Carbon Tax Draft Bill: public hearings

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Finance Standing Committee

14 March 2018
Chairperson: Mr Y Carrim (ANC) and Mr M Mapulane (ANC)
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Meeting Summary

Reducing Greenhouse Gas Emissions: The Carbon Tax Option   
Reducing greenhouse gas emissions and facilitating the transition to a green economy 
IRP 2016  
IRP 2010

The Standing Committee on Finance and the Portfolio Committee on Environmental Affairs, together with National Treasury and the Department of Environmental Affairs held the first tranche of public hearings on the Carbon Tax Bill.

Sasol expressed its commitment to supporting South Africa’s transition to a lower-carbon, more climate resilient economy. For Sasol to build on what had been done, a different policy approach was required. Sasol was of the view that climate change mitigation policy must take into account South Africa’s structural realities. An inherently energy intensive economy, with limited access to lower-carbon energy alternatives, and a regulated electricity sector limits the impact of the proposed carbon tax. On the way forward, Sasol emphasised the need to accelerate the development and implementation of the holistic integrated climate change mitigation policy which must do the following: incorporate South Africa’s energy, industrial and economic policy, and most importantly the Integrated Resource Plan for the electricity sector; take account of South Africa’s economic and resource realities; provide longer term policy certainty, thereby facilitating investment and mitigation; create uniform prices and incentives throughout the economy; adopt an offset framework that provides flexibility and least cost mitigation options; and encourage and incentivise longer term commitments to energy efficiency. Overall, the proposed carbon tax must be halted and focus needed to be placed on further refining the integrated mitigation policy.

ArcelorMittal South Africa (AMSA) submitted that as a responsible corporate citizen, AMSA was committed to operating its business in a sustainable manner. The company took into account its impact on the environment and was actively taking steps to mitigate any negative impacts. However, there needed to be an appropriate balance between the measures taken and their impact on both the objectives of reducing greenhouse gas (GHG) emissions and generating revenues to support the development of a sustainable economy. The concern with the carbon tax in its current form was that it may have unintended and possibly irreversible consequences for the economy. In the event of the carbon tax legislation being implemented, the following should be considered: ensuring a level playing field for South African manufacturing and in the absence thereof, exemption to be considered; focusing on the global emissions from acquiring a ton of steel for SA; finding the right balance to ensure a path of economic growth; and tax treatment of loss making companies to be investigated further. The timing of the proposed tax should be reviewed, and the Bill and the methodologies proposed to calculate a company’s carbon tax liability should be made significantly simpler. The failure to do so would result in significant negative consequences for the iron and steel sector and the South African economy as a whole.

Promethium Carbon said greenhouse gas mitigation was imperative as climate change could have the following negative impacts: severe weather events which would have significant negative social impacts, infrastructure damage, and fatalities; droughts which would threaten cities and food security; and social stability and economic activity could be severely disrupted. However, climate change could create opportunities such as green growth based on renewable energy as well as creation of a vibrant carbon offset market. Globally, countries have been building structures to price carbon into domestic economies, and allowing companies to experience a zero cost of carbon in the first phase. For instance, in an effort to mitigate impact of carbon pricing on domestic economies, the European Union, China and California had allowed free issuance of emission allowances in carbon. South Africa could achieve the same impact by allowing companies to access allowances without the proposed cap. Promethium recommended the following: the implementation of the carbon tax to be in line with international developments and South Africa’s commitment in terms of the Paris Agreement; the use of uncapped carbon offsets which would be an important part of the Bill; and treatment of emissions from petrol and diesel combustion in a consistent way with all other emissions to enhance the effectiveness of the Bill.

The Association of Cementitious Material Producers (ACMP) expressed its commitment to appropriate response to climate change. The cement sector has over the past years proactively addressed climate change concern, and were fully committed to responding to impacts posed by climate change. However, a carbon tax regime in the context of the current developmental state of South Africa would pose a significant challenge to the cement business. It would result in higher costs of doing business. In the event that the carbon tax was implemented, ACMP recommended that for the first phase, there be no increase in the rate of tax for the period. It noted that National Treasury would review future increases based on consumer price index (CPI). However, there appeared to be no rationale for increasing the CPI by 2%. This would add another hurdle into the production costs, which would be passed on to customers. Besides that, the threat from the cheap imported cement will potentially be a big loss for the local industry leading to massive consequences in the employment, drastic reduction of investments. ACMP further recommended that there be harmonisation across government departments to enable sound mitigation actions. It urged the evaluation of the impact before implementing the fiscal instrument. The first phase should be used to assess effectiveness of these policies to better inform future introduction or not of the carbon tax fiscal instrument to effect climate change. In addition, implementation of carbon tax should be deferred to provide medium term certainty to business planning.

The Industry Task Team on Climate Change submitted that given the structure of South Africa’s electricity sector, the Integrated Resource Plan and mandatory carbon budget regime were more appropriate to driving and enabling structural change of the economy. Therefore, the current focus should be cohesive policy development and consolidation of key policy instruments. The proposed carbon tax must be halted (especially as South Africa is within envisaged emissions trajectory) and the country should continue with the first phase of the carbon budget process whilst ensuring alignment with energy and industrial policy. This, in addition to increasing the role of lower-carbon energy alternatives in the South African economy, would strike a balance between achieving climate change commitments with continued and expanded industrial production.

The Energy Resource Centre, University of Cape Town, supported the implementation of the proposed carbon tax. He welcomed the Budget Speech statement indicating the tax would be implemented from 1 January 2019, after years of deferral. It emphasised the need to urgently implement a well-designed carbon tax from 1 January 2019. A simpler carbon tax regime would be better and the tax must achieve its purpose of emission reductions, hence adjustment mechanism would also be essential. Combining a low tax rate, multiple allowance and deduction from income tax would result in net payments that are negligible. In addition, to operationalise the ‘polluter pays principle’, the effective tax rate must be of a non-trivial amount. At the super-low rates that the current draft implies, no change in behaviour could be expected.

The Business Unity South Africa (BUSA) expressed its support for a transition to a lower carbon economy. The transition must however take particular care not to further disadvantage the poor. Carbon tax was recognised as one of the instruments that could contribute to transition. Notably, the local impact was as a result of global not local emissions as South Africa was currently meeting Nationally Determined Contribution and was likely do so until 2025 without the carbon tax. On the way forward, the Bill was not needed to meet Nationally Determined Contribution (NDC) before 2025 so implementation date should not be announced until the integration of the tax into mitigation system has been achieved. Should implementation still be considered, further engagement on a number of challenging issues was still outstanding, including: timing of implementation; regulations on trade exposure; engagements with SARS and Treasury on amendment of Customs and Excise Act; finalisation of engagements with DEA on reporting regulations; and establishment of DEA GHG emissions database in a manner aligned to Customs and Excise requirements and system to manage offsets must be operationalized.

The Chamber of Mines said a carbon tax was not necessary to meet international commitments under the current national circumstances. Over the last five years, the South African mining sector faced a flat to declining commodity price environment, with flat to declining production placing downward pressure on profitability and global competitiveness. With the mining industry being a significant contributor to GDP and a major employer, a carbon tax will render most of the mining operations marginal, add significant costs to mining operations, and consequently undermine the capability of the sector to contribute to sustainable employment levels. The mining operations are maintained on an extremely high base load capacity and as such, increases in input costs undermine the viability of marginal operations. In addition, the mining industry is trade exposed, hence the introduction of carbon tax will impact on its competitiveness.

PricewaterhouseCoopers, among other areas of concern, said it was not clear as to how the tax-free thresholds would operate in the context of petrol and diesel. There was no indication is given as to whether even the 60% basic tax-free threshold would apply. However, it seemed clear that any person that is subject to the carbon tax would not be able to benefit from the trade exposure, performance, carbon budget and offset allowances insofar as their emissions from the combustion of petrol and diesel were concerned. The result was that such persons would be indirectly exposed to a far higher effective carbon price through the fuel tax regime relating to the use of such fuels than they would face were the carbon tax from the use of the fuels to be levied directly on them. This would undermine the very purpose of the allowances. The carbon tax should therefore be designed to incorporate an ability to claw back allowances in relation to the carbon tax imbedded in the price of such fuels.

Deloitte agreed that South Africa must take steps to combat climate change. However, implementing a flawed mechanism will only cause harm and have no real impact on GHG emissions. Ultimately, energy use is responsible for 80% of South Africa’s GHG emissions. It therefore believed that the most effective tool for government to reduce South Africa’s GHG emissions is a carbon budget system with input from the Integrated Resource Plan for energy. Furthermore, it suggested that the carbon tax be implemented with a universal 100% tax-free threshold initially as suggested by the Davis Tax Commission so that the potential consequences could be properly understood and evaluated.

The Energy Institute, Cape Peninsula University of Technology, said the carbon tax must be rejected outright. It had to be interrogated why South Africa should introduce a carbon tax. The country was already a low emitter and, importantly, it had not grown its emissions as its BRICS partner nations have. It could well afford to wait to see whether other nations stop their growth in emissions. Among developing nations, there was little sign of this happening. The evidence for catastrophic change due to emissions of greenhouse gases into the atmosphere was far too equivocal to form the basis for action – much of the observed climate change is natural. The international commitments South Africa had made were deeply flawed and equally provide no basis for action. Any carbon tax was likely to damage the economy and lose jobs, because the country’s dependence on fossil fuels is so large that it will take many years before a significant fraction of that dependency could be closed. Any carbon tax will therefore not have the desired effect of reducing South Africa’s emissions significantly, and will certainly increase the costs of energy, so making the country less competitive and reducing the ability to create jobs even further.

