CARBON TAX BILL AND CUSTOMS AND EXCISE AMENDMENT BILL - PowerPoint Presentation

1. CARBON TAX BILLAND CUSTOMS AND EXCISE AMENDMENT BILL Select Committee on Finance6 MARCH 2019Presenters: National Treasury

2. Presenters National Treasury Ismail MomoniatYanga Mputa Memory Machingambi Sharlin Hemraj 2

3. Background The initial draft Carbon Tax bill was published for public comment in November 2015 following Cabinet approval in October 2015. Cabinet adopted the second Draft Carbon Tax Bill and approved the submission of the draft bill to Parliament on 16 August 2017 noting the carbon tax as an integral part of the system for implementing government policy on climate change. National Treasury published the second Draft Carbon Tax Bill in December 2017 for public comment, introduction in Parliament, and convening of public hearings by Parliament in early 2018. The closing date for public comments on the Bill was 9 March 2018. Fifty nine (59) written comments was submitted to the TreasuryBudget 2018 announcement that implementation will be from 1 Jan 2019 - Minister of Finance announced postponement in the implementation date of the carbon tax to 1 June 2019 in his MTBPS speech. Carbon Tax Bill tabled on 20 November 2018 and submitted to the SCoF for finalisation. 3

4. 2018 Carbon Tax Bill and Parliamentary Meetings The policies reflected in the 2018 Carbon Tax Bill is a refinement of the 2013 Carbon Tax Policy Paper, the initial 2015 Draft Carbon Tax Bill and 2017 Bill. 2018 bill incorporates public comments received on these earlier documents. Informal briefing of the Joint Committee – 13 February 2018Public Hearings on the Bill – 14 March 2018National Treasury Response to Public Comments Hearings – 7 June 2018Carbon Tax Bill Workshop – 27 November 2018Carbon Tax Bill Meeting – 4 December 2018 NEDLAC Carbon Tax Bill Task Team Report (July to November 2018)Carbon Tax Bill main changes and Overview NT meeting with Industry (30 November 2018) Carbon Tax Bill meeting – 5 December 2018 Carbon Tax Bill Finalisation and Voting – 5 February 2019 Customs and Excise Amendment Bill meeting – 12 February 2019National Assembly – 19 February 2019 4

5. Climate change policy - Context for Carbon Tax South Africa voluntary committed (at COP 15 in 2009) to curb GHG emissions by 34% by 2020 and 42% by 2025 below the BAU trajectory subject to support from developed countries - climate finance, capacity building & technology transfers. South Africa ratified the Paris Agreement in November 2016 and endorsed the submission of its Nationally Determined Contribution (NDC) which requires that emissions peak in 2020 to 2025, plateau for a ten year period from 2025 to 2035 and declines from 2036 onwards. South Africa’s emissions by 2025 and 2030 will be in a range between 398 and 614 Mt CO2-eq, as defined in national policy. Paris Agreement will require sizable reductions in energy-related greenhouse gas (GHG) emissions by large emitting countries, including in developing economies. The NDC noted carbon tax as an important component of our mitigation policy strategy to lower GHG emissions.Carbon tax forms an integral part of climate change response policy package under the National Climate Change Response Policy (NCCRP) of 2011, and in National Development Plan (NDP) as an important cost-effective instrument 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. Assists in reducing GHG emissions and ensuring SA will meet its NDC commitments as part of its ratification of the 2015 Paris Agreement.5

6. South Africa’s Climate Change Response Governance Framework - (DEA)6

7. Carbon Tax Consultation Process - timeline7

8. SOUTH AFRICA’S CARBON TAX DESIGN FEATURES: Rate, Tax-free Allowances and Recycling Measures 8

9. Carbon Tax Policy Changes and Issues – 2013 to 2017Electricity pricing and electricity levy: Carbon tax (taken with electricity levy) will be revenue neutral in the first phase and have no impact on the price of electricity. credit for electricity generation levy and for renewable energy premium In addition business already benefits from energy efficiency savings tax incentive – rate for allowance was increased from 45 to 95 cents/kWh in 2015 Tax rates and thresholds for phase 1 and 2 of the carbon tax: To provide policy certainty, Section 5 of the bill was amended to include the headline, marginal tax rate of R120/tCO2e; and specifies the annual increase to the nominal carbon tax rate by a max of inflation plus 2 per cent. Alignment of the carbon tax policy with the carbon budgeting system of the DEA:Phase 1: Introduction of the 5% carbon budget allowance in 2014 Carbon tax modelling study – modelling of the current design undertaken through the World Bank in 2016 and the socio-economic impact of the carbon tax shows a significant impact in reducing the country’s emissions, without a significant impact on growth (negative 0.05-0.15%). 9

