Electricity and Control October 2022

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Achieving net zero, the role of carbon tax

Nirvasha Singh, Partner, Carryn Alexander, Partner, and Amanda Nkwanyana, Associate at the law firmWebberWentzel, highlight that the structure of South Africa’s carbon tax legislation incentivises compliance to convert to green sooner rather than later – particularly for those sectors that are typically heavy carbon emitters.

A reduction in carbon emissions is integral to South Africa’s global commitment to achieve net zero. The government strategically introduced carbon tax to encourage a low carbon economy – and combat global warming. The extractive industry is South Africa’s primary supplier of fuel to generate energy. While coal has been Eskom’s main resource (fuelling 75%or more of SouthAfrica’s energy supply), its negative environmental, climatic and social impacts can no longer be overlooked. Great strides have been made by some industry leaders to move to clean energy – using hydrogen powered vehicles in their mining fleets, for example. Mining in a more environmentally friendly way will undoubtedly result in a reduction in carbon emissions and carbon tax liability. However, such projects are notably capital-intensive and will take some time to implement. In response to the crisis of South Africa’s energy deficit, the South African government has also taken steps to prioritise the acceleration of renewable energy programmes to generate more electricity and ease the demands on Eskom. This urgent focus by government forces the extractive industry not only to consider switching to environmentally friendly production processes, but also to re-look the minerals mined in South Africa. The new global clean energy economy has opened the way for industrial opportunities in strategic alternative minerals such as: platinum, vanadium, titanium, cobalt, copper, manganese, chromium, and lithium. The exploration of these alternatives can lead to reduced emissions and pollution levels, which will also lead to a reduced carbon footprint and thus, a reduction in a business’s carbon tax liability. South Africa’s carbon tax regime is being implemented in progressive phases, starting with a relatively modest rate, together with transitional support and exemptions. Currently, companies are entitled to carbon tax allowances of up to

95% to assist financially in transitioning their operations to low carbon and cleaner technologies. However, these allowances will not remain applicable for all three phases. In the 2022 Budget, government announced its intention to ramp up the carbon price and strengthen the price signals to promote behaviour changes over the short, medium, and long term. It proposed increases in the carbon tax rate for the 2023 to 2025 tax periods by a minimum of USD 1, increasing gradually to USD20 in 2026 and at least USD30/ tCO 2 e in 2030. Additional short-term tax relief was introduced by government through the energy efficiency savings tax incentive, which provides for a tax deduction equivalent to the monetary value of actual energy efficiency savings (kWh) achieved, subject to a certificate of approval issued by the South African National Energy Development Institute. It is proposed that this incentive be continued until 1 January 2026, for relief from the proposed higher carbon tax margin and to encourage companies to reduce greenhouse gas emissions and help stimulate new energy efficient practices and industries during this period. Companies need to take advantage of this temporary relief now, by transforming their activities through investments in energy efficiency, renewables, and other low-carbon measures with the aim of reducing their carbon footprint. Furthermore, investing in low-carbon energy sources will help a business to fulfil its obligations in terms of environmental, social and governance (ESG) principles. A commitment to ESG principles is important for many reasons – including attracting investors and talent. ESG focused investments can also, importantly, reduce a business’s carbon tax liability – and the savings are greater for early adopters. Although paying extra tax is generally resented, the monitoring and controlling of carbon emissions is

more than just a tax obligation. It is fundamental to everyone’s commitment to achieving sustainability in South Africa (and globally) through a low-carbon and circular economy.

For more information visit: www.webberwentzel.com

At law firm Webber Wentzel: Nirvasha Singh, Partner,

Carryn Alexander, Partner,

Amanda Nkwanyana, Associate.

32 Electricity + Control OCTOBER 2022