The Paper Manufacturer’s Association of South Africa (PAMSA) noted that the Bill should be implemented with effect from 1 January 2019. PAMSA believed that this was premature due to the uncertainties surrounding the performance allowance, sequestration calculations and the carbon offset regulations, none of which have been finalised or are likely to be finalised timeously. The South African Pulp and Paper industry contributed in excess of 9 Billion rand to the country’s balance of payments and (and only about 0.8% of the country’s greenhouse gas emissions) in 2016. Its value chain from planting trees to recycling employs around 150 000 people. It existence leads to extensive rural development including roads clinics and schools. Therefore, the inclusion of the S in recognition of sequestration was welcomed but if appropriate methodology is not developed it will negatively impact the fibre portion of the value chain and may result in a reduction rather than an increase of planted forests.

WWF South Africa said the carbon tax is a critical tool in South Africa’s climate change toolbox, necessary to both meet international obligations and address local constitutional and developmental requirements. An inadequate tax runs the risk of blunting this tool, and hindering South Africa’s chance at achieving an easy transition to an inclusive low-carbon economy. The Urgenda court case in the Netherlands and similar cases around the world have demonstrated that all nations have a legal obligation to protect their citizens from climate change, and must take clear and forthright action to do so. WWF South Africa strongly felt that the government will be better able to meet this obligation through appropriate amendment and rapid promulgation of this carbon tax Bill.

Eskom said the entity was very supportive of the proposed carbon tax. Eskom and the National Treasury had been engaging regarding the proposed carbon tax since 2010. Two main categories of issues were discussed and still remained of concern, these being: alignment with the Department of Environmental Affairs Greenhouse Gas management processes, and Electricity Price impact. Overall, Eskom supported carbon pricing. However, there was need to look to at what is fit for purpose before its implementation.

The Legal Resource Centre commented on compliance and enforcement of the Bill. The first issue pertaining to compliance was as follows: it is not clear if the Environmental Regulations stated earlier were going to be used as the reporting methodology. Furthermore, the current edition of the Bill did not include a guarantee of revenue recycling. The only mention of the issue of revenue recycling is in the explanatory memorandum marked annexure 1 wherein it explained that the Bill will be revenue neutral through revenue recycling by reducing the electricity generation levy and renewable energy premium credit. However, there is nothing mentioned in the Bill itself regarding detailed linkage to revenue recycling. Lastly, there was no mention on how cost of food and other goods are going to be revenue recycled. Accordingly, the Fuel levy is going to increase due to the Bill this will of course naturally impact food prices. It is suggested that the Fuel levy be relooked at in terms of the potential revenue recycling to minimise increase of vital foods on communities. Failing which this could impact the right to food in terms of the Constitution. In conclusion, the Legal Resources Centre is cautiously in accordance with the Bill. However, there had to be a plethora of issues to be addressed before Parliament is ready to allow the Bill to be enacted.

COSATU submitted that climate change and its resulting consequences were a matter of great importance and impact to workers, their families and communities. COSATU appreciated the need to change the way things are done as a matter of the highest urgency if climate change was to be delayed, halted and ended. It appreciated the need for government intervention in a variety of mechanisms to intervene to ensure that society changes how it operates and moves to a green economy and future. It understood that taxation is a critical tool for government to encourage and force industry and consumers to adapt their destructive behaviour. However, COSATU was equally concerned that government is seemingly focused on taxation as the only mechanism available to induce change, and distressed that government had no other macro plan to move society towards a green future. COSATU was willing to play its part, and hoped that government and industry would come to the party and accept their failures to lead and their need to show leadership.

National Treasury said it had been engaging stakeholders on the carbon tax since a discussion paper on same was published in 2010. The first draft Bill was published in 2015 for public comments. This was the second draft based on the initial stakeholder inputs, and engagements were ongoing.

The Department of Environmental Affairs (DEA) said there was an in principle agreement that there was going to be alignment of the carbon tax and the carbon budget. Also, there will be no double penalties. The processes and attendant modalities would be discussed with Treasury.

Some Members expressed concern that the hearings were largely weighted in the direction of big business. Environmentalists, NGOs and similar stakeholders were not sufficiently represented. The Committees might need to consider soliciting for more submissions to ensure more balanced public hearings. It was said that Members were no tax experts, and therefore the Committees were not going to plunge into any decision-making until every aspect of the Bill was fully understood. This was an initial foray and there might be further public hearings if need be.

The Co-Chairperson indicated this was one of two tranches of public hearings. He urged stakeholders and Treasury to engage further outside parliamentary processes. There would be a workshop to enable Members to get a technical grasp of some of the issues on a later date. Before the end of June, stakeholders would them appear before the Committees to take the process forward. However, the proposed VAT and the Public Investment Corporation Bill were the Standing Committee on Finance’s priorities at the moment.

Meeting report

Opening remarks
Mr Carrim welcomed everyone and indicated that stakeholders were free to speak their minds. No decisions would be made by the Committees at this stage. Members’ views, at this stage, were exploratory and would not necessarily be a reflection of political party positions.

SASOL submission
Sasol expressed its commitment to supporting South Africa’s transition to a lower-carbon, more climate resilient economy. For Sasol to build on what had been done, a different policy approach was required. Sasol was of the view that climate change mitigation policy must take into account South Africa’s structural realities. An inherently energy intensive economy, with limited access to lower-carbon energy alternatives, and a regulated electricity sector limits the impact of the proposed carbon tax.

Sasol’s constraints mirror that of South Africa. The main constraint being coal dependence owing to the fact that alternative feedstock options (gas & renewables) required large investment, and limited further energy efficiency options due to diminishing returns. Therefore, a standalone carbon tax would not enable Sasol or South Africa to sustainably transition to a lower carbon economy but may in fact hinder ability to transition. Sasol and South Africa needed a flexible and well-designed climate change mitigation policy to enable a just transition. The current design of the standalone carbon tax was at odds with the integrated climate change mitigation system which is in the process of being finalised.

The proposed carbon tax had dire implications for Sasol. Lack of clarity on promised policy alignment was particularly concerning as it: creates uncertainty for its 2050 investment largely due to confusion as to how its projects should be allocated capital. The tax would increase risk premiums, thus reducing feasibility of growth opportunities. Further, the tax design maximises cost while creating little incentive to mitigate emissions, and provided no incentive to integrate renewables into its facilities. The poorly designed offset policy did not allow for the pursuit of a least cost mitigation path; and Sasol’s cheap energy efficiency opportunities would be foregone as the economy bears the cost of more expensive mitigation outside the proposed carbon tax design. South Africa and Sasol could grow sustainably through a well thought through integrated mitigation strategy complemented by fit for purpose energy policy.

On the way forward, Sasol emphasised the need to accelerate the development and implementation of the holistic integrated climate change mitigation policy which must do the following: incorporate South Africa’s energy, industrial and economic policy, and most importantly the Integrated Resource Plan (IRP) for the electricity sector; take account of South Africa’s economic and resource realities; provide longer term policy certainty, thereby facilitating investment and mitigation; create uniform prices and incentives throughout the economy; adopt an offset framework that provides flexibility and least cost mitigation options; and encourage and incentivise longer term commitments to energy efficiency.

In conclusion, the proposed carbon tax must be halted and focus needed to be placed on further refining the integrated mitigation policy.

ArcelorMittal South Africa (AMSA) submission
Mr Mohamed Adam, General Manager: General Counsel and Regulatory Affairs, AMSA, submitted that, as a responsible corporate citizen, AMSA was committed to operating its business in a sustainable manner. The company took into account its impact on the environment and was actively taking steps to mitigate any negative impacts. However, there needed to be an appropriate balance between the measures taken and their impact on both the objectives of reducing greenhouse gas (GHG) emissions and generating revenues to support the development of a sustainable economy. The concern with the carbon tax in its current form was that it may have unintended and possibly irreversible consequences for the economy.

AMSA expressed concern that the current Bill, by not imposing the tax on imports, was creating an unfair playing field to the detriment of the country’s manufacturing. South Africa will continue to need and consume the same amount of steel so it will just be imported at lower prices (there being a price advantage due to the carbon tax not being applicable). The result would be more emissions per ton of steel due to scope three transport emissions. Given the current economic weakness in the country, the impact on industry at this stage will be significant. The consequent threat to the primary steel industry in South Africa will likely result in the loss of critical steel-making capacity and jobs.
Currently, no industrial carbon-free technology solution to produce steel exists, hence the ability to reduce emissions through behavioural changes was very limited. Notably, the carbon tax imposed on steel-making cannot be passed on to steel consumers due to the fair pricing principles agreed with government and lower import costs without the Carbon tax. There may be an additional impact if inputs such as electricity are also taxed.

The proposed tax would have a significant negative impact on the industry. The industry will be exposed to imports not subject to a similar tax, making the South African industry potentially uncompetitive or not viable at all. Imports will also result in higher emissions due to transport. The severe economic hardship experienced by the iron and steel sector was well known. The ability to pass on the carbon tax to customers was limited, especially for the export market thereby reducing potential export revenue for South Africa. Notably, the allowance for trade exposure did not sufficiently address this concern. Further, significant amounts of steel also enter into the country in the form of finished goods and such imports were difficult to control.

