From headline to effective: Navigating phase two with offsets as a tax asset

​​​​The carbon tax (as defined in section 1 of the Carbon Tax Act 15 of 2019 (CTA) is a tax on the carbon dioxide (CO2) equivalent of greenhouse gas emissions. It is imposed in terms of section 2 of the CTA at the applicable carbon tax rate, which escalates annually in the amounts as set out in section 5 of the CTA. This headline rate is moderated by a suite of allowances (including the carbon offset allowance) that reduce the effective rate significantly.

Of these allowances, the carbon offset allowance is set to change as the CTA enters its second phase, as announced in the 2022 budget speech, extending from 1 January 2026 to 31 December 2030 (Phase Two).¹

Phase Two: At first glance

The revised carbon tax rate is set to reach ZAR 308 per tonne carbon dioxide equivalent (tCO2e) in 2026 (a 31% increase from the 2025 rate of ZAR 236), continuing its upward trend to ZAR 462 per tCO2e in 2030, as per sections 5(2A) and 5(2B) of the CTA.

Rate path and indicative effective rates (ZAR/tCO2e)

Contrary to initial proposals, the National Treasury’s official annual macro-fiscal policy statement, tabled alongside South Africa’s national budget on 12 March 2025 (the 2025 Budget Review) and the Draft Taxation Laws Amendment Bill, 2025 as published on 16 August 2025 (TLAB), have confirmed that Phase Two will retain substantial tax-free allowances (60-95%). These allowances were originally intended to assist the transitional phase during the first phase of the CTA, which ran from 1 June 2019 to 31 December 2022 and was subsequently extended for three years until 31 December 2025 (Phase One). This retention maintains the significant disparity between the headline rate and the effective tax rate.²

Even though the extension was well-intentioned, the disparity may adversely impact parties exporting in-scope goods and precursors originating from a third country under Article 2 of Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism (the CBAM Regulations), read with Annex I (read our insights about this here), identified by their specific Combined Nomenclature (CN) codes when imported into the European Union (Affected Exporters).

Affected Exporters will be obliged to pay an equivalent price to the weekly average auction price of the EU ETS allowances (the Certificate Price) under Article 21 of the CBAM Regulations. Under Article 9 of the CBAM Regulations, an authorised CBAM declarant may claim a reduction in the number of certificates corresponding to one tonne of CO2e of embedded emissions in goods, as per Article 3 of the CBAM Regulations, to be surrendered to take into account the effective carbon price paid in the country of origin or a third country for the declared embedded emissions.

Given the vast disparity between the Certificate Price and the effective tax rate, the Article 9 deduction will only partially offset CBAM exposure.

The differential is set to broaden further as the Certificate Price is expected to reach an estimated EUR 149 per tonne (USD156/t) by 2030.³

Effective price paid in South Africa:

*The rate used for conversion is the average exchange rate for the period 24 October 2024 to 24 October 2025 (EUR/ZAR = 20.0369).⁴

Legislative framework

Having set the statutory path and the effective burden, the CTA channels administration through an established fiscal framework for collection, reporting, and enforcement. Section 15(2) of the CTA, read with sections 1 and 54A of the Customs and Excise Act 91 of 1964 (the Customs Act), provides that the carbon tax will be administered as an environmental levy under Chapter VA of the Customs Act and collected by the South African Revenue Service (SARS).

Carbon offsets: Tax asset

Section 13 of the CTA allows taxpayers to use carbon offsets to reduce their carbon tax liability for the applicable tax period, as defined in section 16 of the CTA. This carbon tax liability is calculated in accordance with sections 5 and 6 of the CTA (Carbon Tax Liability).

The voluntary utilisation of carbon offsets establishes a domestic compliance market for the sale and purchase of quantified and verified emissions reductions or removals (Carbon Credits), the value of which (subject to qualification as carbon offsets) is expected to approximate the prevailing carbon price.⁵

The qualifying criteria for carbon offsets are set out in the regulations on carbon offsets under section 19 of the CTA, published in Government Gazette No. 42873 (as amended) (the Regulations), which explicitly recognise Carbon Credits generated under approved projects as defined in section 1 of the Regulations (Approved Projects). Where Carbon Credits generated in terms of Approved Projects adhere to the eligibility requirements under Part II read with Part III of the Regulations, they can be applied as carbon offsets.

