ATC190203: Report of the Standing Committee on Finance on the Draft Report on the Carbon Tax Bill 2018, dated 3 February 2019
Finance Standing Committee
Report of the Standing Committee on Finance on the Draft Report on the Carbon Tax Bill 2018, dated 3 February 2019.
- Need for the Carbon Tax Bill
South Africa ratified the Paris Agreement in November 2016 and endorsed the submission of its Nationally Determined Contribution (NDC) which requires that greenhouse gas (GHG) emissions peak from 2020 to 2025, plateau for a ten-year period from 2025 to 2035 and decline from 2036 onwards. The NDC noted carbon tax as an important component of our mitigation policy strategy to lower GHG emissions.
The Carbon Tax Bill gives effect to the polluter-pays-principle and aims to price GHG emissions and ensure that firms and consumers take these costs into account in their future production, consumption and investment decisions. The tax will assist in reducing GHG emissions and ensure that South Africa meets its Nationally Determined Contribution commitments under the 2015 Paris Climate Agreement.
The implementation of the carbon tax will be complemented by a package of tax incentives and revenue recycling measures to minimise the impact in the first phase of the policy (up to 2022). These measures include commitment to a zero impact on the price of electricity through a tax credit for the renewable energy premium built into the electricity tariffs, a credit for the existing electricity generation levy and the extension of the Energy Efficiency Savings tax incentive which further provides sectors with flexibility to transition their activities through investments in energy efficiency, renewables and other low carbon measures. The first phase will be from 1 June 2019 to 31 December 2022, and the second phase from 2023 to 2030.
The design of the carbon tax also provides significant tax-free emissions allowances ranging from 60 per cent to 95 per cent for the first phase. This includes a basic tax-free allowance of 60 per cent for all activities, a 10 per cent process and fugitive emissions allowance, a maximum 10 per cent allowance for companies that use carbon offsets to reduce their tax liability, a performance allowance of up to 5 per cent for companies that reduce the emissions intensity of their activities, and a maximum 10 per cent allowance for trade-exposed sectors. This will result in a relatively modest effective carbon tax rate ranging from R6 to R48 per ton of CO2 equivalent emitted.
- Main Issues Raised in the Public Hearings and Deliberations on the 2017 Draft Bill
The Bill was submitted to Parliament in August 2017 noting carbon tax as an integral part of the system of implementing government policy on climate change. Although the Bill, as a Money Bill, was referred only to Scof, the Committee decided to process it jointly with the Portfolio Committee on Environmental Affairs (Pcea) until the formal voting stages.
Public Hearings on the Bill were held on 14 March 2018. Meetings on the 2017 draft Bill and 2018 tabled Bill were also held on 13 February, 7 June, 27 November, 4 December, 5 December 2018 and 5 February 2019.
Apart from these formal parliamentary meetings, on the recommendations of Scof and Pcea, National Treasury and DEA met with stakeholders several times to process issues in the Bill. This is in addition to the consultations held by the National Treasury and the Department of Environmental Affairs over the past 9 years on the Carbon Tax Discussion Paper published in 2010, Carbon Tax Policy Paper in 2013, Carbon Offsets Paper of 2014, the first draft Carbon Tax bill published in 2015 and second draft bill in 2017, as well as publication of the initial draft Regulation on the Carbon Offset in June 2016 followed by the second draft regulation in November 2018. In parallel, consultations were also held on the Emissions Intensity Benchmark report in May 2015, Carbon Tax Modelling study which was published in 2016 and the report on the Alignment of the Carbon Tax and Carbon Budget in 2017 which were undertaken through the Partnership for Market Readiness initiative implemented by the World Bank.
The Bill was amended to take into account comments from stakeholders, including:
- Section 6: Calculation of the carbon tax payable: Section 6(1) provides a deduction in the formula for sequestered emissions and petrol and diesel related emissions. The formula was changed to reflect the tax-free allowances provided for the liquid fuels sector – that is, petrol and diesel emissions.