The tax load will be highly disproportionate to the earnings potential of iron and steel manufacturers, even with the allowances being considered. In the case of AMSA, when considering 2016 and 2017 financial figures, the estimated carbon tax payable would have affected Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) figures by very significant levels which was cause for concern. Further, there was no alternative technology that could be used to produce steel and reduce emissions to the extent required, so the effect of the carbon tax would not incentivise a change in behaviour but rather be a penalty – which is contrary to the main purpose of the carbon tax.

Mr Adams commented on the complexity of the tax. The fact that an emitter needed to distinguish between process, energy or combustion and fugitive emissions added to the complexity. These emissions often occur in a combined manner and one emission type often may not take place without the other as part of the production of steel. The higher allowances for process and fugitive emissions should be applicable to the total emissions of an emitter and not only to the portion characterised as process and/or fugitive emissions. It should also be noted that the higher tiers provided for in the Intergovernmental Panel on Climate Change (IPCC) guidelines do not in all cases supply sufficient guidance to distinguish between the emission types.

AMSA was worried about the timing of the tax. South Africa had already achieved significant emission reductions due to the high cost of electricity and the availability thereof in the past. Weak economic growth further contributed to this phenomenon. A balanced approach to sound environmental management should also be considered as the proposed tax would significantly impact on profitability of producers and hence less funds may be available to address other pressing issues namely air quality and water. The global playing field regarding a price being levied on carbon was far from being level yet, and closer scrutiny, where implemented, revealed that the iron and steel industry is grandfathered to prevent unintended consequences.

In conclusion, in the event of the carbon tax legislation being implemented, the following should be considered: ensuring a level playing field for South African manufacturing and in the absence thereof, exemption to be considered; focusing on the global emissions from acquiring a ton of steel for SA; finding the right balance to ensure a path of economic growth; and tax treatment of loss making companies to be investigated further. The timing of the proposed tax should be reviewed, and the Bill and the methodologies proposed to calculate a company’s carbon tax liability should be made significantly simpler. The failure to do so would result in significant negative consequences for the iron and steel sector and the South African economy as a whole.

Promethium Carbon submission
Mr Robbie Louw, Director, Promethium Carbon, said greenhouse gas mitigation was imperative as climate change could have the following negative impacts: severe weather events which would have significant negative social impacts, infrastructure damage, and fatalities; droughts which would threaten cities and food security; and social stability and economic activity could be severely disrupted. However, climate change could create opportunities such as green growth based on renewable energy as well as creation of a vibrant carbon offset market. Globally, countries have been building structures to price carbon into domestic economies, and allowing companies to experience a zero cost of carbon in the first phase. For instance, in an effort to mitigate impact of carbon pricing on domestic economies, the European Union, China and California had allowed free issuance of emission allowances in carbon. South Africa could achieve the same impact by allowing companies to access allowances without the proposed cap.

On effectiveness of the proposed Bill, the emission reduction impact of the carbon tax would be enhanced if the use of offsets was not capped. The capping of the use of offsets limits the potential impact of the offset market on green growth and job creation. Also, the proposed inclusion of the carbon tax on petrol and diesel in the fuel levy removes the visibility of the carbon tax in this important sector and therefore limits its potential to change behaviour.

Promethium recommended the following: the implementation of the carbon tax to be in line with international developments and South Africa’s commitment in terms of the Paris Agreement; the use of uncapped carbon offsets which would be an important part of the Bill; and treatment of emissions from petrol and diesel combustion in a consistent way with all other emissions to enhance the effectiveness of the Bill.

Association of Cementitious Material Producers (ACMP) submission
Dr Dhiraj Rama, Executive Director, ACMP, said ACMP members were committed to appropriate response to climate change. The cement sector has over the past years proactively addressed climate change concern, and were fully committed to responding to impacts posed by climate change.

However, a carbon tax regime in the context of the current developmental state of South Africa would pose a significant challenge to the cement business. It would result in higher costs of doing business because: cement producing hubs are located far from the metropolitan economic activities and the knock on effects to these regions will be significant in terms of both the cement sector as well as its supply/value chain in terms of logistics; cement industry ranks amongst the most capital-intensive industries with a lower than average capital turnover when compared to others, most energy-intensive of all manufacturing industries, and most process-intensive with 50% emissions related to chemistry of raw material.

Cement remained an integral part of sustainable development and hence requires careful consideration in the context of its capital intensive and energy intensive characteristics. Due to it being trade exposed, the carbon tax burden would have further negative consequences to the local industry. The 10% process related allowance may not be sufficient to effect behaviour change as more than 50% related to chemistry and could not be mitigated (process related). Further, carbon tax as a fiscal mitigation policy instrument for the cement sector may not necessarily be appropriate for its mitigation action as the sector was continuously embracing the latest technology and abatement strategies, which added significant overall costs to cement production.

A carbon tax regime would pose a significant challenge to the cement business. It will result in cement price escalation and in higher costs of doing business. Cement producers would be unable to absorb the carbon tax related costs and will pass on the increase. Thus, a price escalation by more than 2.5 % was expected. The gap between cheap imports and local production was widening due to the increasing costs related to different levies and taxes, evolving local environmental regulatory environment as well as logistics (cement production facilities are located at long distances and transport costs are ever increasing).

On trade exposure challenges, it is appreciated that the proposed carbon tax regime addressed trade exposure to some extent but it may just not be enough to address ACMP members’ local vulnerability. Although some of the imports were designated products for import purposes, the carbon tax implications to local producers would favour the importers as there has been no details provided in the Bill with regards to carbon tax levies for imports. The trade exposure allowance threshold may not be sufficient to protect local production leading to increasing in process or even retrenchments and drastic reduction in investments.

Dr Rama commented on revenue recycling. The only provision in the Bill (and explanatory note) in this regard related to electricity price neutrality and possibly other regulated fuels subject to levies (Explanatory note). The previous draft Bill included various approaches to revenue recycling. However, the current draft Bill was silent on the matter. It is however noted that the formula took into account electricity levy reduction as per details reflected in the preamble. ACMP expressed concern that GHG emissions related to electricity and regulated fuels was below 10% for cement production and that opportunities to recycle the revenue to other strategies had not been considered in the Bill. In the case of the cement sector, some of the revenue could be used to structure projects to facilitate investments in co-processing of waste to give effect to integrated waste management, circular economy, as well mitigating coal based GHG emissions from cement kilns. This required close cooperation between the different spheres of government with regards to financial assistance to introduce systems and technologies for co-processing.

There were concerns on timing of imposition of the tax. The issues being the finalisation of overall climate change related legislation and carbon tax, and its associated regulations such as alignment between carbon budget and carbon tax, choice of interface options among others, which were not yet finalised.

In the event that the carbon tax was implemented, ACMP recommended that for the first phase, there be no increase in the rate of tax for the period. It noted that National Treasury would review future increases based on consumer price index (CPI). However, there appeared to be no rationale for increasing the CPI by 2%. This would add another hurdle into the production costs, which would be passed on to customers. Besides that, the threat from the cheap imported cement will potentially be a big loss for the local industry leading to massive consequences in the employment, drastic reduction of investments. ACMP further recommended that there be harmonisation across government departments to enable sound mitigation actions. It urged the evaluation of the impact before implementing the fiscal instrument. The first phase should be used to assess effectiveness of these policies to better inform future introduction or not of the carbon tax fiscal instrument to effect climate change. In addition, implementation of carbon tax should be deferred to provide medium term certainty to business planning.

Discussion
Mr Carrim noted that stakeholders had been engaging with National Treasury and the Department of Environmental Affairs in respect of their concerns, in preparation for the Bill. He asked stakeholders if, in view of the current Bill before the Committees, if government had shifted its position since the initial drafting. What had been achieved since the first draft of the Bill or since initial negotiations with government? Also, while the Bill was with the Committees, stakeholders were encouraged to continually engage with government.
Sasol said it had participated in numerous engagements with Treasury since initial proposals. Treasury had been open and welcoming and some of Sasol’s comments had been taken on board. However, in terms of the substantive issues as presented before the Committee, Treasury had not moved from its initial positions, and some of the proposals had worsened, from Sasol’s vantage point. These would include the issue of uncertainty as well as that of integration with the integrated mitigation system. These were issues Sasol had raised a number of times and, in some respects, the current design was moving farther away from the initial proposals. Sasol would continue engaging with government.

Mr Carrim said Members were no tax experts, and therefore the Committees were not going to plunge into any decision-making until every aspect of the Bill was fully understood. This was an initial foray and there might be further public hearings if need be. The onus was on the stakeholders and government to ensure that Members fully comprehend all aspects of the Bill.

Mr Adam said there had been a lot of discussions with Treasury since the initial 2010 position paper. AMSAs emphasis about the need to level the playing field had been taken on board, but the essence of the issue had not been address. The need to take steps to protect local industry was not well-appreciated by government. Also, there had been insufficient cognisance of the impact of bringing imported steel into the local market on the steel sector in particular and the economy at large.

Ms T Tobias (ANC) said the steel companies must not divide the industry in terms of why government had to take a decision to regulate the price of steel as a means of protecting the domestic steel industries from cheap imports. The policy decision was well-canvassed. Also, the discussions should be on the rate of incentives from carbon emission programmes. She agreed that there might be a need to regulate cheap cement imports to protect local cement industry. Also, Members expected a number of commitments from companies such as Sasol in the localities they conducted business in.