10. Carbon Tax Policy Changes and Issues – 2013 to 2017 (2) Trade exposure allowance adjusted from a company to a sector-based trade exposure allowance. Further adjusted the qualifying threshold for the maximum allowance from 50 to 30 per cent trade intensity Carbon tax pass through allowed for regulated sectors – liquid fuels Process and fugitive emissions – provision of the 10 per cent additional tax free allowanceOffset allowance – scope of offsets expanded e.g. Inclusion of certain renewable projects Sequestration – deduction for sequestered emissions e.g. from forestry plantations Application of thresholds – Aligning reporting and classification of greenhouse gas emissions for tax purposes with mandatory emissions reporting to the Department of Environmental Affairs. 10

11. MAIN CHANGES TO BILL FOLLOWING SUBMISSIONS AND HEARINGS - 2018 11

12. Key changes reflected in 2018 Bill Taxation of Domestic Aviation: amendment n activity to specify domestic aviation (activity 1A3a) and adjustment in allowances from 90 to 95 per cent with basic tax-free allowance increased from 60 to 75%; trade exposure allowance from 10 to 0 %. This is in line with the CORSIA basket of measures.Transport – liquid fuels: The basic tax-free allowances for transportation were changed to allow for administrative ease of implementation. For activity 1A3 (b-e), the basic tax-free allowance was changed from 60 to 75%; trade exposure allowance from 10 to 0 % and performance allowance was changed from 5 to 0%. Waste incineration: basic tax-free allowances for waste incineration was changed to allow for alignment in the tax treatment of energy generation (including heat and electricity recovery from waste).Payment of the tax: The payment of the tax was amended to allow for one annual carbon tax payment instead of provisional payments. The account for that year, together with the payment of the carbon tax liability, would then be due by 30 June of the following year when the Dept of Environmental Affairs verifies the declared emissions by May of that year 12

13. Key policy issues raisedEnergy efficiency savings tax incentive extension (Budget 2019 proposal) NEDLAC Jobs Mitigation and Creation Plan ReportAdministration of the tax – Customs and Excise Act Future Climate Policy - Alignment with the carbon budgets13

14. Revenue Recycling – Energy efficiency savings tax incentive Section 12L The Section 12 L energy-efficiency savings tax incentive was introduced in November 2013 to complement the proposed carbon tax. This measure was specifically introduced as one of the options for potential revenue recycling, even though the carbon tax had not yet been introduced. The incentive allows businesses to claim deductions against their taxable income for energy-efficiency saving measures – measured in kWh equivalent. The rate at which the deduction is calculated was increased from   45c/ kWh to 95 c/kWh in 2015.   The South African National Energy Development Institute is responsible for monitoring and verification of energy efficiency savings claims from  taxpayers and issues a certificate to the taxpayer endorsing the savings. The mining and manufacturing sectors are the largest beneficiaries of the incentive. Initial analysis suggests that the monetary value or subsidy for energy efficiency investments is about R3 billion. National Treasury announced the extension of the duration of the EES incentive in Budget 2019 to 31st Dec 2022 to align with the first phase of the carbon tax. 14

