South Africa’s biggest emitters should face no liability in the first year of the country’s long-awaited carbon tax, according to a committee tasked with reviewing the tax system, a recommendation that would effectively exempt companies from paying for their emissions until 2018.

In a report published last Friday, the Davis Tax Committee, citing the government’s draft carbon tax proposal released earlier this month, noted that the economy-wide levy may now be introduced in Jan. 2017, delaying the measure by another year.

“[The exemption threshold should] be set to 100% for the first year, i.e. firms producing Scope 1 emissions [those from sources owned or controlled by the entity] should be required to comply and submit returns but should incur no tax liability,” the report said.

“Such an option would provide companies with the necessary data to plan more effectively, allow [South African Revenue Service] to fine-tune tax reporting systems, and provide the National Treasury with additional information to allow for more accurate modelling and revenue forecasting. It would also assist government in developing and testing the necessary administrative systems.”

South Africa, one of the world’s top 20 GHG emitters, first suggested the carbon tax in 2010. However, after delays to allow more time for planning and consultation with stakeholders, it was scheduled to be launched in 2016.

The government’s Nov. 2 draft proposal called for the tax to be initially set at 120 rand/tCO2e ($8.47), but said the effective rate will vary between 6-48 rand to the end of the tax’s first phase (2016-2020) because of exemptions of up to 95% to help companies prepare for it.

It recommended a basic 60% tax-free threshold be applied over the next five years to most of the sectors, with a handful being granted additional exemptions to account for higher process emissions or to help them better compete internationally.

The government proposed 100% exemptions to be bestowed on two sectors – waste management and forestry and land-use – for the first phase due to administrative difficulties in measuring and verifying emissions from these areas.

The Davis Committee also said “a more detailed analysis of revenue recycling is needed in order to fully understand the distributional effects of the carbon tax”.

Because of the current oligopolistic structure in a number of South Africa’s largest-emitting sectors, the government determined that a carbon tax was a more appropriate instrument to curb the country’s rising emissions than cap-and-trade.

South Africa relies on coal for around four-fifths of its energy requirements, which has helped the country to grow its GHG output by 44% between 1994 and 2010.

OFFSETS

The Davis report cited South Africa’s immature carbon offset market as another reason to delay the introduction of the tax, while criticising the government’s proposal regarding their use.

The draft plan lets most sectors use offsets to cover either 5% or 10% of their emissions.

“Given that the rationale behind the carbon tax is environmental and not revenue generation, there is no clear economic reasons for not allowing the maximum offset to be 100%,” the Committee said.

“The small size of many offset projects makes them ideal vehicles to experiment with new technology. As such, investment in such carbon reduction projects should be encouraged as far as possible. This will potentially lead to more offset projects becoming available, which will make it easier to meet the national carbon budget.”

The government has not set out any criteria for what types of offsets can be used, referring only to previous proposals that called for any reductions to be real, additional, permanent, and based in South Africa.

The Davis report warned that the number and size of existing offset projects that are eligible under the carbon tax regime is small.

“Some of the largest projects that have been registered are operated by large South African firms that are subject to the carbon tax and whose projects would not be eligible as offsets,” the report said.

“It is thus doubtful that, in [the first phase], South African firms will be able to utilise the offset scheme to any significant extent. The predictions of available offsets, based on independent studies reported by the National Treasury appear to be overly optimistic. They appear to include offset schemes which would meet CDM requirements but would not be eligible as offset schemes because the operators themselves fall within the carbon tax net.”

The government has previously suggested that projects registered under the CDM, Verified Carbon Standard (VCS), Gold Standard, and Climate, Community and Biodiversity Standard (CCBS) could be considered.

But the Davis Tax Committee highlighted the current lack of capacity amongst the country’s few accredited emissions auditors, “which will affect the time taken for registration of the carbon offset projects, compounding the difficulties South African firms will face in accessing meaningful offsets in the short term”.

It added that in the absence of working relationships between the four carbon credit certification bodies and South Africa’s Designated National Authority (DNA), “it might be preferable for a primary standard, i.e. the CDM, to be used for all projects, except those that are not covered by the CDM but are deemed viable”.

“Because the DNA was created to handle CDM projects, capacity will need to be created as a matter of urgency in the DNA if carbon offsets are to become significant in the short term.”

The Committee backed calls for an offset trading platform in order to make the market more efficient, but noted that a “sufficient” number of projects is required for liquidity and that additional efforts are needed in the short-term to catalyse the development of more offset-eligible, carbon-cutting initiatives.

RULES CLARIFIED

It also said the offset rules must be clarified, for example in a situation where a large South African emitter invests in a domestic CDM project, receives CERs but then sells them on to a buyer in the EU ETS.

“Such a project would not be eligible as an offset in South Africa. Nonetheless, the firm could gain double benefit from reducing its tax liability by lowering its emissions and using that reduction for CERs to be sold in a market outside South Africa.”

“It is unclear what the national government’s position on such a practice is, [but] it can be argued that such projects would no longer meet the additionality criterion under the CDM.”

The government’s draft proposal is now open for comment until Dec. 15, while the Davis Tax Committee is accepting stakeholder comments until the end of Jan. 2016.

By Mike Szabo – mike@carbon-pulse.com