The Carbon Tax Act: What does the law say?
Policies are in place to ensure that South Africa reduces its emissions in line with international agreements
South Africa’s carbon emissions are disproportionately high when compared with total global emissions, primarily because of our reliance on coal to generate energy. In an effort to minimise our footprint, our government has made a number of international and national commitments to reduce greenhouse gas (GHG) emissions.
Among other pledges, the government has ratified the 2015 Paris Agreement. This agreement asks each country to outline and communicate their post-2020 climate actions, known as their Nationally Determined Contributions (NDCS). South Africa’s NDC aims to achieve the absolute decline of GHGS from 2040 onwards. Under this national commitment, GHG emissions are expected to peak between 2020 and 2025, plateau between 2025 and 2035, and decline thereafter.
To achieve the reduction of GHGS from 2040, various policies and measures have been and will continue to be introduced. Measures include:
• a carbon tax
• sector-specific desired emission reduction outcomes sector, subsector and company carbon budgets and regulatory standards and controls for specifically identified GHGS and GHG emitters.
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Carbon Pricing
One of the measures identified is carbon pricing. This is regulated through the Carbon Tax Act of 2019, which taxes CO2 equivalent emissions generated by certain activities (R120 per ton of CO2 equivalent). However, this tax rate is subject to a number of allowances, which is divided into: • Allowances for emissions resulting from fossil fuel combustion, industrial processes or fugitive emissions, respectively
• A trade exposure allowance
• A performance allowance
• A carbon budget allowance, and
• An offset allowance
Offset Allowance
The offset allowance mentioned above is a method by which a taxpayer can reduce the amount of carbon tax for which they are liable. This reduction is to be done by utilising carbon offsets as prescribed by the minister of finance, but subject to the percentage limitations set out in Schedule 2 of the Act. In terms of section 19(c) of the Act, the minister must publish regulations in respect of section 13, which regulations have to contain:
• The projects or activities in respect of which
an offset is generated
• The limitation on the carbon offset
allowance
• Offset duration periods
• The institution, board or body that must
administer the offset allowance
• The powers and responsibilities of the
institution, board or body referred to above • The procedure that must be followed in
claiming the offset allowance
• The records that must be kept in respect of
administering the offset allowance; and • Anything else needed to regulate the
utilisation of the carbon offsets.
Fugitive emissions
Fugitive emissions are leaks and other irregular releases of gases or vapours from a pressurised containment — such as appliances, storage tanks, pipelines, wells, or other pieces of equipment — mostly from industrial activities.
Offset Regulations
The Offset Regulations (those under Section 19 of the Carbon Tax Act) were published under Government Notice 1556 in Government Gazette 42873 on 29 November 2019. In terms of the Offset Regulations, an offset means an avoidance, a reduction or a sequestration of carbon dioxide equivalent (CO2E) emissions recognised in terms of an approved project. Approved projects include: • Clean Development Mechanism (CDM)
projects
• Verified Carbon Standard (VCS) projects • Gold Standard projects
• Other projects (those that comply with another standard approved by the minister responsible for energy or delegated authority).
The United Nations’ CDM, VCS and Gold Standard can be understood as existing international carbon offset standards developed under the Kyoto Protocol in 1992. Each of these international standards have various registration and eligibility requirements that projects need to comply with to qualify as an approved project.
Following on from this, approved projects under these standards generate carbon credits, a generic term referring to:
• Certified emission reductions (CERS)
generated under the CDM
• Verified carbon units (VCUS) generated
under the VCS, and
• Gold standard credits
The generation, transfer and acquisition of carbon credits generated by these projects are tracked and recorded through registry systems and the International Transaction Log (ITL) established under the UNFCCC’S Kyoto Protocol.
Earning carbon credits through gas extraction: A case study
A Cape Town project has earned 126 274 carbon credits from the United Nations’ Clean Development Mechanism (CDM). The purpose of the Landfill Gas Extraction and Utilisation Project is to reduce carbon emissions at its Muizenberg site, thereby contributing to the overall mitigation of the effects of climate change. Further mitigation
takes place when the landfill gas is then converted into electricity. Landfill gas, which consists predominantly of methane, has a global warming potential that is about 25 times greater than carbon dioxide.
The CDM is one of the flexibility mechanisms under the UN Framework Convention on Climate Change (UNFCCC). The UNFCC’S Kyoto Protocol encourages developing countries to implement emission reduction and thus earn carbon credits.
How does it work?
The gas extraction system comprises a wellfield made up of a combination of vertical and horizontal wells, well heads, condensate traps, pipelines, gas blowers, measuring instrumentation and a gas flare. It extracts landfill gas for flaring to reduce the greenhouse gas emissions associated with
waste decomposition in landfill sites. Once the electricity generation equipment is installed, the landfill gas will be used to generate electricity.
Benefits of Carbon Credits
These credits can be sold to industries that are otherwise unable to reduce carbon emissions to meet their carbon tax obligations.
Carbon credits can be sold on the international carbon markets as well as on the South African market under the carbon tax legislation that was signed into law recently. They can also be used to meet the recipient’s own obligations under the carbon tax in the form of offsets under the South African Carbon Offset Regulations.
How to Receive Credits
A Programme of Activities (POA) must be approved by the CDM to potentially earn carbon credits. This is a complex process, but it allows third party projects to join at a low cost. It is governed by strict methodologies that require substantial documentary evidence to be verified in terms of the UNFCCC rules.
The CDM’S third-party provision means that, with Cape Town’s approved POA, future landfill gas projects all over South Africa may be eligible to earn carbon credits, provided they comply with the technical and legal specifications governing the POA. This has the potential to make a significant contribution towards local and national carbon emissions reduction goals.