15. Energy Efficiency Savings Tax Incentive: Applications per sector to date List of approved projects / certificates (up to May 2018): 15Project Activity kWh Saved Technology 1Manufacturing 15 940 704 Whole Plant Optimisation2Manufacturing 5 094 504 657 Operational Energy Efficiency3Manufacturing 3 573 590 Energy Efficiency Project4Mining 35 224 669 Operational Energy Efficiency5Mining 83 909 700 Energy Efficiency Project6Manufacturing 122 567 Lighting Retrofit7Manufacturing 59 254 015 Energy Efficiency Project8Manufacturing 9 638 183 Whole Plant Optimisation9Commercial Building 175 302 Lighting and HVAC10Commercial Building 100 675 Lighting and HVAC11Commercial Building 124 254 Lighting and HVAC12Commercial Building (99 475)Lighting and HVAC13Commercial Building 681 766 Lighting and HVAC14Commercial Building 128 680 Lighting and HVAC15Commercial Building (123 531)Lighting and HVAC16Manufacturing 61 406 520 Whole Plant Optimisation17Manufacturing 93 757 774 Whole Plant Optimisation18Manufacturing 215 977 808 Whole Plant Optimisation19Manufacturing 96 876 426 Whole Plant Optimisation20Manufacturing 159 422 461 Whole Plant Optimisation21Mining 2 017 987 Energy Efficiency Project22Mining 1 457 024 Energy Efficiency Project23Manufacturing 363 217 Lighting Retrofit Total kWh saved 5 934 434 973   Estimated cost to fiscus (Rand) 2 672 908 688  

16. NEDLAC Carbon Tax Bill Task Team - Jobs Mitigation and Creation PlanAt the request of the SCoF and the PCoE, government, business and labour established a Carbon Tax Bill task team in NEDLAC to develop a Jobs Mitigation and Creation Plan.The task team held 7 meetings (July to November 2018) – presentations of proposals made all constituencies aimed at identifying sectors with potential job losses and job creation opportunities and specific actions. Initiatives targeted to the energy, building, waste, water, biodiversity and transport sectors as well as cross cutting proposals for jobs reskilling and opportunities to tap into research, development and technology innovation; research partnerships and support. Significant convergence across proposals submitted by all constituencies The process of implementing the proposals would take place as part of the implementation of the Presidential Jobs Summit Agreement which already includes agreement on the need for a Just Transition. 16

17. Administration – Use of the Customs and Excise ActThere was a view that the Customs and Excise Act is not the appropriate legislation under which to administer the carbon tax as it is designed to deal with goods that can be easily identified and requires licensing of warehouses although GHG emissions are reported at a company level. A separate Carbon Tax Administration Act was suggested Customs and excise the correct mechanism to administer the tax. The base of the carbon tax is the CO2e of greenhouse gas emissions. These gases are classified under the World Customs Organisation Harmonised System and are tradable commodities. This means the base of the carbon tax is goods as defined in the Customs and Excise Act, 1964. The administration of the carbon tax as an environmental levy under the Customs and Excise Act, 1964, is the most suitable solution - these taxable greenhouse gas emissions are environmentally harmful goods of which the externality costs should be internalised. SARS will consider innovative licensing solutions specific to the carbon tax for the licensing of facilities to simplify the licensing process including:could be tied to the activity that gives rise to the taxable emissions. In instances where several connected facilities are involved in a singular activity that is subject to the carbon tax, one consolidated license could be considered; or where a company holds several licenses over multiple licensed facilities, consideration could be given to combining those licenses under the company as a singular licensee17

18. Future policy – Alignment of Mandatory Carbon Budget NT and DEA agreed on alignment including a higher tax rate for emissions above the allocated budget. It was clarified that this was a proposal for possible alignment which will form part of the consultation for the second phase (2022)This process for the future does not (technically and legally) affect the carbon tax bill and the tax over the next 3-4 yearsNoted that the Climate Change Bill is currently under discussion in NEDLAC. The bill provides for the establishment of carbon budgets however, draft bill does not specify the methodology for allocating budgets to companies. To ensure transparency in the process to determine carbon budgets and provide policy certainty to entities, the National Treasury recommends to the DEA that the climate change bill should specify the methodology and formula to be used to determine the level of the budget for an entity. National Treasury will continue to engage the DEA and affected stakeholders on the future climate policy including the alignment – carbon tax is a key part of the climate policy package. National Treasury will undertake a review of the carbon tax after three years of implementation. This will take into account the impact of the tax in helping with mitigation of emissions and its contribution to our NDC commitments under the Paris Agreement18

19. SCOF AMENDMENTS TO 2018 TABLED BILL 19

20. SCoF: Amendments to the Tabled 2018 Bill Technical amendments to the Bill were proposed during deliberations of the Committee on 5 December 2018, and adopted on 5 February 2019 to address the following:Clause 6: to clarify that the calculation of Carbon Tax payable applies to the tax base as defined in terms of both section 4(1) and (2)Clause 14: to clarify that the maximum tax-free allowance for activities covered by the tax is 95 per cent while exempt activities are provided a 100 per cent tax-free allowance Clause 16: to ensure the tax period explicitly refers to the implementation date of the carbon taxSchedule 1, Table 1: to correct the default calorific value for the fuel type classified as “other bituminous” Schedule 2: to make a technical correction to the level of allowances and applicable thresholds for certain process emissionsSchedule 3: Removal of the word Bill20

