Carbon Tax Bill; Customs & Excise Amendment Bill; PIC Amendment Bill: briefing

NCOP Finance

06 March 2019
Chairperson: Mr C de Beer (ANC, Northern Cape)
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Meeting Summary

The Carbon Tax would be implemented from 1 June 1 2019 by Treasury. It was part of was part of South Africa’s commitment to global efforts to reduce greenhouse gas emissions. The tax would start at a low rate of R120 per ton. However, a range of offsets and incentives would allow companies to avoid up to 95% of the tax. The aim was to allow time for behaviour changes to be made over the coming five years before the tax was ratcheted up. Extensive consultation and hearings had resulted in changes being made to the Bill now before the Select Committee. Treasury gave an undertaking that any new issues raised in the Select Committee hearings would be taken into account.

The Select Committee was given a detailed briefing on the incentives and offsets which would reduce the effective tax to between R6.00 and R4.00 per ton of carbon emitted. There would be no impact on electricity prices in the first five years of implementation of the Act.

Members asked about the advisability of imposing a further tax on corporations; how local governments would be affected; and if revenue raised from the tax would be channelled to environmental projects.

Treasury replied that the tax would correct a failure by markets to price in the cost of externalities such as a higher incidence of asthma among people living in areas with high sulphur emissions. Municipalities, especially those which generated their own electricity, had been involved in the development of the tax. Carbon offsets provided in the tax could help fund municipal projects to convert waste to energy.

While the tax revenue would not be earmarked for specific projects there would be efforts to ‘recycle’ it to support initiatives such as the installation of solar water geysers and free basic electricity for poor households.

The Committee was briefed on the need to amend the Customs and Excise Act to allow for the administration of the Carbon Tax.

The Standing Committee on Finance Chairperson briefed the Committee on the Committee Bill drafted by his Committee in response to concerns about irregularities at the Public Investment Corporation. The Bill would make the PIC accountable to Parliament for its investments and allow for union representation on the PIC Board. He noted that while the Bill was being approved in the National Assembly there had been an approach from the Mpati commission of inquiry currently investigating the Public Investment Corporation about whether the bill processing could be stopped while the commission did its work. While his Committee had the highest respect for the commission, it was opposed to abandoning its Bill which should be seen as a transitional measure until the Cabinet acted on the commission’s report later in the year.

Meeting report

Carbon Tax Bill: briefing
The National Treasury delegation comprised Mr Ismail Momoniat; Ms Yanga Mputa, Chief Director:  Legal Tax Design; Dr Memory Machingambi, Senior Economist: Environmental and Fuel Taxes; and Ms Sharlin Hemraj, Director: Environment and Fuel Taxes. Also present was Mr Jongikhaya Witi, Chief Director: Climate Change Monitoring at Department of Environmental Affairs.

Mr Ismail Momoniat Deputy Director General: Tax and Financial Sector Policy, noted that global warming was the biggest challenge facing mankind and the world was racing against the clock to deal with greenhouse gas emissions. The Carbon Tax Bill before the Committee would give effect to South Africa’s own voluntary commitment to curb greenhouse gas emissions which it made when it ratified the Paris Agreement in 2016. The carbon tax was just one attempt to put a price on carbon emissions in line with the “polluter pays” principle.

Mr Momoniat said National Treasury was sticking to the June 1 implementation date. This followed extensive consultations over several years leading to hearings before the National Assembly’s Standing Committee on Finance. These had resulted in several changes being made to the draft legislation. He gave an undertaking that the Treasury would consider any new issues that might be raised in the hearings before the Select Committee on Finance.

The carbon tax would start at a very low rate for the first five years before being ratcheted up. Companies had been given ample notice to change their behaviour.

The Treasury delegation made a slide presentation on the background to the tax and the way in which it would be implemented.

Ms Sharlin Hemraj, Director: Environment and Fuel Taxes, said the tax would apply to combustion-related emissions from the energy sector, process emissions, including those from the cement, iron and steel sectors, and fugitive emissions which came from mining, specifically coal mining. These were all emissions which could be measured and calculated:
▪ The tax would be R120 a ton of carbon emitted, but various offsets and incentives would reduce the effective tax.

