JOHANNESBURG - The current COP24 taking place in Poland and the recent announcement by Finance Minister Tito Mboweni that the South African government is going ahead with the implementation of Carbon Tax in June 2019 comes amid many questions - most of which will remain unanswered due to the contentious nature of the levy.
The debate around the Carbon Tax Bill recently tabled by the National Treasury is far from concluded, and the big sticking point is not the merits in reducing greenhouse gases (GHG), but rather its proposed implementation and ability to make a difference for ordinary South Africans.
Instead, questions are being raised about the wisdom of introducing a new tax into an environment that is reeling with rising costs of living due to spiralling energy costs, food prices, joblessness and growing inequalities. How the collected taxes will be utilised by the government is a significant point of debate with growing calls for the income being deployed for mitigating initiatives rather than to increase the fiscus.
Because of the legacy of industrialisation, the new law would affect between 1000 and 1500 companies and 75percent of national emissions. It proposes a tax rate of R120 per ton of carbon dioxide equivalent and states that total tax-free allowances during the first phase until 2022 can be as high as 95percent.
The South African government has been drafting carbon tax legislation for more than a decade with the aim of reducing pollution which has been part of the country's landscape for more than a century as the local economy ramped up industrialisation through the development of mines, cement and steel plants and fossil powered electricity plants.
In 2006, the South African Cabinet mandated work on the Long-Term Mitigation Scenarios (LTMS) with some form of carbon tax being the central feature of measures aimed at curbing activities of these big businesses considered high emitters.
South Africa is not alone in wanting to fight carbon emissions. But the country is one of the few developing or middle-income countries that has agreed to difficult commitments to reducing GHG at the Paris Climate Accord (COP 21) in 2015.
The main objective of the agreement is to limit the global temperature increase to below 1.5ºC. The recognition of the 1.5-degree target is of central importance to South Africa as an African and developing country that is highly vulnerable to climate change.
South Africa ratified the Paris climate change pact two years ago and has pledged to cut emissions by almost half by 2030, when they are seen peaking between 398 and 614million tons of carbon dioxide equivalent.
The Paris Agreement is also an important tool in mobilising finance, technological support and capacity building for developing countries and will also help to scale-up global efforts to address and minimise loss and damage from climate change and increase climate resilience.
South African corporates, such as AfriSam, operating in the cement industry, are in support of carbon emission curbing measures, if the instruments are appropriately implemented and there is government financial support.
Cement production accounts for about 5percent of global carbon emissions, making it the second biggest source of carbon emissions from global industry, after steel.
Reducing its carbon emissions has been a core focus for AfriSam for almost 30 years and have made great strides due to enhancements in technology, equipment and its cement manufacturing processes. As a result, the company has managed to reduce its GHG emissions by 31percent since 1990.
Through the Association of Cementitious Material Producers (ACMP), AfriSam has actively been participating in carbon tax legislation development and has had interactions with the Department of Environmental Affairs and Treasury on the design of the carbon tax and implications thereof.
AfriSam has improved the energy efficiency of its clinker manufacturing process, by implementing high-level process control systems and various other mechanical improvements on critical equipment. This resulted in significant improvements, such that it justified the awarding of a Section 12L tax rebate.
In looking at the medium-term implications for the company, there will undoubtedly be a financial implication and an increased drive to implement carbon reduction projects.
AfriSam believes that South Africa needs to ensure that it positions itself in the global context as well, and that it works towards a more holistic approach towards GHG management. There is a very fine balance between the sustaining of economic activities in the country and complying to international GHG reduction commitments. Ensuring that carbon reduction technology can be more financially accessible, will fast-track the implementation of these.
The tax rate is set at R120 per ton of CO2e (carbon dioxide equivalent) produced. To allow businesses time for transition, a basic percentage-based threshold of 60percent will apply, below which tax is not payable.
Despite its envisaged success in reducing its GHG, the carbon tax bill will result in an increase in cost and will have financial impact on not only AfriSam’s profitability, but also other companies in the steel and energy industries.
These are companies already operate on thin margins and compete with imports which are not necessarily subject to the same tax in South Africa or the country of origin. This will have a detrimental impact on the local producers as all local manufacturers will be liable for the tax. Implementation of the Carbon Tax will increase all local manufacturer’s production cost, but there will be no equivalent increase in the cost of cement imported into the country. This will result in these importers having an increased cost advantage against local producers.
Another major concern is the uncertainty of the legislation's near future. Not knowing how the legislation will be carried out makes it quite hard for companies to make necessary plans for sustainability.
For instance, knowing that in four to six years from now all allowances will fall away might make it worthwhile to install a more capital-intensive solution rather than to wait to pay massive taxes.
Over and above this, there are anticipations that the funds paid due to the implementation of Carbon Tax are ring-fenced to assist companies in the implementation of projects that will result in a reduction in GHG emissions. The tax should be used as an instrument to achieve better results on GHG reduction strategies, rather than general fiscus boasting exercise.
Hannes Meyer: Cementitious executive at AfriSam.