21. Implementation of tax and update on regulations The implementation date of the carbon tax is 1 June 2019. A review of the impact of the tax will be conducted after at least three years of implementation of the tax taking into account progress made to reduce GHG emissions, in line with our NDC Commitments. Regulations A revised draft Regulation on the carbon offsets was published for further consultation in November 2018. 26 sets of comments have been received and were processed. In finalising the regulation, a stakeholder consultation workshop will be held later this month.Trade exposure allowance was revised following extensive consultations with BUSA on the methodology for determining the allowance and sector classification. Benchmarks were developed by sectors / subsectors during 2017 and 2018 and final proposals (methodologies and benchmark values) were submitted during 2018 following extensive consultations with the National Treasury. The trade exposure and benchmarking regulations providing a list of sectors / subsectors and their respective allowances and proposed benchmark values will be published shortly for stakeholder consultation. 21

22. CUSTOMS AND EXCISE AMENDMENT BILL 22

23. BackgroundPart IV of the Carbon Tax Bill makes provision for the administration of the Carbon Tax through the Customs and Excise Act. When the second Draft Carbon Tax Bill was published for public comment in December 2017, Schedule 3 of the Carbon Tax Bill included an amendment to the Customs and Excise Act by inserting section 54AA.Section 54AA specifically makes provision for the administration and collection of carbon tax.In the process of certifying the Carbon Tax Bill, the State Law Advisors recommended that Section 54AA dealing with administration and collection of Carbon Tax should be removed from the Carbon Tax Bill as the Carbon Tax Bill is a money Bill in terms of section 77 of the Constitution and this clause deals with the administration of Carbon Tax and falls under Admin Bill in terms of section 75 of the constitution. As a result, a separate amendment dealing with section 54AA, which follows the process of amending Admin Bills (section 75 of the Constitution) was proposed in the Customs and Excise Act 23

24. Purpose of the amendmentAdministration The amendment inserts a new section in the Customs and Excise Act for the purposes of administration and collection of carbon tax revenues.This new section facilitates the administering of allowances as rebates, refunds or drawbacks under the Customs and Excise system.Licensing of premisesThe amendment makes provision for the taxpayer to license premises where the emissions occur.Confers powers on Commissioner to prescribe rulesThe amendment makes provision for the SARS Commissioner to make necessary rules to regulate duties, powers and rights in relation to the collection and payment of Carbon Tax.24

25. Implementation date and update on rulesThe implementation date for the proposed amendments in the Customs and Excise Act is the same as implementation date for Carbon Tax, i.e. 1 June 2019. To ensure a smooth administration process and to allow sufficient time for consultation on the rules to the Customs and Excise Act, SARS will publish draft rules for further consultation in March 2019. 25

26. Thank you26

27. Climate change – Sobering Facts..Research shows that global temperature increases of 4° — termed "business as usual" by climate scientists, corresponding to current rates of emissions — will lock in almost nine metres of global sea level rise by melting glaciers, ice caps, and polar ice sheets. The expansion of seawater as it warms will compound these effects.There is consensus in the scientific community that GHGs such as carbon dioxide is responsible for these shifts (IPCC Fifth Assessment report 2014). The last three years were the hottest on record, the United Nations weather agency says, citing new global data underscoring the dramatic warming of the planet. Of the 17 hottest years on record globally, 16 have now occurred since 2000…Consolidated data from five leading international weather agencies shows that "2015, 2016 and 2017 have been confirmed as the three warmest years on record", the World Meteorological Organisation (WMO) said. Impacts of this rapid warming range from triggering long-term drought in places accustomed to higher rainfall (Cape Town, for instance) to threatening mass extinctions, with up to a sixth of all species alive today at risk.

