Income Tax Act S12L: The Carbon Tax

/ / News, 2018, Commercial Law, Environmental Law

By Gary Boruchowitz, Associate and Chantelle Gladwin, Partner


The process has been painstaking but South Africa is creeping closer to the implementation of a carbon tax. Draft carbon tax bills were introduced in 2015 and 2017, and the South African government is confident that a green tax will be implemented next year.


What is a carbon or ‘green’ tax?

This is a tax imposed on the consumer with the aim of regulating activity in a way that benefits the environment.

The tax is paid by consumers for products or services that are not environmentally friendly.

The tax is based on greenhouse gas emissions (GHG) generated from burning fuels.

The tax will force consumers to reduce fuel consumption, use cleaner fuels and adopt new technologies and methodologies within their businesses.

Economists believe that taxes on polluting emissions reduce environmental harm in the least costly manner, by encouraging changes in behaviour by those businesses that can reduce their pollution at the lowest cost.


How this tax works

The tax will be divided into three sections or scopes. Scope 1 emissions are the burning of fossil fuels onsite or used in equipment and vehicles. Scope 2 is the emission of electricity, while Scope 3 are emissions that result from activities such as business travel.

Taxes for Scope 1 emissions will be levied at a rate of R120 per metric tonne of carbon dioxide equivalent. This rate will be raised by 10% a year until 2019. Treasury will be providing exemptions for the first 60 % of Scope 1 emissions, with companies liable for the remaining 40%.


Carbon tax will affect all companies

Companies that are not subject to Scope 1 have not been spared the effect of the heavy tax as they could pay higher prices to their suppliers who are carbon tax liable. Eskom is a good example of this. The power utility will be taxed on its coal use on Scope 1, and this will be passed on to customers, whose electricity is classified as Scope 2. All this means higher electricity prices.


Incentives for consumers who comply – regulation  under  Section 12L of the Income Tax Act

In 2013 a regulation came into operation stipulating that there must be a tax deduction for those consumers who are energy efficient.

The regulation sets out the process for determining the quantum of energy efficiency savings and the requirements for claiming a deduction.

Companies have to compile energy saving reports and have their savings certified by the South African National Energy Development Institute (SANEDI) through the issuing of a certificate.

Any tax entity can claim this tax allowance for energy efficiency savings. This in effect means that the allowance is not restricted to any industry, sphere of business or any project or energy efficient initiative. If you are paying tax, you can claim the allowance.

Individuals who pay tax can claim the allowance.


Accelerated depreciation deduction

Another incentive being offered is a deduction for those companies investing in renewable energy. This comes in the form of an accelerated depreciation deduction which is subject to requirements, exceptions and limitations. Hydropower generation and solar photovoltaic renewable energy are two examples where accelerated depreciation deductions will be considered.

Nene announced that the government was considering a temporary increase in the electricity levy from 3.5c/kWh to 5.5c/kWh to deal with South Africa’s current electricity shortage. The carbon tax will hopefully lower if not eliminate this levy by 2016.


Carbon offsets

There will be an incentive for those companies that carry out carbon-friendly projects. These activities are known as carbon offsets, an economic tool proposed in the White Paper two years ago.

A carbon offset is an investment that presents a cheaper option than direct investment into its existing infrastructure.

This measure has received criticism, however, as it is being perceived as a government-profit driven initiative rather than a potentially successful strategy in the fight against climate change. That’s because of its restrictive nature, with only certain projects eligible for using the carbon offset.

A project is evaluated on the basis of its mitigation potential, or the ability of the project to offset GHG emissions.



Offsets are generally achieved by financially supporting projects or organisations that reduce the emission of greenhouse gases or lead to the prevention of future greenhouse gas emissions.

Types of carbon offsetting projects range from carbon sequestration through reforestation, renewable energy, energy efficiency, methane recovery and fuel switch.

Carbon sequestration through reforestation

One of the most popular ways to offset emissions is through the planting of trees. Deforestation is responsible for between 15 and 20% of global carbon emissions. Trees absorb or soak up CO2 from the atmosphere through photosynthesis.

Renewable Energy

Investment in renewable energy projects, such as wind energy, solar or hydropower all displace fossil fuels for energy production.

Energy Efficiency

Investments in energy efficiency projects reduce the amount of energy required to deliver the same service and so result in reduced emissions from fossil fuels. These can include the subsidising of fuel efficient cook stoves in impoverished communities

Some of the world’s poorest families spend up to six hours a day, and around 20% of their annual income on fuel for cooking and heating.

Methane recovery

Methane is a greenhouse gas with a high global warming potential 21 times that of carbon dioxide.

Methane recovery projects include landfill gas to recovering methane from coal mines.

Fuel switch

Another way that carbon emissions can be reduced is through projects that switch from one fuel source to another fuel that emits less carbon.

Switching to renewable sources of biomass not only prevents the release of CO2 from fossil fuels, it avoids the ecological damage associated with mining, drilling and transportation of these fuels.


Pressure from big business

BUSA has questioned whether the tax is necessary at a time when South Africa is experiencing an electricity crisis and a poor economic outlook.  It argues that in the short term there will be no material increase in the GHG emissions, that is until Medupi and Kusile come online.

Furthermore, the electricity levy will increase the cost of electricity which will further undermine the competiveness of the economy relative to other countries, particularly those that do not put a price on carbon emissions. The increased cost of electricity would have a severe impact on the competiveness of the mining and manufacturing industries.

Therefore BUSA has welcomed the Davis Tax Committee’s (DTC) decision to include a review of the scope and design of the proposed carbon tax.

In this regard BUSA has made submissions to the DTC laying out its concerns and reservations about the carbon tax, ensuring that legislation will not easily be passed without proper consideration by government and Treasury as to its pros and cons.

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