The Government's role

From a taxpayer’s perspective, carbon offsets function as a balance-sheet instrument with clear compliance and administrative preconditions. The government's role is not that of a standard-setter but that of a sovereign gatekeeper, ensuring that only projects meeting national priorities are eligible for tax compliance.

This role is fulfilled through the Carbon Offset Administration System, (established in terms of regulation 6, read with regulation 5 of the Regulations) (the COAS). The COAS was activated on 23 July 2020 by the Department of Mineral Resources and Energy (DMRE).⁶ Following the restructuring of the DMRE, the COAS is now managed by the Department of Electricity and Energy, which is responsible for implementing the carbon offset scheme in terms of regulations 5–12 of the Regulations, evaluating and approving eligible carbon offset projects, enabling the listing and retirement of carbon offsets, and issuing offset certificates for taxpayers to claim the carbon offset allowance under the CTA.⁷ The COAS is a digital platform used to manage and facilitate the listing, transfer, and retirement of Carbon Credits as a means to offset Carbon Tax Liability.

In practice, the COAS functions as the domestic “bridge” between international and non-governmental registries (where Carbon Credits are issued and cancelled) and the SARS (where the offset allowance is claimed), ensuring traceability and single use.

Regulatory framework

The regulatory architecture governing the domestic compliance market includes: (i) the CTA, which establishes the charging provisions and rate path, (ii) the Carbon Offset Regulations, which define project eligibility and procedural steps, and (iii) the Customs Act, which supplies the collection machinery and return-based administration.

Policy instruments concerning Phase Two

On 13 November 2024, the National Treasury published a discussion paper on Phase Two of the carbon tax. This paper proposed several measures to reduce tax-free allowances and strengthen the effective carbon tax rate to encourage behavioural change.⁸ Among these were amendments directly affecting the carbon tax offset allowance, as illustrated below:

Under the position set out in the 2025 Budget Review and TLAB, both combustion and process/fugitive offset allowances increase by five percentage points relative to Phase One, modestly expanding offset headroom.

With those parameters clear, the immediate practical question is how taxpayers turn eligibility into relief, ie the exact steps and documents required to translate qualifying Carbon Credits into a claimable offset.

Procedure for claiming a carbon offset allowance

The procedure for claiming a carbon offset allowance is detailed in regulation 8 of the Regulations as follows:

"A person that claims the allowance must-

(a) register with the administrator in the time, in the form and in the manner as the administrator may prescribe;

(b)submit to the administrator those documents, in the time, in the form and in the manner, as the administrator may prescribe, enabling the administrator to issue an extended letter of approval;

(c) (i) obtain an extended letter of approval from the administrator; or (ii) submit the extended letter of approval that was already issued to the administrator;

(d)submit to the administrator a certificate of voluntary cancellation;

(e) obtain from the administrator a certificate containing the content as contemplated in regulation 11;  and

(f)claim the allowance against tax liability."

In view of the above, Companies should ensure strong documentary control with adequate record-keeping of compliance with the aforementioned procedure and those related documents discussed therein (as set out in Part VII of the Regulations).

With the legal pathway and evidentiary steps clear, the focus turns to execution, governance, procurement, and reporting disciplines that keep offset strategies defensible and audit ready as the regime evolves. In this regard, it is recommended that specialised advice be obtained.

Phase Two (2026–2030) retains sizable allowances, keeping effective rates well below the rising headline rate and exposing Affected Exporters to basis risk and compliance or penalty risk. Offsets remain a core tax asset — but only if COAS steps (approval, voluntary cancellation, Regulation 11 certificate) are executed and documented. In this regard, it is important that a person who undertakes a taxable activity listed in Schedule 2 of the CTA, and who (i) has an aggregated installed capacity equal to or above the tax threshold, or (ii) a tax threshold indicated as “none” applies, obtains timely and bespoke advice.