28. IPCC Special Report on Impacts of 1.5 Global Warming: Upcoming COP in Poland Human activities are estimated to have caused approximately 1.0°C of global warming above pre-industrial levels, with a likely range of 0.8°C to 1.2°C. Global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate.Pathways limiting global warming to 1.5°C with no or limited overshoot would require rapid and far-reaching transitions in energy, land, urban and infrastructure (including transport and buildings), and industrial systems. These systems transitions are unprecedented in terms of scale, but not necessarily in terms of speed, and imply deep emissions reductions in all sectors, a wide portfolio of mitigation options and a significant upscaling of investments in those optionsThe latest special report from the Intergovernmental Panel on Climate Change (IPCC) on the implications of global warming of 1.5°C notes that countries in the tropics and Southern Hemisphere subtropics are projected to experience the largest impacts on economic growth due to climate change should global warming increase from 1.5°C to 2°C. 28

29. IPCC Report – Energy Systems transition In 1.5°C pathways with no or limited overshoot, low-emission energy sources are projected to have a higher share, compared with 2°C pathways, particularly before 2050. In 1.5°C pathways with no or limited overshoot, renewables are projected to supply 70–85% (interquartile range) of electricity in 2050. the use of CCS would allow the electricity generation share of gas to be approximately 8% (3–11% interquartile range) of global electricity in 2050, while the use of coal shows a steep reduction in all pathways and would be reduced to close to 0% (0–2%) of electricityWhile acknowledging the challenges, and differences between the options and national circumstances, political, economic, social and technical feasibility of solar energy, wind energy and electricity storage technologies have substantially improved over the past few years. Improvements signal a potential system transition in electricity generation29

30. Energy Transitions Commission report –Better Energy, Greater Prosperity (April 2017)Achieving net-zero CO2 emissions from the energy and industrial systems will require rapid improvements in energy efficiency combined with the rapid decarbonisation of power and the gradual electrification of as much of the economy as possible, mainly in light-duty road transport, manufacturing, and a significant part of residential cooking, heating and cooling;Dramatic reductions in the cost of renewable electricity generation and of energy storage options now make it possible to plan for cost-competitive power systems which are nearly entirely dependent on wind and solar (e.g. at 85-90%);Power decarbonisation policies should plan for very significant increases in power demand, accelerating renewable power deployment;National decarbonisation plans, as described in the NDCs, should set out an integrated vision for power decarbonisation and electrification, ensuring that increased power demand will be met by zero-carbon power.30

31. Renewable energy (REIPPPP) in South Africa “Through the competitive bidding process the REIPPPP effectively leveraged rapid, global technology developments and price trends, buying clean energy at lower and lower rates with every bid cycle, resulting in SA getting the benefit of RE at some of the lowest tariffs in the world”. The estimated, average portfolio cost for all technologies under the REIPPPP has dropped consistently in every bid period from a combined average of R2.79/kWh in BW1 to R0.92/kWh in BW4. Indications are that prices will continue to decrease in future rounds as low as R0. 40/kWh for wind.”By the end of June 2018, the REIPPPP had made the following significant impacts to the country’s economic and social objectives:6 422 MW of electricity procured from 112 projects (IPPs) in seven bid rounds, 62 IPPs started commercial operations with average lead time of 1.9 years to complete construction;Since 2013, the IPPPP increased SA’s installed and operational RE capacity to more than 3.7 GW; envisaged will create 114 266 job years over the construction and 20 year operations period. A job year is equivalent to a full time employment opportunity for one person for one year. 31

32. REIPPPP - investment, economic, social and environmental impactsInvestment (equity and debt) to the value of R201.8 billion, of which R48.7 billion (24%) is foreign investment, was attracted.  Up till now R55.9 billion of this investment has been spent;85% of jobs were created during construction and 15% operational phase of the projects;  40 698 total job years created in total by the programme to date of which 41% is for youth;R845 million spent on socio-economic and enterprise development in local, mostly rural, communities to support education and skills development, health, social welfare and enterprise development projects in these communities;Carbon emission reductions of 27.2 Mton CO2 and water savings of 29.9 million kilolitres realised by the programme from inception June 2018. 32

33. The Global Commission on the Economy and Climate: New Climate Economy report 2018As much as global action will be required, national action will be critical to limit temperature rise to 1.5°C. Steeper reductions in emissions from the energy sector with increased efforts channelled towards cleaner, renewable energy alternatives are required. Action is urgently needed on climate change, and it does not have to come at the expense of economic growth. It is crucial that we scale up our efforts to grow our economy in a manner that decouples economic growth from environmental damages - Climate Action does not require economic sacrifice. 33