Sasol took note of Ms Tobias’ comments and said to ensure that local communities particularly benefit, carbon tax offsets should be flexible and should not be restricted in any way so as to positively impact on the environment.

Mr Adam pointed out that government and labour came together for discussions about what was needed to ensure sustainability of the steel industry in South Africa when the industry was facing the challenge of cheap imports. The stakeholders agreed upon a number of issues during the discussions. Together, they came up with strategies on how to manage steel pricing into the future. There was no issue about the government agreement as industry was also a party to it. The issue was the limitation of the carbon tax and its effect on other taxes.

Mr Louw said Promethium had been having engagements with Treasury on the carbon tax since 2010. The engagements were constructive and some of papers by Promethium were cited by Treasury and the Davis Tax Commission report on carbon tax.

Dr Rama said during ACMP’s discussions with Treasury, the latter had recognised some of the challenges such as the mitigation of greenhouse gas waste related emissions. However, there was still a lot of work to be done between Treasury and the Department of Environmental Affairs (DEA), especially in relation to the alignment between carbon tax and carbon budget. ACMP also queried the timing of the carbon tax, and felt the carbon tax regime was being rushed.

Ms Yanga Mputa, Chief Director: Legal snd Tax Design, National Treasury, said Treasury had been engaging stakeholders on the carbon tax since a discussion paper on same was published in 2010. The first draft Bill was published in 2015 for public comments. This was the second draft based on the initial stakeholder inputs, and engagements were ongoing.

The Department of Environmental Affairs (DEA) said there was an in principle agreement that there was going to be alignment of the carbon tax and the carbon budget. Also, there will be no double penalties. The processes and attendant modalities would be discussed with Treasury.

Ms Tobias urged stakeholders to be on board throughout the discussions.

Industry Task Team on Climate Change (ITTCC) submission
Ms Jarredine Morris, Communications Manager, Industry Task Team on Climate Change (ITTCC), focused on the energy landscape of South Africa, its challenges and the role that the energy mix must play in transitioning to a lower-carbon future. ITCC supported South Africa’s international commitments to address climate change that considers its current national circumstances, developmental state and socio-economic aspirations. ITTCC supports a predictable and gradual transition in South Africa to a lower-carbon, resources-efficient economy which must be based on an accurate and up-to-date emissions profile. Current trends from analysis of the GHG Inventories indicate that any increase in emissions may be even further into the future. Therefore, ITTCC believed there must be an integrated and aligned approach to the development of emissions reduction and energy planning policies as these issues are inextricably.
ITTCC undertook an analysis which demonstrated that the proposed carbon tax was not necessary to meet international commitments within the current national circumstances. The updated draft SA GHG inventory indicates muted growth in emissions. Comparison of the updated draft inventory and 2012 in relation to 2010 indicate muted growth in GHG emissions. Based on current national circumstances, this trend was likely to be sustained moving forward for the short-to-medium term. South Africa has seen significant increases in electricity costs and a decrease in consumption. A combination of sharp increases in electricity prices has played a large role in electricity sales volumes contracting by more than 14% below 2011 levels, with the largest contractions in mining and industrial sectors. Projected economic growth has not materialised. Emissions from electricity sector was projected to only grow post 2022 and were still within the Peak, Plateau and Decline (PPD) until 2025. South Africa’s emissions are within the limits of the PPD trajectory and unlikely to increase before 2022-25. Therefore, implementation of a carbon tax at this time was not necessary and would only further burden an already strained economy. This was because: the country was below the PPD and was likely to remain so for the short to medium-term; the electricity crisis, low commodity prices and slow economic growth has muted growth in GHG emissions; emission growth from the electricity sector and most sectors depending on electricity will remain relatively muted with overall emissions remaining under the PPD for an extended period of time. The analysis did not reflect the implementation of sector-wide energy efficiency efforts, which if included would further improve this outlook.
The initial indication of available “carbon space” until 2022 to 2025 allowed sufficient time to: achieve South Africa’s economic growth; develop an energy mix and price path that allows the country to retain its relative competitiveness and improve investment attractiveness, while transitioning to a lower-carbon economy; outline preferred energy and industrial pathways to a lower-carbon future that retains such a competitive and investment position, while still achieving South Africa’s GHG mitigation commitments as aligned to the country’s submitted Nationally Determined Contribution (NDC) and the Paris Agreement.

Given the structure of South Africa’s electricity sector, the Integrated Resource Plan and mandatory carbon budget regime were more appropriate to driving and enabling structural change of the economy. Therefore, the current focus should be cohesive policy development and consolidation of key policy instruments. The proposed carbon tax must be halted (especially as South Africa is within envisaged emissions trajectory) and the country should continue with the first phase of the carbon budget process whilst ensuring alignment with energy and industrial policy. This, in addition to increasing the role of lower-carbon energy alternatives in the South African economy, would strike a balance between achieving climate change commitments with continued and expanded industrial production.

Energy Resource Centre (ERC) submission
Prof Harald Winkler, Director: ERC, University of Cape Town, supported the implementation of the proposed carbon tax. He welcomed the Budget Speech statement indicating the tax would be implemented from 1 January 2019, after years of deferral.

ERC believed the rate of tax was very low and needed to increase beyond 2022. In order to make a material difference to South Africa’s GHG emission and given the low tax rate and high percentages of allowances, the tax rate must be increased by several percentage points above CPI each year. Real increases should start in the first year after implementation of the Carbon Tax Act and continue until there was a) certainty that SA emissions would remain below the PDD trajectory or b) globally no further action was required on climate change. Further, the design in its current form was complex and a simpler tax design would be better. The tax should be well-designed such that the objective of the legislation is simplified to ensure administrative simplicity and consistency in principles of operation. Moreover, allowances should be removed as they had no basis. Nominal tax rate was too low to transform SA energy economy, as indicated in many studies and Treasury’s own modelling. Allowances have no sound basis as there were a result of negotiations.

On allowances, a much simpler tax design would be to charge ‘full’ R120 and allow companies to claw back via the proposed Jobs and Competitiveness Programme. ERC was of the firm view that raising tax but deducting allowances is a sub-optimal design of the carbon tax. It would be far preferable to levy the full tax and then provide for a ‘jobs and competitiveness programme’ which would allow energy-intensive and trade exposed payers, who also demonstrate their contribution to increased employment, to claw back part of the carbon tax paid (up to 50%) in order to reduce both unemployment and GHG emissions, i.e. to assist them with mitigation and socio-economic transformation. The explanatory memorandum indicated the allowances are “transitional” (National Treasury 2017b). The Act therefore needed to make provision for phasing out of allowances. ERC suggested this be done by 2030 for energy-intensive and trade-exposed sectors and by 2025 for all other sectors. The exception would be allowance for performance – it may remain desirable to incentivise those mitigating most effectively within their sector. However, allowances for carbon budgets, off-sets should not be implemented at all.

ERC recommended that Parliament in its consideration of the Bill include consideration of a full tax at the margin, with energy-intensive and trade-exposed companies applying for assistance in implementing mitigation and contributing to jobs and competitiveness. It further recommended that the rate of tax be adjusted on an annual basis, following review of emissions in South Africa’s latest GHG inventory to the peak, plateau and decline trajectory, increasing the rate if emissions were or were projected to rise above the PPD trajectory and lowering the rate if emissions were below the PPD range.

In conclusion, ERC emphasised the need to urgently implement a well-designed carbon tax from 1 January 2019. A simpler carbon tax regime would be better and the tax must achieve its purpose of emission reductions, hence adjustment mechanism would also be essential. Combining a low tax rate, multiple allowance and deduction from income tax would result in net payments that are negligible. In addition, to operationalise the ‘polluter pays principle’, the effective tax rate must be of a non-trivial amount. At the super-low rates that the current draft implies, no change in behaviour could be expected.

Business Unity South Africa (BUSA) submission
Business Unity South Africa (BUSA) expressed its support for a transition to a lower carbon economy. The transition must however take particular care not to further disadvantage the poor. Carbon tax was recognised as one of the instruments that could contribute to transition. Notably, the local impact was as a result of global not local emissions as South Africa was currently meeting Nationally Determined Contribution and was likely do so until 2025 without the carbon tax.

BUSA noted with concern that the alignment between the carbon tax and the carbon budget had still not been achieved. The 5% allowance for taxpayers that have been allocated a carbon budget was not an adequate replacement for the proper alignment of the two instruments, which BUSA had been repeatedly assured would happen before the introduction of the mandatory carbon budget system. It was clear from the Bill that the carbon tax will overlap with the introduction of the mandatory carbon budget system, which was not an acceptable situation. The failure to address this situation, when a number of studies have been undertaken and a range of options to achieve the alignment have been proposed and consulted on was not understood. Although the commitment in the explanatory memorandum and the Socio-Economic Impact Assessment System (SEIAS) report that there would not be double punitive measures was noted and the reference to an integrated review in the media statement, BUSA believed that it was imperative to make reference to this review in the Bill.