▪ All activities would qualify for a basic 60% tax-free emission.
▪ There would be a maximum 10% tax-free allowance for trade exposure aimed at companies which argued that their exports would be compromised.
▪ A 10% tax-free allowance for process and fugitive emissions which were difficult to mitigate in manufacturing and mining.
▪ A performance allowance of up to 5% for companies which exceeded benchmarks on emissions for their sectors. This was intended to encourage firms to reduce the intensity of producing a particular product.
▪ A 5% tax-free allowance for providing the Department of Environmental Affairs (DEA) with data on emissions under the Carbon Budget programme in which DEA sets emissions targets for companies.
▪ An allowance for carbon offsets for firms which invest in projects to reduce emissions. The allowance would be capped at 5% for process emissions and 10% for combustion emissions.
The allowances ranged from 60 to 95% meaning that the effective tax would be between R6.00 and R48.00 per ton of carbon emitted.

There would be no impact on electricity prices for the first five years. An electricity generation levy paid by Eskom and other producers would be offset against their carbon tax liability. Eskom would also receive credit for the renewable energy premium built into the electricity tariffs.

Although Treasury was opposed to earmarking revenue raised from the carbon tax, efforts would be made to recycle such funds towards emission reduction. For example, funds could go to supporting the installation of solar water geysers; enhanced free basic electricity for low income households; improving public transport and shifting freight from road to rail.

Customs and Excise Amendment Bill: briefing
Ms Yanga Mputa, Chief Director:  Legal Tax Design, explained that implementation of the Carbon Tax would require a separate amendment to the Customs and Excise Bill.

When the Carbon Tax Bill was first published it contained an amendment to the Customs and Excise Act to allow for its administration under that Act. However, the State Law Advisers pointed out during the certification of the Bill that, while the Carbon Tax Bill was a Money Bill under Section 77 of the Constitution, the provision dealing with administering the tax fell under Section 75 of the Constitution which dealt with administration bills. That was why there were two Bills before the Committee.

The Chairperson said the briefing made it clear that there would have to be intensive and robust oversight of the implementation of the Carbon Tax Bill.

Mr F Essack (DA; Mpumalanga) asked how much South Africa contributed to global greenhouse gas emissions. He asked if, in a developing economy, a further tax on corporates could be justified. He commented that Eskom’s coal-fired power stations were the largest emitters yet they would largely be exempted from the tax for the next five years. Would Eskom in the medium term be able to afford the tax and would they, as he put it, come to the party?

Mr Essack asked if there were at checks and balances to ensure that carbon tax revenues were channelled specifically to environmental uses.

Ms Z Ncitha (ANC, Eastern Cape) said she had not heard much about what was happening at the municipal level and asked if the SA Local Government Association (SALGA) had been involved in the process. She asked what systems would be in place to monitor if emissions targets were being met.

Ms Hemraj replied that South Africa made a commitment at the Paris Climate Agreement in 2016 to reduce emissions. In common with other countries, South Africa had set a target that its emissions would peak at a specific level, remain at a plateau and then decline. South Africa ranked around 12th or 14th in the world for absolute emissions. However the challenge was that per capita emissions of around 12 tons were comparable to developed countries.

On taxing corporates, she replied that in calculating the costs of producing goods and services, the market failed to price in the cost to society of externalities such as increased incidence of asthma among people living in areas with high sulphur dioxide emissions. The tax was an instrument for correcting that market failure. It aimed at encouraging people to change their behaviour by starting at a marginal rate and giving industries time to adjust.

On Eskom, Ms Hemraj replied that government faced challenges in the energy sector from a financial as well as an environmental perspective. Financial institutions and the World Bank were looking at not subsidising coal-fired power stations in future, so Eskom should be viewed against this broader perspective.

On using the revenue from the tax, Ms Hemraj replied earmarking it for environmental purposes only would be difficult because the range of incentives meant that as little as 5% of emissions might be taxed. This would be insufficient to support specific programmes. However, Treasury was committed to various ways of recycling the revenue, as outlined in the tax proposals.

Municipalities had been engaged in the process of formulating the tax over the past eight years, specifically those who generated their own electricity.