- Section 17: Payment of the tax: The payment period for the tax was amended to allow for one annual carbon tax payment rather than two provisional payments which were deemed to be too onerous for taxpayers.
- Schedule 2: Domestic Aviation. There is an amendment to specify that only domestic aviation (activity 1A3a) will be subject to the tax and adjustments in allowances - increasing the maximum tax-free allowance from 90 to 95 per cent; increasing the basic tax-free allowance from 60 to 75%; and reducing the trade exposure allowance from 10 to 0 % to ensure alignment with the design of the global carbon offsetting mechanism.
- Schedule 2: Other Transport: The basic tax-free allowance for transportation was changed to allow for administrative ease of implementation. For activities 1A3 (b-e), the basic tax-free allowance was changed from 60 to 75%; trade exposure allowance from 10 to 0% and performance allowance from 5 to 0%.
- Schedule 2: Waste incineration: Basic tax-free allowance for waste incineration was changed to allow for alignment in the tax treatment of energy generation (including heat and electricity recovery from waste).
- Amendments to the 2018 Tabled Carbon Tax Bill
The above amendments are included in the 2018 Carbon Tax Bill tabled by the Minister of Finance on 20 November 2018. The policies reflected in the 2018 Carbon Tax Bill are a refinement of the 2013 Carbon Tax Policy Paper, the initial 2015 Draft Carbon Tax Bill and the 2017 Bill and incorporates public comments received on these earlier documents.
Additional submissions from stakeholders and verbal inputs on the tabled Bill were made to the Committee until 5 February 2019. During deliberations of the Committee on 5 December 2018, amendments to the Bill were proposed in terms of section 11, read with section 8(5), of the Money Bills and Related Matters Act, 2009 to address the following:
- Section 6: Calculation of the carbon tax payable
Section 6 has been amended to clarify that the calculation of the amount of carbon tax payable will also include those emissions calculated using the Department of Environmental Affairs’ (DEA) approved methodologies in terms of Section 4(1).
- Section 14: Limitation on the total tax-free allowance of 95 per cent
The limitation on the tax-free allowance applies for those activities that are subject to the carbon tax while the 100 per cent tax free allowance gives effect to an exemption for certain activities mainly within the agriculture, forestry, land-use and land-use change and waste sectors due to challenges with accurate measurement of emissions from these sectors. Section 14 of the Bill has been amended to clarify that the maximum 95 per cent tax-free allowance applies for all activities that are subject to the carbon tax and the 100 per cent tax free-allowance caters for exempt activities.
- Section 16: Tax period
This section in the Bill has been amended to reflect the effective date for implementation of the tax as 1 June 2019.
- Schedule 1: Calorific value for Bituminous coal
In Schedule 1: Table 1 stakeholders clarified that the calorific value for “other bituminous coal” was incorrect and should be 0.0243 instead of 0.0192. The emission factors and calorific values contained in Schedule 1 were aligned with the DEA Mandatory GHG Emissions Reporting Regulations and the Technical Guidelines to the regulation. In consultation with DEA, this proposal was accepted and the schedule has been amended to reflect the correct calorific value. The DEA will also amend the Technical Guidelines to correct this value.
- Schedule 2: Thresholds and allowance for process emissions
Stakeholders commented that certain activities fall within the category of process emissions including “Other Process Uses of Carbonates” and the “metal industry” and should qualify for a basic tax-free allowance of 70 per cent rather than 60 per cent and a total tax-free allowance of 95 instead of 90 per cent. The Bill has been amended to reflect the correct level of the allowances and applicable thresholds for the respective activities.
- Key policy differences
- Policy certainty - Alignment with the post 2020 Mandatory Carbon Budget System
Stakeholders raised concerns on the lack of policy certainty on the alignment of the carbon tax and carbon budget instruments post 2020; the proposed higher tax rate for emissions exceeding the level of the budget and prior consultation on the proposed alignment; and the practical and operational considerations to ensure an effective alignment of the carbon budget and tax. The National Treasury consulted industry in November 2018 and clarified that this was a proposal for possible alignment of the instruments which will form part of the consultation for the second phase (2022). It was emphasised that this process for the future does not (technically and legally) affect the Carbon Tax Bill and the tax over the next 3-4 years.