BUSA welcomed the recognition in the Bill for the need to reduce the carbon tax bill of companies by the implicit cost of implementing low carbon electricity generation and the cost of the environmental levy on electricity. However, it remained concerned at the risk of double taxation if this rebate was disallowed in 2022, as appears to be the intention. BUSA believed that any amendment to the tax design should only be contemplated after the integrated review of carbon reduction instruments which will be undertaken after the first phase of implementation of the carbon tax.

On administration of the tax, BUSA had consistently raised its concerns with the use of the Customs and Excise Act as the policy instrument for administering the carbon tax. This concern had been exacerbated by the completely new wording presented in Schedule 3 of the Bill. Environmental levies are generally imposed on goods, and the proposed amendment to the Customs and Excise Act still reflects such an approach. In contrast to the previous version of this Bill, which exempted carbon tax liable entities from licensing of warehouses in terms of the Customs and Excise Act, the Bill no longer included this amendment, which meant that the standard rules for environmental levies apply for the carbon tax.

Overall, the Bill required significant amendment to address the concerns raised. BUSA requested that the following issues be addressed in the finalisation of the Bill:
Alignment between the carbon tax and the carbon budget must be addressed in this Bill to ensure longer term policy certainty.
Significant implementation challenges which must be addressed prior to implementation.
Addressing challenges with implementing the carbon tax in relation to other tax legislation
Establishment of performance monitoring mechanism to assess efficacy of the carbon tax
Inclusion of taxation of liquid fuels in the Bill.

Although the timing of the implementation of the Bill was not contained in the Bill, the issue required focused engagement considering the following, before making the decision on an implementation date:
The need to introduce any new legislation that could even have the slightest negative impact on employment should be carefully assessed
Understanding of the impact of the revised Integrated Resource Plan (IRP) on the GHG profile
Greenhouse gas emission projections demonstrate that South African national emissions are currently well within the NDC range and likely to remain in that position until at least 2025, thus removing the need for a tax in the current uncertain economic environment.
The proposal to implement the carbon tax with effect from 1 January 2019 should be subjected in intensive consultation taking the state of the economy into accoun

On the way forward, the Bill was not needed to meet Nationally Determined Contribution (NDC) before 2025 so implementation date should not be announced until the integration of the tax into mitigation system has been achieved. Should implementation still be considered, further engagement on a number of challenging issues was still outstanding, including: timing of implementation; regulations on trade exposure; engagements with SARS and Treasury on amendment of Customs and Excise Act; finalisation of engagements with DEA on reporting regulations; and establishment of DEA GHG emissions database in a manner aligned to Customs and Excise requirements and system to manage offsets must be operationalized.

Chamber of Mines
Mr Bongani Motsa, Senior Economist, Chamber of Mines, expressed the organisation’s support for South Africa’s international commitment to lowering its GHG emissions, and the Nationally Determined Contributions commitments. The Chamber and its members remain committed to sustainable growth of the South African economy and to responsible corporate citizenship. As such, the Chamber was supportive of the government’s intent to facilitate a transition to low carbon economy, with responsible investment and growth in various sectors including the mining industry.

The Chamber identified the following concerns and risks with the Carbon Tax Bill:
The National Emissions Trajectory was already lower than the national benchmark trajectory due to the low economic growth therefore, imposition of a carbon tax was unnecessary
Lack of alignment with carbon budget and the mitigations system currently developed by the DEA
Contradiction between the definition of the Tax Payer and the Mandatory GHG reporting regulations
Outstanding development and finalisation of the Regulations that will enable effective implementation of the Tax; and rebates for renewable energy premium and environmental levy which need to be clearly set out in legislation.
There were also challenges pertaining to developing benchmarks/Z factor in the mining industry.

On the impact of carbon tax on the mining industry, the basic argument was that mining in South African is marginal business such that a slight increase in input cost results in the closure of some operations. It is a price taker, unlike other productive sectors, and mineral commodity prices are determined at the global market. The mining sector could not transfer increases in costs to the final price of the product. While the Chamber embraced the notion of long term carbon pricing and various mechanisms to facilitate transition to a low carbon economy, it was of the view that the carbon tax has the potential to erode profitability through increasing costs and hence deliver the outcome of a shrinking sector. The result of which would be further job losses therefore exacerbating South Africa’s structurally high unemployment rate. Additional costs, would adversely affect profitability (a key variable in the decision matrix when companies are considering new or expansion capital).

Mr Motsa emphasised that given the price taking nature and marginal state of the mining sector, the carbon tax was negative for the sector, for the fact that it increases input costs therefore reducing profitability. Additionally, the Chamber was of the firm view that the proposal for an inflationary adjustment to the carbon tax rate of CPI + 2 % (percentage points) on an annual basis until 2019 was inappropriate for a tax. The Chamber recommended a zero percent adjustment to the carbon tax rate. It believed that the adjustment to the carbon tax rate should only be considered when there is a significant shift in the underlying dynamics that have resulted in the current carbon tax rate of R120. Moreover, in the event of the need to adjust the tax rate, this should be done with motivation for the proposed new carbon tax rate. The Chamber did not believe that an automatic annual adjustment to the rate was warranted. The Chamber’s recommendation was motivated by the fact that input costs inflation in the mining sector are currently increasing at a pace faster than that of commodity selling prices, resulting in margin compression and adversely affecting the sustainability of the sector. The negative differential in the mining sector inflation profiles between costs and selling prices, presented a situation of profit margin erosion and placed in question the sustainability of the mining sector. By extension it also adversely affected the attractiveness of the sector for new or expansion capital. It was in the context of the above analysis that the Chamber contended with the inflationary adjustment proposed for the carbon tax rate. Importantly, this would not be out of the norm for the South African context and by extension the mining sector. The Diesel Fuel Tax Refund System applicable to the mining sector, was not set to automatically escalate on an annual basis. Therefore, the same could be applied to the carbon tax rate.
The Chamber acknowledged that carbon tax could be one of many policy measures to address market distortions or to promote certain behavioural changes in order to achieve GHG emissions reduction. However, in light of the South Africa’s socio economic implications of the tax, and the design and the principle set out in the draft Carbon Tax Bill, the Chamber could not support the implementation of the Bill at this stage. Significant technical, policy alignment issues, finalisation of certain regulations, means of implementation would have to be achieved prior to the promulgation of the Bill.

Overall, a carbon tax was not necessary to meet international commitments under the current national circumstances. Over the last five years, the South African mining sector faced a flat to declining commodity price environment, with flat to declining production placing downward pressure on profitability and global competitiveness. With the mining industry being a significant contributor to GDP and a major employer, a carbon tax will render most of the mining operations marginal, add significant costs to mining operations, and consequently undermine the capability of the sector to contribute to sustainable employment levels. The mining operations are maintained on an extremely high base load capacity and as such, increases in input costs undermine the viability of marginal operations. In addition, the mining industry is trade exposed, hence the introduction of carbon tax will impact on its competitiveness.

Discussion
Ms Tobias asked the Chamber of Mines to justify its argument against an automatic inflationary adjustment of the carbon tax rate. She asked the Energy Research Centre about what it would deem an adequate carbon tax rate in its opinion.

Mr Motsa replied that mining sector input costs have been running far ahead of general price movements largely due to a difficult operating environment for the mining sector. Inputs costs have been running almost double above inflation and thus an inflation adjusted carbon tax increase every year would exert a significant pressure on profitability.

Prof Winkler said the proposed tax rate was too low to change behaviour and consumption. The Bill itself did not make any explicit connection between the effective rate of tax and its impact. However, the carbon tax had to be implemented even if the initial rates are low as they could be tinkered at later stages.

Mr Carrim expressed concern that the hearings were largely weighted in the direction of big business. Environmentalists, NGOs and similar stakeholders were not sufficiently represented. The Committees would consider soliciting for more submissions to ensure more balanced public hearings.

Mr Mapulane noted that most stakeholders seemed opposed to the carbon tax. However, there seemed to be little in terms of alternatives being brought forward. Most stakeholders seemingly want to ensure the status quo is maintained. However, the carbon tax was part of a host of instruments in the transition towards a more sustainable economy. He agreed that there might be need for more hearings to ensure fair and balanced representations. Business seemed not to fully appreciate the need for a transition.

Ms Mputa noted administration-related comments from stakeholders. She said Treasury was engaging SARS to deal with administrative issues. The carbon tax is an excise duty and thus administered by SARS. Stakeholders and Treasury would meet jointly with SARS to discuss administrative aspects of the proposed tax.

PricewaterhouseCoopers submission
Mr Kyle Mandy, Head of National Tax Technical, PwC, noted the proposal that the carbon tax relating to the use of petrol and diesel be added to the current fuel tax regime. While PwC was not opposed to this proposal as a matter of principle, should it be proposed to include the carbon tax in the fuel tax regime, the vehicle emissions tax should be repealed in order to eliminate the double taxation that would otherwise result. Alternatively, the fuel tax should not include any carbon tax element relating to the burning of petrol and diesel.

Mr Mandy said it was not clear as to how the tax-free thresholds would operate in the context of petrol and diesel. There was no indication is given as to whether even the 60% basic tax-free threshold would apply. However, it seemed clear that any person that is subject to the carbon tax would not be able to benefit from the trade exposure, performance, carbon budget and offset allowances insofar as their emissions from the combustion of petrol and diesel were concerned. The result was that such persons would be indirectly exposed to a far higher effective carbon price through the fuel tax regime relating to the use of such fuels than they would face were the carbon tax from the use of the fuels to be levied directly on them. This would undermine the very purpose of the allowances. The carbon tax should therefore be designed to incorporate an ability to claw back allowances in relation to the carbon tax imbedded in the price of such fuels.