34. The Global Commission on the Economy and Climate: New Climate Economy report 2018 (2) Major structural and technological changes in the global economy are now making it possible to achieve both lower-carbon development and better economic growth. The window for making the right choices is uncomfortably narrow because remedial measures will become progressively costlier. The next 2—3 years are a critical window when many of our policy and investment decisions that shape the next 10—15 years will be taken.With the scale of investment that will have to be made in the next two decades, we cannot afford to lock-in polluting technologies and inefficient capital.Priorities for urgent action are needed and pricing carbon and moving toward mandatory disclosure of climate related financial risks, as part of a broader package of climate policy measures are crucial.34

35. International DevelopmentsChina has introduced seven regional carbon trading pilot schemes. Each pilot covers a large city that is, Beijing, Tianjin, Shanghai, Chongqing and Shenzhen or a province namely, Guangdong, and Hubei. Building on these pilots, China implemented a national ETS in Dec 2017. A carbon tax was introduced in Mexico in 2014 and applies to fossil fuels. It also allows for the use of offsets in the payment (only CDM). The tax rate applied is set at about US$ 3.5 / tCO2e and natural gas is exempted from the carbon tax. India implements a coal tax effective from 2010, currently US$ 6/ton coal. Carbon tax implemented in Chile at the rate of US$5 from 2017. In 2008, the Canadian Province of British Columbia launched its carbon tax at a rate of Can$10 per tonne of CO2. The national government proposed a national carbon tax for those provinces that have not implemented a carbon price in line with specific national criteria (i.e. A minimum carbon price). Colombia implemented a carbon tax in 2017 on transport fuels.Brazil exploring a carbon price, Ivory Coast and Morocco also exploring a carbon tax,Singapore and Argentina – implementation of carbon tax in 2019. 35

36. Carbon pricing in numbers (State & Trends of Carbon Pricing 2018 – World Bank & Ecofys) 36

37. GHG Inventory, 2010 – Estimates, DEA372010: GHG Inventory (Estimates) -- CategoriesEmissions - CO2 Eq (Gg)Emissions - CO2 Eq (Gg)Total Emissions - CO2 Eq (Gg)Percentage Contribution1 - Energy    428 368 82.66% A - Fuel Combustion Activities    402 817 77.73% 1.A.1.A - Electricity   236 798  45.69% 1.A.1.B - Petroleum Refining  2 284  0.44% 1.A.1.C - Manufacture of Liquid Fuels (Synfuel )  28 611 5.52% 1.A.2 - Manufacturing Industries and Construction   41 117  7.93%  1.A.3 - Transport   47 607   Civil Aviation 3 670     Road Transport 43 440  8.38% Rail Transport 497    1.A.4 - Other Sectors   44 684  8.62%  B - Fugitive emissions    25 551 4.93%2 - Industrial Processes and Product Use    44 351 8.56% 2.A - Mineral Industry   4 793    Cement production 4 187     Lime production 502     Glass Production 104     2.B - Chemical Industry  1 011    2.C - Metal Industry   37 513    Iron and Steel Production 24 147     Ferroalloys Production 11 809     Aluminium production 1 468    3 - Agriculture, Forestry, and Other Land Use    (25 714)(4.96%)4 - Waste    19 806 3.82%Total National Emissions and Removals    518 239 100.00%International Bunkers    2 572  

38. Carbon tax policy framework for SATax Base Electricity generation and fuel combustion Industrial processes – cement, iron and steel, glass, ceramics, Fugitive emissions – e.g. methane emissions from mining Direct (Scope 1) stationary emissions Direct (Scope 1) non- stationary emissions – as an add on to the fuel tax regime.Marginal tax rateR120/tonCO2e Recycling measures Reducing other taxes and providing tax incentives If revenues left over, on budget support for pro poor programmes in energy, transport sectors Phased approachPhase 1: 2019 to 2022Starting off the tax at a relatively modest rate, coupled with generous tax-free allowances, adjusted over time to facilitate a structural transition to a low carbon, climate resilient economy in a cost effective manner.