- Administration of the carbon tax - Use of the Customs and Excise Act to administer the tax
Stakeholders were of the view that the Customs and Excise Act is not the appropriate legislation under which to administer the carbon tax. It was argued that emissions are not a good as they cannot be easily identified and the Act requires licensing of warehouses; however, GHG emissions are reported at a company level. A separate administration system was suggested.
This view of industry stakeholders was not accepted. The administration of the carbon tax as an environmental levy under the Customs and Excise Act, 1964, is the appropriate mechanism as these taxable GHG emissions are environmentally harmful goods and the externality costs should be internalised. In addition, the use of the existing administrative provisions under the Customs and Excise Act, 1964, with its underlying licensing, accounting, collection and enforcement systems is more efficient as it prevents the creation of an entirely new duplicate carbon tax administration.
The Democratic Alliance (DA) has reservations on the Bill, including:
- While supporting enhanced energy efficiency, the Bill does not take into account the country’s stage of economic development and its global contribution to GHG emissions.
- The first period until 2022 should be considered a trial not only to adjust rates and tax-free thresholds but re-evaluate the need for the carbon tax in South Africa’s carbon reduction strategy.
- The revenue from carbon tax should be ring-fenced.
- The Bill does not allow for companies to achieve 100% tax free status.
- Implementation Timelines and Challenges in Implementation
- Implementation date
The implementation date of the carbon tax has been changed from 1 January 2019 to 1 June 2019. To ensure an effective carbon tax policy, a review of the impact of the tax will be conducted after at least three years of implementation of the tax and will take into account the progress made to reduce GHG emissions, in line with our country’s NDC Commitments.
Changes to rates and tax-free thresholds in the Carbon Tax Bill will follow after the review, and be subject to the normal consultative processes for all tax legislation.
- Update on regulations
Stakeholders were concerned that the regulations to the Carbon Tax Bill have not been finalised and that companies would not be able to determine the full impact of the carbon tax and their tax liability.
- An initial draft Carbon Offset Regulations and explanatory note was published for public comment and further consultation in June 2016. A revised draft Regulations on the carbon offsets taking into account public comment was published on 12 November 2018 for further public comment and consultation. National Treasury informed the Committee that about 26 submissions have been received and it will have a workshop in March 2019.
- The Committee was also informed that National Treasury and the DEA will also publish the draft trade exposure allowance regulations for public comments in February 2019. According to National Treasury, this follows an extensive consultation process to finalise the design and methodology for determining the trade exposure allowance for sectors in collaboration with Business Unity South Africa.
- According to National Treasury, the benchmark regulations will be finalised in consultation with stakeholders as part of a review which will be undertaken through the Partnership for Market Readiness initiative administered through the World Bank. Sectors including cement, liquid fuel refining, gold and platinum, ilmenite, clay brick manufacturing, ferro chrome, pulp and paper, iron and steel, coal-to-liquids, sugar milling, silico-manganese and nitric acid producers have developed and submitted benchmark proposals following extensive engagements with the National Treasury during 2018. An initial draft regulation will be published in March 2019 for further consultation.
- Administration of the carbon tax
The South African Revenue Services will administer the carbon tax in close collaboration with the DEA. To ensure a smooth administration process and to allow sufficient time for consultation on the rules to the Customs and Excise Act, the SARS will publish draft rules for further consultation by March 2019.
The National Treasury and the DEA are finalising the procurement process to appoint a service provider to assist with the modification of the National Atmospheric Emissions Information System (NAEIS) to allow for electronic reporting of GHG emissions. National Treasury informed Scof that a workshop with taxpayers and other interested stakeholders will be held during the 2nd quarter of 2019 on the proposed adjustments to the NAEIS.
- NEDLAC Jobs Mitigation and Creation Plans
Following the National Treasury Response to Public Comments hearing in June 2018, the Scof recommended that a task team be convened within the NEDLAC to engage on job mitigation and creation plans due to the carbon tax.