PwC welcomed the extension of trade exposure to cover both imports and exports as well as the determination thereof on a sectorial basis. However, some concerns remained. The proposed relief for trade-exposed sectors applied only to direct emissions. The result was that such sectors that have significant scope 2 emissions would continue to be exposed to reduced competitiveness stemming from any increased electricity prices should all or a portion of the carbon tax be passed through to electricity consumers. Many of South Africa’s most trade-exposed sectors will be more exposed to the carbon tax as a result of scope 2 emissions rather than scope 1 emissions. Concerns also remained as to whether the proposed approach will provide adequate protection to trade-exposed sectors. Some sectors may not see significant imports currently, but this could change with the introduction of the carbon tax. Reliance solely on quantitative trade data prior to the introduction of the carbon tax is misplaced. Even if this was updated after the introduction of the carbon tax, this may be too late to provide adequate protection to sectors exposed to import substitution. There were a number of industries in South Africa that are largely in this position, including cement, glass, steel and petroleum. The result was that inadequate protection for domestic producers exposed to import substitution was likely to place significant strain on those industries, potentially placing jobs at risk and negatively impacting on the trade deficit. It was therefore suggested that qualitative factors should also be taken into account in assessing trade exposure and not just reliance on historical data.

PwC commented on the carbon budget allowance. Ostensibly, the purpose of this allowance was to align the carbon tax with the carbon budget programme. With all due respect, simply granting an additional allowance of 5% for those companies participating in the carbon budget pilot hardly constituted alignment. The fact of the matter was that companies participating in the carbon budget pilot will still be faced with two instruments covering the same emissions and a resultant duplication of costs in the form of the carbon tax and costs incurred in order to bring emissions within the carbon budget. A proper alignment would entail the exemption from the carbon tax of those companies participating in the carbon budget programme or, at the very least, a basic tax-free allowance equal to the carbon budget (with no further allowances for trade exposure or performance) such that the company would only have a carbon tax liability on those emissions in excess of the budget.

On the offset allowance, it was not clear what the rationale was for the proposal to limit offsets for those firms which obtain relief for process emissions to 5%. It would seem that the policy has as a point of departure that an offset mechanism constitutes the grant of further free emission allowances or exemption from the carbon tax. While this may be true to the extent that the State will not obtain tax revenues to the extent that an offset applies, it hardly amounts to free emissions or an exemption. This was because any offset comes at a cost to the company offsetting its emissions, whether through the acquisition of carbon credits or investment directly in offset projects. Serious consideration will need to be given to expanding the pool of eligible projects in order to increase supply, particularly in the first phase of the carbon tax. At the very least, this would mean reducing the extent of ineligible projects such as those receiving government incentives, but may also necessitate the extension of allowable projects to those outside South Africa.

Lastly, PwC did not believe that the Customs and Excise Act was the appropriate legislation under which to administer the carbon tax as it is not designed to deal with a tax of this nature. It is designed to deal with easily measurable goods that can be easily identified. The result was that this will lead to significant uncertainties in the application of the Customs and Excise Act in the context of the carbon tax. It would be preferable for a separate Carbon Tax Administration Act to be promulgated to address administrative issues specific to this tax and for the tax to be administered in terms of the Tax Administration Act insofar as general matters are concerned, as was the case for other taxes such as the Mineral Royalties.

Deloitte submission
Mr Izak Swart, Director, Deloitte, said Deloitte recognises the importance of taking steps to mitigate anthropogenic climate change, and to keep global warming below the targeted 2°C. It agreed in principle with utilising effective, efficient and least cost mechanisms to do so. In this respect, Deloitte continued to believe that a carbon budget, as opposed to a carbon tax, was a more suitable approach. A carbon budget system is far simpler, resulting in less administrative burden and greater certainty to emitters. The opportunity for unintended consequences is also far lower due to the simpler design. The Department of Environmental Affairs was already testing a carbon budget system, and aimed to introduce a Mandatory Carbon Budget by 2020. Deloitte believed the carbon tax was not a suitable mechanism to realise its stated intention of reducing greenhouse gas emissions.

On scope of the tax, in terms of Section 3 of the Bill, a person is subject to the carbon tax if that person conducts an activity above the threshold. The current Bill has a far more extensive list of activities or sectors that would be subject to the carbon tax. The threshold for most combustion emissions are set at 10 MW thermal input capacity. Schedule 2 also includes a “catch all” category for combustion named “Non-Specified”. The thresholds have also been clarified to apply at entity level. As a result, many additional sectors or activities who were arguably not going to be subject to the carbon tax will now be liable for carbon tax. An entity level threshold vastly broadens the scope of the carbon tax, meaning that the economic impact will be far more significant than initially anticipated. Another consequence of the above was that entities that operate across multiple sectors will be unfairly prejudiced. A specific activity within an entity may be subject to the carbon tax based on the threshold for a specific activity. The introduction of thresholds provided certainty on when an emitter will be subject to the Carbon Tax. However, the application of the thresholds still needs further clarification and consideration especially when it is aimed at an entity level as opposed to a site level as was initially thought.

National Treasury had indicated that should the carbon tax at its current rate prove ineffective at changing behaviour, rate increases should be expected. Effectively only 43% of emissions will be subject to the carbon tax, and therefore a heavy burden was placed on those subject to the carbon tax to reduce its emissions. Under the circumstances, merely imposing the carbon tax to reduce emissions will be counterproductive. More importantly, certain sectors of South Africa’s economy, specifically those with process emissions, could not be changed to reduce emissions. Process emissions are part of the chemistry of the products being produced. Imposing a carbon tax on these sectors would not result in reduced emissions, similar to what is being seen with the Environmental Levy. Furthermore, increasing the Carbon Tax rate will not change these sectors, it will simply close them down. Also, consideration should be given to exempt process emissions from the carbon tax, as was done in most international Carbon Taxes.

Deloitte was concerned with the large quantities of additional work around the carbon tax that has been assigned to the DEA. The DEA had already been slow to respond to comments on the GHG reporting regulations and technical guidelines, as well as in approving carbon budgets. Many additional submissions in terms of voluntary carbon budgets and emissions factors were expected to follow the implementation of the Carbon Tax. If the DEA could not manage this workload in a timeous manner, this could delay taxpayers from receiving allowances or appropriate emission factors.

Overall, Deloitte agreed that South Africa must take steps to combat climate change. However, implementing a flawed mechanism will only cause harm and have no real impact on GHG emissions. Ultimately, energy use is responsible for 80% of South Africa’s GHG emissions. It therefore believed that the most effective tool for government to reduce South Africa’s GHG emissions is a carbon budget system with input from the Integrated Resource Plan for energy. Furthermore, it suggested that the carbon tax be implemented with a universal 100% tax-free threshold initially as suggested by the Davis Tax Commission so that the potential consequences could be properly understood and evaluated.

Energy Institute submission
Prof Phillip Lloyd, Energy Institute, Cape Peninsula University of Technology, said the carbon tax must be rejected outright. It had to be interrogated why South Africa should introduce a carbon tax. The country was already a low emitter and, importantly, it had not grown its emissions as its BRICS partner nations have. It could well afford to wait to see whether other nations stop their growth in emissions. Among developing nations, there was little sign of this happening.

Furthermore, there was a strong possibility that a carbon tax will not reduce South Africa’s emissions, but merely slow their growth. He knew of only one jurisdiction where a carbon tax has reduced emissions, and that is British Columbia in Canada. It was a rather special case, because most of its emissions are from the transport sector. Over 80% of electrical generation is from hydropower, so that a carbon tax was essentially a fuel tax. Elsewhere a carbon tax has had some impact – occasionally in the wrong direction. India, for instance, introduced a significant tax on coal. However, it has not had a detectable impact. Europe has established a wide-ranging carbon credit scheme to encourage tax offsets. It had been so successful that the price of carbon has fallen to a few dollars per tonne, at which point it is almost valueless and the tax becomes merely punitive.

The draft Integrated Resource Plan (IRP) 2016 proposed closing so many coal-fired plants that the demand for coal will decline by 37%. This would probably result in more than 100 000 people losing their jobs, affecting over half a million dependants. Under this scenario, by 2035 South Africa’s GDP growth will have been reduced by almost R1 trillion and employment would be almost 5 million less than what could have been achieved. A revised IRP would seem to be essential. Certainly, there were economic opportunities in extending the life of the existing infrastructure. Further, Treasury suggested that it might be possible to offset any tax via carbon credits. It appeared to have been overlooked that there have already been some 300 attempts by South African entities to achieve carbon credits, of which about 20 have been successful for a few years before being abandoned in the face of a long-term fall in the value of carbon.

In conclusion, the evidence for catastrophic change due to emissions of greenhouse gases into the atmosphere was far too equivocal to form the basis for action – much of the observed climate change is natural. The international commitments South Africa had made were deeply flawed and equally provide no basis for action. Any carbon tax was likely to damage the economy and lose jobs, because the country’s dependence on fossil fuels is so large that it will take many years before a significant fraction of that dependency could be closed. Any carbon tax will therefore not have the desired effect of reducing South Africa’s emissions significantly, and will certainly increase the costs of energy, so making the country less competitive and reducing the ability to create jobs even further.