Municipalities have options for transforming waste to energy, for example, using methane gas from landfills to produce electricity. They could access the offset allowances to make those projects more viable and sell them to companies that wanted to reduce their emissions.

On the monitoring of emissions, Ms Hemraj replied the tax would be administered by Customs and Excise but they would rely heavily on the Department of Environmental Affairs (DEA) to monitor emissions.

Mr Jongikhaya Witi, Chief Director: Climate Change Monitoring at the DEA, said that DEA had several systems for monitoring and evaluating emissions. There were regulations stipulating what emissions had to be reported and how this should be done. DEA was also enhancing an online reporting system, the National Atmospheric Emission Inventory System, which facilitated the reporting of air pollutants.

Public Investment Corporation Amendment Bill: briefing
As this was a Committee Bill drawn up by the National Assembly’s Standing Committee on Finance, its Chairperson, Mr Yunus Carrim, briefed the Select Committee on the Bill, in terms of parliamentary procedure.

Mr Carrim said his Committee began to pick up allegations about wrongdoing in the Public Investment Corporation (PIC) and could not fold its arms and do nothing. The PIC appeared before it several times but while the answers given by the PIC appeared credible, the Committee could not tell whether they were true.

The people who were passing on information were scared and feared for their jobs.

In 2017 the Public Servants Association and unions were up in arms about the PIC offering loans from public service workers’ pension funds to ailing state-owned enterprises.

The Committee then set about getting approval from the National Assembly for it to craft a Committee Bill.

Mr Carrim said the Bill aimed to make the PIC accountable to Parliament under the law. The reason was that if the PIC lost government worker funds in defined benefit pension funds, the government would have to come to the rescue.

Mr Carrim outlined the provisions in the Bill:
▪ The Minister of Finance would have to submit to Parliament any regulations governing the PIC.
▪ Any deviations from the Public Finance Management Act would have to be reported to Parliament.
▪ The PIC would have to declare all investments, both listed and unlisted. Mr Momoniat said there were claims of ‘skulduggery’ in the investments in unlisted companies.
▪ Three union representatives would sit on the PIC Board of ten non-executive directors. Two of these would come from the largest public service union.
▪ The Minister would delegate the Deputy Minister of Finance to chair the board. If for some reason this was not appropriate - for example a conflict of interest - the board would be chaired by another deputy minister from the economics cluster.

Mr Carrim said there had been much criticism of this provision about the PIC board chair. One reason for having it was that the fiscus was ultimately responsible for government’s defined benefit pension funds. Secondly, with unions represented the board, a person with political gravitas was needed to manage the unions. The Bill would provide guidelines for investments by the PIC. While depositors would set the investment mandate, this should be in line with the guidelines.

Mr Carrim said while the Committee was busy with its Bill, the President had appointed a commission of inquiry into the PIC. After much discussion the Committee decided to press ahead with its Bill.

Mr Carrim said the Committee had the highest regard for the commission of inquiry. The aim of the Bill was not to undermine the work of the commission. If the Committee did not go ahead with the Bill, the same challenges it had considered would arise later in the year.

Mr Carrim said that after the Committee had voted on its Bill, the commission of inquiry asked if anything could be done to stop the bill process.

He said the Standing Committee on Finance was opposed to this. The commission of inquiry was an executive structure. Its work would have to be processed by the executive which would then bring a Bill to Parliament. That was unlikely to happen before August which was too long a gap given all the work the Committee had done and the public hearings it had held. The proposed Bill should be seen as a transitional measure.

Mr Carrim said it would set a precedent if the commission of inquiry could stop the processing of the Bill after the National Assembly had voted on it. In his view it would be foolhardy to dump the Bill after all the hard work that had gone into it. However, the matter was now in the hands of the Select Committee.

Parliament’s Senior Legal Adviser, Adv Frank Jenkins, told the Committee that allowing the commission to stop the work of Parliament would have serious implications for the constitutional separation of powers.

The Chairperson said the Committee would hold public hearings on the Bill. It would vote on the Bill on March 19 and then take it to a plenary session of the NCOP.

The meeting was adjourned.

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