Government, business and labour established a Carbon Tax Bill Task Team in NEDLAC to develop Jobs Mitigation and Creation Plans. About 7 meetings of the task team were held from July to November 2018. A report outlining proposals for the plan as submitted by constituencies was finalised and submitted to the Scof in December 2018.
The Standing Committee on Finance, having considered and examined the Carbon Tax Bill [B 46-2018] (National Assembly – section 77) referred to it, reports the Bill with amendments [B46A-2018].
Report to be considered
The DA reserves its right.
COMPLIANCE WITH THE MONEY BILLS AND RELATED MATTERS ACT
- Requirements when amending a money Bill
Section 8(5) of the Money Bills and Related Matters Act, 2009 (Act No. 9 of 2009) requires that in amending a money Bill, Parliament and its committees must ensure an appropriate balance between revenue, expenditure and borrowing; the impact on the fiscal framework; and, take into account all public revenue and expenditure. Other requirements contained in section 8(5) of the Act relate mostly to expenditure.
Section 11(3) requires that in amending a revenue Bill Parliament and its committees must:
a. ensure that the total revenue raised is consistent with the approved fiscal framework and Division of Revenue Bill;
b. take into account the principles of equity, efficiency, certainty, ease of collection;
c. consider the impact on the composition of tax revenues;
d. consider regional and international tax trends; and
e. consider the impact on development, investment, employment and economic growth.
Section 11(5) requires that the Minister of Finance must be given 14 days to respond to any proposed amendment. On 30 January 2019 the Minister indicated that he supports the proposed amendments.
Section 11(6) provides that the report of the Committee must motivate amendments in terms of sections 8(5) and 11(3); and, include comments from the Minister on any proposed amendment.
The Carbon Tax Bill is a money Bill, specifically a revenue Bill.
- Potential impact of the amendments
- Impact on tax revenue
The proposed amendments to the calorific value for other bituminous coal from 0.0192 to 0.0243 TJ/ tonne implies that the emissions from using this type of coal for energy and non-energy purposes would be higher. This will mean a proportionally higher tax liability for an entity.
The proposed increases in the level of tax-free allowances from 60 to 70 per cent for certain industrial process emissions and an increase in the total tax-free allowance to 95 per cent to be aligned with other process emissions activities could result in a marginal decline in the total revenue from these activities.
Given that the number of companies impacted would be relatively small and that currently process emissions accounts for less than 9 per cent of total GHG emissions, the tax revenue implications or revenue foregone can be expected to be marginal for this relatively small subset of industrial processes.
- Equity, efficiency, certainty and ease of revenue collection
The proposed change to the calorific value will result in a more equitable carbon tax regime where taxpayers that use the lower quality and higher emission other bituminous coal would now be subject to a higher level of tax rather than being taxed similar to the lower emitting sub-bituminous coal.
This will also result in a more economically efficient outcome and ensures that the higher emitting other bituminous coal faces a higher carbon tax. The correct pricing of the emissions and price differential between the two types of coal will maintain the policy intent of the carbon tax and strengthen the economic incentive mechanism by encouraging a shift away from the higher emission coal use towards lower carbon fuels including renewables.
The change in the allowances addresses an anomaly in the current treatment of process emissions. For industrial process activities where it is difficult to reduce emissions from these activities, the inclusion of the process allowances and the increase in the total tax-free allowance will help to address any unintended adverse impacts on the competitiveness of these industries.
There will be no further implication for the overall costs of administering the tax as the same system will apply with no further changes to the system being needed.
- Composition of tax revenues
Taking into account the additional revenues due to the calorific value adjustment and the expected decline in revenue collection due to the increase in the tax free allowances for additional industrial process activities, the total revenue impact is expected to be marginal and could be partially offset.
There would be no net impact on the composition of tax revenues due to the various revenue recycling measures provided under the carbon tax including the energy efficiency savings tax incentive and the commitment to a neutral impact on the price of electricity for the first phase of the tax up to December 2022.
