulation 2 of the Carbon Offsets Regulations also clarifies that projects and offsets issued for a specific monitoring period up to 31 May 2019 will be eligible for offsets. Further, for project activities that are covered under the carbon tax, these offsets must be used within the first phase of the carbon tax up to December 2022, except for qualifying renewable energy projects. For project activities not covered by the carbon tax in the first phase, these offsets can be used until the end of the crediting period as stipulated under the relevant standard.
The Carbon Offsets Regulations further provides for the procedure for the claiming of an offset allowance by a taxpayer and also mandates the creation of an offsets registry which includes contain a project database containing information in respect of approved projects, the persons undertaking those approved projects and the documents submitted to the administrator in respect of those approved projects.
It is important to note that due to the design of the carbon tax, a 5% offset allowance does not necessarily lead to a 5% change in carbon tax liability and that a greater reduction in carbon tax payable may be achieved.
The Draft Trade Exposure Allowance Regulations
A further allowance provided for under the Carbon Tax Acts is in relation to trade exposure - providing some reprieve to entities exposed to international competitiveness. The Draft Trade Exposure Regulations provides a list of such applicable sectors and/or subsector with the corresponding trade allowance percentage of that sector in Annexure A and includes the following sectors:
- the production, collection and distribution of electricity;
- the manufacture of gas; distribution of gaseous fuels through mains;
- the mining of coal, lignite, uranium, iron ore and other minerals;
- the extraction of petroleum and natural gas;
- the manufacture of food, wood, paper, plastic and glass products; and
- the manufacture of chemicals, machinery and equipment.
Draft Regulation 3 provides that the carbon tax payable by the abovementioned sectors will be determined by the sum of the GHG emissions for each category, less the allowances for each emissions category (combustion, fugitive or industrial process). The Regulations further provide that should a taxpayer undertake activities in different sectors and therefore potentially face different trade intensity risk levels simultaneously, a weighted average of the different tax-free allowance levels will be calculated.
An alternative approach to calculate the trade exposure allowance has also been proposed, where a taxpayer is of the opinion that the sector based allowance does not accurately reflect the level of the allowance that they should qualify for.
The Draft GHG Emissions Intensity Benchmarks
Where a taxpayer has implemented measures to reduce its GHG emissions in respect of a tax period, such taxpayer must receive an allowance in respect of that tax period, which is to be calculated against an approved sector or subsector emission intensity benchmarks. In other words, taxpayers that perform better than an approved sector or subsector emission intensity benchmarks will qualify for a performance allowance.
The Draft GHG Emissions Intensity Benchmark Regulations sets out in Annexure A the emissions intensity benchmarks for the sectors and subsectors.
Despite the broader regulatory framework for the carbon tax starting to come into effect, there are concerns related to whether the large emitters are in fact strategising and implementing measures in which to lower their emission and give achieve South Africa's transition to a low carbon economy. What we have seen is major emitters, particularly those in monopolised industries, directly passing-through their carbon tax liability to customers which pass-through does not appear to be prohibited. As such, there is no incentive to these entities to meaningfully engage in the allowances, which essentially seek to drive behaviour change.