# Carbon Tax: Dangers and opportunities

- Link: https://dearsouthafrica.co.za/2020/07/21/carbon-tax-dangers-and-opportunities/
- Published: 2020-07-21T17:50:02+02:00
- Author: dearSA

**And what it means for companies.**

[_ Zelda Burchell – MoneyWeb_](https://www.moneyweb.co.za/news/south-africa/carbon-tax-dangers-and-opportunities/)

![DearSA-carbon-tax](https://cdn.dearsouthafrica.co.za/wp-content/uploads/2020/07/
20191012/DearSA-carbon-tax.jpg "DearSA-carbon-tax")

Many South African companies face unprecedented dangers amid the coronavirus crisis,
with the economic impact of the lockdown on an already contracting economy.

In these circumstances it is vital for any company to plan their tax affairs carefully.

Hence the focus by [Cova Advisory](http://www.cova-advisory.co.za/) on new Carbon
Tax details, which have only recently been published by the Treasury.

Understanding them is challenging, not least because there is not yet total clarity
on all aspects of the regulations and how to claim each and every allowance.

However, failing to examine, to assess and then to act will mean that company executives
are neglecting an opportunity to make savings – especially on a tax some corporates
are resistant to pay in the first place.

A concern with the Carbon Tax is the way in which information and legislation has
dribbled out, in a frustratingly unpredictable way after the tax has been implemented.
It is vital that all the rules around the carbon tax are clear so that companies
can plan to reduce their carbon footprint and thereby reduce their carbon tax liability.
The fundamental purpose of the tax is to change behaviour, and by implication, a
business will want to pay as little as possible.

We attempted to tackle this in a recent webinar, which looked at some of the allowances
under the Carbon Tax Act, and the ways to reduce your carbon tax liability.  Some
of the main messages are summarised below.

For anyone who is not familiar with the structure of the Carbon Tax Act, the tax
is levied on the direct emissions of a company over a calendar year.

The act was signed into law on May 23, 2019, and became effective on June 1, 2019.
The design of the tax includes a number of tax-free allowances, which effectively
reduce the amounts which need to be paid over to the fiscus.

Regulations have been published for these tax-free allowances. Most recently, the
regulations for trade-exposed sectors were published. In addition, we now have the
regulation for the allowance if a company is able to emit lower emissions than others
in their sector.

We almost have a complete picture, but one more part of the Carbon Tax that is crucial
for claiming the allowances is yet to be launched – and that is the carbon offsets
administration system and its associated guidelines.

So, what is new?

We now have a better idea of what it means for a company to be considered as trade-
exposed, and how it must go about claiming the allowance.

Companies that are trade-exposed are those which face competition from products 
that are imported or exported. Companies that manufacture products locally and are
subject to the Carbon Tax may become less competitive if the same products are being
imported and are_ not_ subject to a Carbon Tax. For this reason, the National Treasury
included a tax-free allowance of up to 10% for these companies.

There is a sector-based approach, where the trade intensity index of each industry
sectors is defined, and the allowances are allocated using a sliding-scale approach.
However, there are provisions for companies which operate in more than one sector.

The approach seems logical, but there are still some uncertainties that exist with
the determination of company-specific trade-exposure allowances, relating to the
type of import, export and production data to be used. In addition, there isn’t 
clarity on auditing requirements.

Further calculation and analysis will also be needed by a company when it comes 
to claiming an allowance under the Performance Benchmark Regulations.

The regulations include a set of greenhouse gas intensity benchmarks for certain
sectors, and the better a company performs against these benchmarks in containing
its emissions, the higher the allowance – which is capped at 5%.

However, it isn’t always clear how these benchmarks are calculated as the methodologies
will need to be requested, the measurement and verification requirements of the 
regulations are not defined, and some sectors have been left out.

In addition to all of this, there are further areas to explore in reducing your 
Carbon Tax burden.

There is a Renewable Energy Premium credit which will reduce the Carbon Tax for 
entities which generate electricity from green technology, such as wind and solar.
Details of the rates for each renewable energy type have now been published and 
will be updated annually.

Finally, companies must consider the carbon offset allowance for firms that have
undertaken a carbon-offset project – that is a project which results in emission
reductions and which has been registered under an accredited standard.

The administrative rules on this are incomplete – as we still await a carbon offset
administration system to create a South African based registry for carbon credits.
It is the system that will be used to transfer carbon credits from an international
registry into South African Carbon Credits which can then be used as a carbon offset
allowance to reduce your Carbon Tax liability.

To conclude, then, companies need to ensure that as a starting point to manage their
Carbon Tax liability, they need to quantify their gross tax liability and then fully
understand which allowances are worth pursuing.

There are still some gaps and uncertainties in the Carbon Tax legislation – but 
one thing which is certain is that it can make financial sense to invest time and
effort to get the most out of the trade exposure, performance benchmark and carbon
offset allowances.

_Zelda Burchell is manager at Cova Advisory._