Paper Manufacturer’s Association of South Africa (PAMSA) submission
Ms Jane Molony, Executive Director, PAMSA, noted that the Bill is supposed to be implemented with effect from 1 January 2019. PAMSA believed that this was premature due to the uncertainties surrounding the performance allowance, sequestration calculations and the carbon offset regulations, none of which have been finalised or are likely to be finalised timeously.

On the Bill, PAMSA proposed the following definition for ‘Fugitive Emissions’: "fugitive emissions" means emissions that are not emitted through an intentional release through stack or vent including during the extraction, processing, delivery and burning (for energy production) of fossil fuels.

On Section 3, the Bill identifies persons subject to tax as: entities that are liable for carbon tax are defined in the Explanatory Memorandum (Annexure 1) as those entities engaged in activities within the indicated IPCC source categories and above the threshold, (those entities with a combined boiler capacity equal to or above 10MW heat input); and certain entities that fall within the pulp, paper and printing sector engage in activities which fall under a different source code. PAMSA emphasised the need for clarity about whether boiler capacities of the operations within this entity but outside of the sector, would be excluded from the combined boiler capacity calculation, when determining the threshold. Notably, there are boilers owned and operated by pulp and paper sector entities that are standby boilers as well as those only operated for a small percentage (1 to 10%) of the time when there is a boiler failure in one of the continuously operating boilers. PAMSA recommended that these boilers not be taken into account when determining the combined installed capacity. Also, certain of the entities within the pulp and paper sector will be excluded from the tax by virtue of their combined boiler capacity being below the threshold. If these operations are producing the same products as other entities in the sector that are liable for the tax, then they have a cost competitive advantage.

On Section 6 (1), PAMSA proposed that S be determined as a five year moving average, for the following reasons:
Plantation forests are relatively slow growing compared to other crops
Changes in pulp production due to swings in demand for pulp and paper can result in relatively large increases or decreases in plantation carbon stocks in a 12 month period
A moving average will smooth out these short term impacts
It followed that during some seasons sequestration value (S) will be high and in others sequestration value (S) will be low
By smoothing out the swings, using a moving average and allowing companies to claim a credit in periods when harvesting is low as a result of lower demand, will result in a more equitable application of the tax
PAMSA therefore proposed that the sentence at end of Section 6(1) (p16 &17) be deleted: “Provided that where the number in respect of the determination of the expression "(E– D - S)" in the formula is less than zero, that number must be deemed to be zero”; and replaced with: “If X is negative this amount should be allowed to be used as a credit to offset future debits.”

Ms Molony said there were issues with respect to S if its calculation remained in its current form.
The legislation is retrospective when it accounts for emissions (decay rate of pulp and paper products produced) but not retrospective when it accounts for sequestration (initial planting of trees and then storing the carbon in the products) and is therefore biased.
In this context an entity which used to have a fibre board mill supplied from its own plantations and which shut down, will be paying tax because the plantation is given zero for its carbon sink but the entity will still be liable for the decay of the fibre board products which it produced in the past

On Section 6 (3), PAMSA felt the definition of “sequestrate” was broad and would allow all forms of carbon sequestration that conform to DEA verification to be claimed by any sector liable for tax under the Carbon Tax Bill. In principle PAMSA supported the deduction of sequestered carbon by other sectors who by the nature of their business or by particular intent reduce their net carbon emissions through carbon sequestration, however it requested a more explicit statement relating to the inclusion of plantations in any qualifying statement relating to carbon sequestration. PAMSA further requested that the definition of sequestration be changed to the following, (or words to that effect), to accommodate plantation farming where sequestration of carbon via the sustainable cultivation of trees is of enormous importance and benefit to the environment: "sequestrate means the process of storing a greenhouse gas or increasing the carbon content of a carbon reservoir which includes forests and sustainable plantations in particular and all other verifiable forms other than the atmosphere in general.”

In conclusion, the South African Pulp and Paper industry contributed in excess of 9 Billion rand to the country’s balance of payments and (and only about 0.8% of the country’s greenhouse gas emissions) in 2016. Its value chain from planting trees to recycling employs around 150 000 people. It existence leads to extensive rural development including roads clinics and schools. Therefore, the inclusion of the S in recognition of sequestration was welcomed but if appropriate methodology is not developed it will negatively impact the fibre portion of the value chain and may result in a reduction rather than an increase of planted forests.

Discussion
Ms Tobias wanted to know if Prof Lloyd used National Aeronautics and Space Administration (NASA) or UK Space Agency data in his analysis. Were there any fundamental contradictions between NASA and UK Space Agency data, and that which he used? Is there a different emission component produced by biomass as opposed to the ones identified.

Prof Lloyd replied that literature and datasets used in his analysis were largely consistent.

Mr Mapulane indicated it was not the first time that Prof Lloyd had made submission to the Portfolio Committee on Environmental Affairs in particular. However, most Members and stakeholders were not in agreement with his viewpoints. Prof Lloyd’s underlying assumptions were fundamentally problematic and most of the Intergovernmental Panel on Climate Change (IPCC) quotations cited were taken out of context. The world had to deal with climate change concertedly.

Prof Lloyd pointed out that he was a contributor to IPCC, and was in the early 2000s nominated for the Nobel Prize. He had contributed significantly to IPCC work, and was not alone in these positions.

WWF South Africa submission
Ms Louise Naude, Programmes Manager, WWF, said WWF South Africa continues to welcome the establishment of a carbon tax to facilitate South Africa’s transition to a low-carbon economy. WWF South Africa was therefore glad to see that this much-delayed legislation was close to submission to Parliament, and urged that an effective carbon tax be promulgated as soon as possible. Given the urgency of the issue, the country can ill afford more delay.

However, WWF felt the carbon tax regime was inadequately priced. WWF has previously asserted that the price of R120/t was insufficient to drive significant behavioural change. Given that this is based on modelling and literature from many sources, and even National Treasury researchers, WWF believed it is well-founded, the current iteration waters this down considerably. Whilst the clarity on the rate of increase was welcome, the reduction in the final price coupled with a stabilisation in the second phase renders it largely ineffective as a driver of change. The carbon tax need not be the exclusive driver of a low-carbon transition, but it is a key element of the national strategy, and therefore adequate pricing was critical. It should be noted that that the effectiveness of this tax by 2025 and 2035 (cited in the World Bank modelling report) assumed a 2016 start, so the current start date of 2019 (at the earliest) implies that effective rates will be considerably lower. In addition, the price increases are lower than specified in the original 2013 Policy Paper. Since the remedy and adaptation of climate change is difficult to estimate, it was hard to land on solid numbers for this, but a carbon price in the range of US$30 to US$46 in 2025 was typically used in relevant literature. The proposed price (under US$10) is well below this level. Moreover, since the revenue was not being ring-fenced for adaptive and remedial effects, it was unclear how the remediation and adaptation will occur. If Treasury truly saw the carbon tax as a means to implement a polluter pays principle, then it is essential that the proposed price accurately reflects the potential damage and impacts of continued carbon emissions. WWF therefore calls for a revision of the pricing strategy. The initial price should at a minimum be pegged at the same level as originally proposed (approximately R150 in 2018 rand), and should follow a more aggressive increment to enable a suitable price of near US$40 before 2030, or at a level that was likely to adequately drive significant change.

On carbon offsets, WWF called to limit offsets to sectors for which there is no alternative means of mitigating emissions, and not as a blanket allowance. Further, there was need for alignment of the tax with the broader mitigation system. WWF South Africa therefore called for a carbon tax to be charged against all emissions, with a lower rate for those emissions within company carbon budgets, and a significantly higher penalty rate for emissions exceeding the budget. Clarity on this alignment must be provided as soon as possible.

In conclusion, the carbon tax is a critical tool in South Africa’s climate change toolbox, necessary to both meet international obligations and address local constitutional and developmental requirements. An inadequate tax runs the risk of blunting this tool, and hindering South Africa’s chance at achieving an easy transition to an inclusive low-carbon economy. The Urgenda court case in the Netherlands and similar cases around the world have demonstrated that all nations have a legal obligation to protect their citizens from climate change, and must take clear and forthright action to do so. WWF South Africa strongly felt that the government will be better able to meet this obligation through appropriate amendment and rapid promulgation of this carbon tax Bill.

Eskom submission
Eskom said the entity was very supportive of the proposed carbon tax. Eskom and the National Treasury had been engaging regarding the proposed carbon tax since 2010. Two main categories of issues were discussed and still remained of concern, these being: alignment with the Department of Environmental Affairs Greenhouse Gas management processes, and Electricity Price impact.

