What is Carbon Tax?

A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined, but the carbon price is.

The choice of the instrument will depend on national and economic circumstances. There are also more indirect ways of more accurately pricing carbon, such as fuel taxes, the removal of fossil fuel subsidies, and regulations that may incorporate a “social cost of carbon.” Greenhouse gas emissions can also be priced through payments for emission reductions. Private entities or sovereigns can purchase emission reductions to compensate for their emissions (so-called offsets) or support mitigation activities through results-based finance.

Some 40 countries and more than 20 cities, states, and provinces already use carbon pricing mechanisms, with more planning to implement them in the future.  Together with the carbon pricing schemes now in place cover about half their emissions, which translates to about 13 percent of annual global greenhouse gas emissions

The Carbon Tax Act came into force on 1 June 2019.

The first tax returns and payments for affected taxpayers will be due July 2020. This return would cover the period 1 June 2019 to 31 December 2019; subsequent periods will run from 1 January to 31 December. Form DA180 would need to be submitted in respect of each licensed emission generation facility.

Companies who are considered to operate emission generation facilities are required to register in terms of the Customs and Excise Act as a taxpayer through local SARS offices.

Primary emitters of carbon dioxide and other greenhouse gasses are taxed. In simple terms, if your business activity directly emits greenhouse gasses you will be taxed per carbon ton equivalent. Even companies not meeting the thresholds in terms of the Carbon Tax Act are required to submit returns.

The Carbon Tax Act governs Phase One out of likely three phases of implementation of carbon taxes. Phase One is effective until 31 December 2022.

Phase One will levy carbon tax based on an annual reporting system, per calculated ton of carbon dioxide equivalent (other greenhouse gasses are converted to carbon dioxide equivalents). The Carbon Tax Act provides for a base amount of R120 per carbon ton equivalent, less certain allowances. Allowances are categorized under fossil fuel combustion allowance, industrial process emissions allowance, fugitive emissions allowance, trade exposure allowance, performance allowance, carbon budget allowance and offset allowance.

Phase One targets certain industries and business activities - in essence only direct emitters of gasses are taxed during the first phase. Phase Two is likely to start taxing indirect emissions, for example, the purchase of energy consumed. Phase Three is likely to start including the supply chain activity and is likely to impact on all business activities.

The carbon dioxide equivalent is determined by formulas contained within the Carbon Tax Act, it is based on determined conversions of carbon dioxide and other greenhouse gas emissions.

The carbon tax will apply to direct emissions in the following categories as specified in the National Greenhouse Gas Emission Reporting Regulations:

• Fuel combustion, which relates to emissions released from fuel combustion activities;
• Fugitive emissions from fuels, which refers to emissions mainly released from the extraction, production, processing, and distribution of fossil fuels; and
• Industrial processes emissions, which refers to emissions released from the consumption of carbonates and the use of fuels as feedstocks or as carbon reductants, and the emission of synthetic gases in particular cases.

Credit: Pkfng