- Regional and international trends
The Carbon Tax Bill gives effect to the polluter-pays-principle and helps to ensure that firms and consumers take these costs into account in their future production, consumption and investment decisions which also assists in reducing GHG emissions and ensuring South Africa meets its NDC commitments as part of its ratification of the 2015 Paris Agreement. The World Bank’s States and Trends in Carbon Pricing Report notes that about 45 national and 25 subnational jurisdictions have already implemented carbon pricing initiatives.
To date Mexico, India, Chile and Colombia have also implemented some form of carbon taxation measures. Brazil is exploring a carbon price. The Ivory Coast and Morocco are also exploring a carbon tax. Singapore and Argentina are scheduled to implement a carbon tax in 2019. Canada proposed a national carbon tax starting in 2019 for those provinces that have not implemented a carbon price in line with specific national criteria (i.e. a minimum carbon price).
The scope of carbon pricing initiatives through carbon taxation is increasing rapidly and is becoming a major part of country policy strategies to achieve the NDCs under the Paris Agreement. As more countries introduce carbon pricing measures, the potential impact on industry competitiveness will be reduced significantly and the opportunities for the growth of new clean industries will rise considerably.
- Development, investment, employment and economic growth
The impacts of climate change could be devastating for South Africa, imposing costs through extensive droughts, anticipated especially in the West; rising water levels along the coast; and increased in-migration from other countries as droughts spread in less resilient countries. A failure to control GHG emissions could lead to a loss in international competitiveness, an increased vulnerability to trade, and investment measures, which would effectively entail other countries imposing a carbon price on South African exports.
The phased approach to the introduction of the carbon tax and the high tax-free thresholds will help to cushion sectors and provide entities with the flexibility to choose how and when to reduce emissions based on their own assessments of costs and benefits. The carbon tax will also protect South Africa’s exports from border carbon adjustments (carbon related import tariffs / charges) that could be imposed on exports to other countries that are already pricing carbon. To avoid potential negative impacts on growth and employment also requires that private and public investors significantly diversify investment from the historic trajectory, which has been dominated by large-scale mining and industrial activities.
Several carbon tax modelling studies have been undertaken to date by the National Treasury (Economic Policy Unit), local academics and international institutions such as the World Bank. The broad findings from these Computable General Equilibrium models show that a carbon tax will make a significant contribution to the reduction of GHG emissions and that the economic impact of the carbon tax will depend on how the revenues are used, i.e. the revenue recycling measures.
A modelling study on the current design of the carbon tax was undertaken through the Partnership for Market Readiness project of the World Bank and the report entitled: “Modelling the Impact on South Africa’s Economy of Introducing a Carbon Tax” is publicly available. The results of these studies provide a reasonable understanding of environmental and economic impacts of a carbon tax and helped with the decision making process. The study shows that the carbon tax will have a significant impact on reducing South Africa’s GHG emissions and would lead to an estimated decrease in emissions of 13 to 14.5 per cent by 2025 and 26 to 33 per cent by 2035 compared with business-as-usual. The carbon tax will have a marginal impact on the economy’s average annual growth rate which will be 0.05–0.15 percentage points below business as usual.
The phased introduction of the carbon tax at a relatively, low modest rate initially and increased over time to the “correct level” will provide a strong price signal to both producers and consumers to change their behaviour over the medium to long term. The tax will help to change the relative prices of goods and services, making emission-intensive goods more expensive relative to those that are less emissions intensive and providing a powerful incentive for consumers and businesses to adjust their behaviour, resulting in a reduction of emissions. The revenue recycling measures will help to mitigate any possible short-term negative impacts on the economy and jobs.
The proposed changes to the bill are marginal and will not significantly impact the overall results discussed above. It is important to note that the potential adverse impacts of the carbon tax are likely to be overestimated in the study due to the inability to model certain tax-free allowances such as the offsets, performance and trade exposure allowances, while the benefits of reducing emissions including reduced costs of adapting to the impacts of climate change and health co-benefits which were not quantified and included in the model.
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