On alignment with the Department of Environmental Affairs Greenhouse Gas management processes, two particular areas of alignment were sought: the mandatory GHG reporting regulations (not yet tested as first submission is due 31 March 2018), and the company-level carbon budgets (expected to be mandatory from 1 January 2021). With respect to the company-level carbon budgets, a World Bank-sponsored study recommended that a “tax enforced budget” option be adopted post-2020 whereby “entities pay a tax on those emissions in excess of their budget”. Therefore, Eskom proposed that instead of implementing one form of the carbon tax in 1 January 2019, efforts should be directed at delivering the fully-integrated “tax enforces budget” option from 1 January 2021 instead. Further, the integrated “tax enforces budget” option should be considered as it meets the alignment imperative and given that South Africa’s GHG emissions (inventoried in 2010 and 2012) remain at 518MtCO2eq which is within the benchmark trajectory range, expressed in SA’s nationally-determined contribution for 2025 and 2030. Also, electricity sector emissions have declined consistently since 2013/14 down to 211 MtCO2 in 2016/17, and national GHG emissions could be expected to be even lower than in 2012.
On Electricity Price impact, the Integrated Resource Plan 2010 and 2016 (draft) also already included a greenhouse gas emissions cap on the electricity sector. The cap constrains what type of new capacity must be built and by when National Treasury should have committed to minimising the impact on the price of electricity in the initial phase. However, the “renewables rebate” previously granted in recognition of the “renewables premium” already built into the electricity tariff; has been limited in this second draft to 31 Dec 2022. This will result in an abrupt increase in the electricity tariff from 1 July 2023 in order or recover an approximately R13 billion per annum in addition to the current levy.

Overall, Eskom supported carbon pricing. However, there was need to look to at what is fit for purpose before its implementation.

Legal Resource Centre submission
Mr Lucien Limacher, Legal Resource Centre, commented on compliance and enforcement of the Bill. There are two main departments that will deal with compliance and enforcement as outlined in the Bill itself; the Department of Environmental Affairs and National Treasury. In terms of becoming compliant a carbon emitter had to first report the quantity of its Greenhouse Gas use. This (if the current regulations are in place) is undertaken by the Department of Environmental Affairs in terms of the Bill section 4(1) read with the National Greenhouse Gas Emission Reporting Regulations read with Declaration of Greenhouse Gases as Priority Air-Pollution. The second compliance obligation was for the carbon emitter to pay for the amount of Greenhouse Gas emitted after all the deduction have been calculated.

The first issue pertaining to compliance was as follows: it is not clear if the Environmental Regulations stated earlier were going to be used as the reporting methodology. The regulations mentioned earlier were promulgated in terms of the National Environmental Management Air Quality Act and have not been linked to the Bill. The only section that is relevant which might potentially link the Bill is in when the following was stated, “the regulations are created, inter alia, to inform the formulation and implementation of legislation and policy”, however as stated earlier the Bill is a Finance Bill that does not deal with environmental law issues but for the fact that it is a tax on an environmental impact. There is a mention in the socio-economic impact assessment that the Department of Environmental Affairs together with the Department of Energy has to implement a monitoring system, no further detail was given, however this is not clearly defined in the Bill and therefore we have to revert to what is stated in the Bill as that is what will become law.

The above clarification is critical for the following: the competent authority in the Regulations mentioned earlier is the Department of Environmental Affairs, however, if this is not the regulations that will be used then the Bill will have to revert to section 4(2) wherein the competent authority will be the Commissioner for the South African Revenue Services. This of course will create a problem as the Commissioner and the Commissioners’ department will have to become an expert on carbon scientific reporting detailing the emissions. Or at the very least it will have to increase its compliance and monitoring officers. Further, it was stated in terms of the Socio-economic Impact Assessment that National Treasury will have to ensure allocation of resources to minimise the impact on incomes for poor and working people and also that they would have to budget allocations and fiscal expenditure. It would appear that in terms of the Budget speech this was not taken into consideration.

Mr Limacher noted that in its current form, the Bill has no direct provision for any enforcement system. The only enforcement, system that will be in place pertains the Customs and Excise Act. At this juncture it is important to note again it is vital to find out whether the regulations detailed above are going to be the reporting method for calculating how much emissions have been emitted and who is the responsible authority. Depending on whether there is going to be a reporting system the following was brought to the Committees’ attention:
If the regulations are not the correct ones in terms of enforcement, then the enforcement will be left to the Commissioner. In terms of this, the Commissioner is either not the competent authority in terms of it ability and therefore needs assistance or the Commissioner will have to employ further experts to determine liability.
In terms of carbon offsetting there no detail about who will monitor and check that such offset project have indeed been implemented. Furthermore there is no detail on how enforcement will be used when it comes to offsetting.

Furthermore, the current edition of the Bill did not include a guarantee of revenue recycling. The only mention of the issue of revenue recycling is in the explanatory memorandum marked annexure 1 wherein it explained that the Bill will be revenue neutral through revenue recycling by reducing the electricity generation levy and renewable energy premium credit. However, there is nothing mentioned in the Bill itself regarding detailed linkage to revenue recycling. It must be noted that this aspect is critical. Without proper designation of Revenue Recycling the poor are going to have to pay higher rates for electricity because there is no guarantee that the tax derived from the Bill will be ear-marked for reduction in electricity. Especially when it is known that Eskom is suffering financially. It is imperative therefore a policy or agreement is concluded with Eskom before the Bill becomes legislation.

Lastly, there was no mention on how cost of food and other goods are going to be revenue recycled. Accordingly, the Fuel levy is going to increase due to the Bill and this will of course naturally impact food prices. It is suggested that the Fuel levy be re-looked at in terms of the potential revenue recycling to minimise increase of vital foods on communities. Failing which this could impact the right to food in terms of the Constitution.

In conclusion, the Legal Resources Centre is cautiously in accordance with the Bill. However, there had to be a plethora of issues to be addressed before Parliament is ready to allow the Bill to be enacted.

COSATU submission
Mr Matthew Parks, Parliamentary Coordinator, COSATU, submitted that climate change and its resulting consequences were a matter of great importance and impact to workers, their families and communities. COSATU appreciated the need to change the way things are done as a matter of the highest urgency if climate change was to be delayed, halted and ended. It appreciated the need for government intervention in a variety of mechanisms to intervene to ensure that society changes how it operates and moves to a green economy and future. It understood that taxation is a critical tool for government to encourage and force industry and consumers to adapt their destructive behaviour. However, COSATU was equally concerned that government is seemingly focused on taxation as the only mechanism available to induce change, and is distressed that government had no other macro plan to move society towards a green future.

COSATU noted government’s tabling of the Carbon Tax in Parliament. It accepted the painful fact that tax is one of government’s powerful tools of influence and coercion. COSATU does believe that industries which have polluted and caused climate change need to adopt green methods and technologies. It accepted that those who can but do not wish to change can face tax penalties for not doing so. COSATU appreciated that this Bill is intended to establish a framework and that the initial tax thresholds in many cases are set at moderate levels, and further appreciated that large exemptions have been given to agriculture. Agriculture is the largest employer of workers outside of the public sector. It is an extremely fragile and vulnerable sector whose workers have low levels of education and few alternative means of employment. Workers’ lives and homes depend upon the sustainability of agriculture. Whilst it acknowledged the mining industry as a heavy polluter, the Union was concerned that it is in an extremely fragile state and has shed over 70 000 jobs in the past two years.

COSATU was concerned that the Carbon Tax is seemingly government’s only macro tool to address the crises of climate change. This is far from enough to address this global crisis. It was further concerned that it is being introduced in addition to increases in the VAT, fuel levies, and health promotion levy and below inflation income tax bracket adjustments as well as reductions in state expenditure and public sector employment. COSATU was also worried that government is introducing a raft of new taxes but has no plans to soften their blows to the poor and the working class. These taxes treat the rich and the poor equally and are thus all regressive and not progressive.

COSATU notes that government said the carbon tax was not intended to raise funds but rather to affect industry and consumer behaviour. It is often difficult to believe governments when it comes to taxation. It thus proposed the following with regard to government’s planned carbon tax:
Any carbon tax revenues generated must be invested in green economy jobs targeting workers who may have or may lose their jobs as a consequence of the transition.
Government provide incentives e.g. rebates, lower taxes, subsidies, support etc. to industries that invest in and create new, permanent and decent green economy jobs.
Eskom tariff hikes be limited to inflationary levels and not allowed to continue with the above inflation massive continuous hikes exploiting the poor.
Government unveil a mitigation plan for the poor to cope with expected increase in prices as a consequence of the carbon tax, e.g. expanding VAT exempt goods to include other essential foods and beverages, medicines, sanitary pads, toiletries and school supplies.

COSATU was willing to play its part, and hoped that government and industry would come to the party and accept their failures to lead and their need to show leadership.

Discussion
Mr A Lees (DA) noted that Eskom was expressing its commitment to this whole process. He asked Eskom to explain why it was dragging its heels in the independent power producers’ programme. The programme had yet again been stalled despite the recent announcement made by the Minister of Finance.

Eskom said it could not sign the renewable independent power producers’ (IPP) agreement the day before due to disagreement with the National Union of Metalworkers of South Africa (NUMSA) and Transform South Africa. The Department of Energy had put out a statement and the matter had gone to court. The agreements could only sign after the court proceedings on 27 March. On why it was dragging its feet, there was a huge difference between the revenue models around electricity pricing and the IPPs’ calculations vis-à-vis Eskom’s base prices. Consequently, some rating agencies had felt Eskom was going against its fiduciary duty by signing on IPP agreements that are more expensive than its own generation. However, the discussions were still underway, and there was a lot Eskom was doing to support renewal energy.

Mr Carrim indicated this was one of two tranches of public hearings. He urged stakeholders and Treasury to engage further outside parliamentary processes. There would be a workshop to enable Members to get a technical grasp of some of the issues on a later date. Before the end of June, stakeholders would them appear before the Committees to take the process forward. However, the proposed VAT and the Public Investment Corporation Bill were the Standing Committee on Finance’s priorities at the moment.

The meeting was adjourned.

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