Government has extended the first phase of South Africa’s Carbon Tax by three years to December 31, 2025, in an effort to support businesses in their clean transition endeavours.

This means that the transitional support measures afforded to companies in the first phase, such as significant tax-free allowances and revenue-recycling measures, will continue.

Other adjustments to the Carbon Tax, which were reported in the Budget 2022, included extending the energy-efficiency-savings tax incentive from January 1, 2023, to December 31, 2025; and extending the electricity price neutrality commitment until December 31, 2025.

The National Treasury advises in the Budget that the electricity-related deduction will be limited to the carbon tax liability of fuel combustion emissions of electricity generators and will not be offset against the total carbon tax liability.

The threshold for the maximum trade exposure allowance will be adjusted from 30% to 50% from January 1, 2023, while updated sectors and allowances will be published for public consultation.

Treasury also discloses that mandatory carbon budgeting comes into effect on January 1, 2023, at which time the carbon budget allowance of 5% will fall away.

Carbon budgeting is a process of allocating a greenhouse gas emissions allowance to a company for a specific period of time.

To address concerns about double penalties for companies under the carbon tax and carbon budgets, it is proposed that a higher carbon tax rate of R640/t of carbon dioxide equivalent (CO₂e) will apply to greenhouse gas (GHG) emissions exceeding the carbon budget.

These amendments will be legislated once the Climate Change Bill is enacted.

The carbon tax rate increased from an initial R134/t of CO₂e to R144/t of CO₂e in January 2022.

The carbon fuel levy for 2022 will increase by 1c to 9c/l for petrol and 10c/l for diesel from April 6, as required by legislation. It is proposed that the carbon tax cost recovery quantum for the liquid fuels refinery sector increases from 0.56c/l to 0.63c/l from January 1, 2022. 

Government proposes to increase the vehicle emissions tax rate on passenger cars from R120/g to R132/g of carbon dioxide emissions per kilometre and increase the tax on double cabs from R160/g to R176/g of carbon dioxide emissions per kilometre from April 1.

To meet the country’s Nationally Determined Contribution, which sets out its climate change mitigation plans, South Africa has to ensure its GHG emissions peak by 2025 and quickly decline to between 350-million and 420-million tonnes by 2030, and approach net-zero emissions by 2050. 

Treasury deems the Carbon Tax integral to lowering emissions and maintaining competitiveness, since exports of carbon-intensive products such as iron and steel will likely face carbon taxes in Europe.

To prepare South Africa for the structural transition to a climate-resilient economy, government proposes to progressively increase the carbon price every year by at least $1 to reach $20/t of CO₂e by 2026.

For the second phase of the tax, government intends to increase the carbon price more rapidly, reaching $30/t of CO₂e by 2030, accelerating higher every few years to reach up to $120/t of CO₂e by 2050.

Treasury assures that basic tax-free allowances will also be gradually reduced to strengthen the price signals under the carbon tax from January 1, 2026, to December 31, 2030.

To encourage investments in carbon offset projects, government intends to increase the carbon offset allowance by 5% from January 1, 2026. These and other proposals will form part of a review for the second phase, to inform future budget announcements.

This approach aligns with global institutions, says the Treasury.  

The World Bank’s High‐Level Commission on Carbon Prices recommends carbon prices of $40/t to $80/t by 2025 and $50/t to $100/t by 2030.

The International Monetary Fund recommends lower minimum carbon prices for developing countries of $25/t to $50/t by 2030 to achieve the Paris climate goals.

Finance Minister Enoch Gondongwana has urged all companies that have not already done so to develop plans for progressively reducing emissions over the next ten years, or face steep taxes in future.