39. Carbon offsetting under the carbon taxIn 1st phase, permitted carbon credits should be developed under:Clean Development Mechanism (CDM); Verified Carbon Standard (VCS); and Gold Standard (GS). Allowance for potential domestic standard to cover project types not well catered for under international standards e.g. AFOLU. Specific eligibility criteria for carbon offset projects for effective implementation of the offset mechanism in South Africa includes:Project activities must occur outside the scope of activities subject to the carbon tax. Only South African based credits will be eligible for use within the carbon offset scheme. Carbon offset projects registered and / or implemented before the introduction of the carbon tax regime will be accepted subject to certain conditions. 39

40. Competitiveness and trade exposure allowance Competitiveness and Trade Exposure Allowance: The design of this allowance has been adjusted from a company to a sector-based trade exposure allowance and will also include imports in the revised formula. Trade intensity will be used as a proxy for trade exposure which will be determined at a sector or subsector level. A sector or subsector will qualify for a flat rate trade exposure allowance of 0, 5 or 10 per cent depending on the trade intensity category within which that sector or subsector falls. Initial analysis suggests that sectors such as mining and iron and steel are likely to qualify for the full 10 per cent trade exposure allowance.40

41. Overview of Tabled Carbon Tax Bill and main changes against Draft Bill Minimal changes made to the billDefinitions – carbon budget, fugitive emissions, person subject to taxSection 4 – tax base: specifies the calculation of the emissions combustion + fugitive + process emissions Section 6 – Calculation of the carbon tax payable sum of combustion, fugitive and process emissions Less the tax free allowances for each type of emission Total emissions × Rate of tax Section 6 – Calculation of the carbon tax payable 6(1) – deduction in 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 ie. petrol and diesel emissions.6(2) – electricity generation levy credit and renewable energy premium Section 11: Performance allowance – up to max of 5 per cent Change to refer to measures not “additional measures” 41

42. Overview of Tabled Carbon Tax Bill and main changes against Draft Bill (2)Section 14: limitation on total tax free allowance up to 95 per cent Clarification that the limitation applies for activities subject to the tax and exempt activities classified as 100 per cent tax free allowance Section 15: Administration – administration of the tax through the Customs and Excise Act Section 16 – Tax period – calendar year January to December Section 17 – Payment of the tax The payment period for the tax was amended to allow for one annual carbon tax paymentSection 21: Short title and commencement – 1 June 2019 Schedule 1: Tables of emission factors by fuel type for energy combustion emissions, and emission factors by type of activity for process and fugitive emissions Correction of calorific value for other bituminous coal 42

43. 1. Carbon Tax Rate is too low and allowances too generousCOMMENT: To operationalize the “polluter pays principle suggested that the effective tax rate will have to increase in real terms for a significantly longer period in order to make a material difference to SA GHG emissions. The proposed tax rate of R120 per ton of CO2e (about US$10) is well below the carbon tax rates of other countries, and the High-Level Commission on Carbon Prices which suggested that price should be at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030. RESPONSE:Noted and partially accepted. Section 5 of the bill specified the headline, marginal tax rate of R120/tCO2e; and the annual increase to the nominal carbon tax rate by up to a maximum of the rate of inflation plus 2 per cent. The annual adjustment of the rate as per the current proposal in the bill of CPI plus 2 per cent for the first phase will therefore be maintained. The phased approach to the introduction of the carbon tax at an initial low rate with significant tax-free allowances seeks to provide industry with the time and flexibility to make the necessary structural adjustments required to transition to a low carbon economy.43

44. 2. Proposed Alignment of the Carbon Tax and Carbon Budget – provision in the bill Comment:Requested clarity on where in the bill reference is made to the higher rate of tax as part of the alignment of the carbon tax and carbon budget and under what conditions this alignment will apply. Response:The National Treasury and Department of Environmental Affairs discussed the options for alignment of the carbon tax and carbon budgets during several meetings held in June and July 2018. NT and DEA agreed in principle that emissions within the carbon budget will be taxed at a lower rate (all tax-free allowances applicable). A higher tax rate proposed at R600/tCO2e will be applied on emissions above the carbon budget (no tax-free allowances apply).  Since the Climate Change Bill including the mandatory carbon budgets system of the DEA has not been promulgated, the carbon tax bill cannot be amended to reflect this alignment at this stage. Once the Climate Change Bill is assented to as an act of parliament, the “Carbon Tax Act” can then be amended accordingly. 44