Tax/budget alignment and implications for carbon offset projects – quick statement, based on Treasury’s recent presentation to the Parliamentary Standing Committee on Finance, on 27 November 2018.
– Once the DEA’s carbon budget allocations commence: – carbon tax at R 120/tC02e will apply to the extent of the carbon budget allocated to an entity, by the DEA, from the first of tC02e emitted up to the limit of the budget; and, – the tax-free thresholds and the allowances apply to the tax payable in respect of such emissions – except that: – the carbon budget allowance will fall away (due to the mandatory nature of the budget allocation); and, – the limit on use of allowances will be adjusted from 95% to 90%. – In addition to the above, exceedences of a carbon budget will be subject to a higher level of carbon tax, namely R 600/tC02e, and no allowances will be permitted to reduce this higher portion of tax liability. – The rate of carbon tax and the level of tax-free thresholds will be reviewed at least three years after implementation of the first phase of the tax. – The DEA will allocate carbon budgets pursuant to the Climate Change Act (when promulgated), read with Carbon Budget Regulations – the latter still to be developed. Based on an entity’s GHG reporting, undertaken in terms of the GHG Reporting Regulations. – Given the DEA’s apparent determination to work, quite swiftly, on the Carbon Budget Regulations, it is submitted as quite likely that budget allocation will commence before the end of the first phase of the carbon tax. – This issue notwithstanding, however, commencement of the carbon tax is not linked to commencement of budget allocations but, rather, maintains the Finance Minister’s recent indication that the tax will be implemented from 1 June 2019 (first phase), implying that, prior to the commencement of carbon budget allocations, carbon tax (as currently understood) will apply pursuant to the Carbon Tax Bill, with liable entities being identified as those that conduct an activity listed in Schedule 2 to the Carbon Tax Bill. – A second phase of the carbon tax will commence in 2022. – Implications for offsets projects: – This is good news for carbon offset generating projects, located in South Africa, because offsets from such projects may be used to reduce a carbon tax liability (under the tax regime’s carbon offset allowance), subject to the limitations on their eligibility provided for in the recently published Carbon Offsets Regulations (revised version), including that such projects must be located inside the country, but outside of a carbon taxable activity. – The offset allowance will apply to a carbon tax liability for an entity’s emissions: – up to the limit of a carbon budget (once the DEA commences with budget allocation); and, – to the full extent of carbon tax payable on all emissions, prior to the allocation of budgets. – This emerging certainty on the tax/budget alignment is a postive indication for the future of the South African carbon market.
Please let me know if there are any queries, regards, Andrew.
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