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Carbon tax in South Africa – a further incentive for renewable energy development

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Article published on 9th December 2019

 

South Africa was the first country on the African continent to introduce a carbon tax in mid 2019. South Africa is a large emitter of carbon dioxide, first of all because the energy sector is strongly dependent on coal. The Act provides a further incentive to increase the use of renewable energies in South Africa and offers opportunities to German enterprises.

 

Since 1 June 2019, a carbon tax regulated in the Carbon Tax Act 15 of 2019 ("Carbon Tax Act") has been levied in South Africa. The Act aims to reduce the emission of greenhouse gases and thus help take action against climate change. The carbon tax is based on the so-called "Polluter Pays Principle" and, thus, the idea that the party causing environmental pollution should bear the costs of its elimination.

 

The carbon tax is payable by carbon dioxide emitters that:

  1. conduct an activity listed in the Carbon Tax Act; and
  2. exceed the threshold for the specific industry established in the Carbon Tax Act.1

 

Examples of activities and thresholds from the Carbon Tax Act:

  1. Food processing – 10 MW;
  2. Iron and steel – no minimum rate;
  3. Main Activity Electricity and Heat Production – 10 MW (except for renewable energies).2

 

The carbon tax will be introduced in phases. The first phase lasts from 1 June 2019 to 31 December 2022. The second phase will last from 2023 to 2030.

 

Currently, the carbon tax rate is ZAR 120 (~ EUR 7.72) per ton of carbon dioxide.3 In the first phase, tax payers are granted tax allowances of 60% to 95%. This leads to an effective tax rate of between ZAR 6  (~ EUR 0.35) and ZAR 48 (~ EUR 2.87) per ton of carbon dioxide. These tax allowances are intended to facilitate the transition to a low-carbon economy. The tax rate as well as the tax allowances will be reviewed and adjusted after the end of the first phase. It should be expected that the high rates of tax allowances will be significantly reduced.

 

The carbon tax constitutes a new incentive for the use of renewable energies in South Africa. Further incentives include, apart from the abundant renewable energy resources, the planned continuation of load shedding measures and a strongly rising electricity price (about 15% annually, on average). Despite these circumstances the share of renewables in the energy mix has been only 9% so far and the energy mix has been dominated by coal having a share of approx. 90%.

 

But in recent years, a significant increase in power plants for self-consumption purposes has been observed (in particular PV solar installations) in South Africa. Following a law amendment, an electricity generation licence is no longer required for power plants for self-consumption purposes of up to 1 MW. Since obtaining an electricity generation licence has been a great challenge in South Africa, this law amendment is very welcome. Currently, efforts are being made to increase the threshold from 1 MW to 10 MW.

 

It is to be expected that after the end of the first phase and the discontinuation of the high tax allowances the carbon tax will further boost the interest in using renewable energies in South Africa. Therefore, now is a good time for German enterprises to prepare for a market entry in South Africa in order to secure themselves a good market position early on.

 

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1 Section 3 des Carbon Tax Act.

2 Schedule 2 des Carbon Tax Acts.

3 Section 5 (1) des Carbon Tax Acts.

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