The National Treasury on Wednesday released a discussion paper outlining proposed changes for Phase 2 of the carbon tax, scheduled for 2026 to 2030.
This phase aims to support South Africa’s climate mitigation goals, with an overarching objective of reaching net-zero emissions by 2050 while fostering economic growth.
Treasury said South Africa is among the top 20 global emitters, with per capita emissions comparable to those of developed nations due to its heavy reliance on fossil fuels. In response, the country has committed to ambitious climate goals, aiming to reduce emissions and support global efforts to limit temperature rises to well below 2°C above pre-industrial levels, with efforts toward the 1.5°C target.
To fulfil this commitment, Treasury said South Africa submitted its target for a net-zero carbon economy by 2050 through its Low Emissions Development Strategy and its updated Nationally Determined Contributions (NDCs) under the Paris Agreement. These set an emissions target range of 398–510 million tonnes of carbon dioxide equivalent (Mt CO₂e) by 2025 and 350–420 Mt CO₂e by 2030, as outlined at the COP26 conference.
"To help achieve South Africa’s NDC commitments for 2025 and 2030, revisions to the carbon tax rates for the 2nd phase from 1 January 2026 to 31 December 2030 were necessary,“ it said.
Restructuring Tax-Free Allowances
Proposed changes target adjustments in tax-free allowances to help industries transition smoothly:
Basic Tax-Free Allowance:
Current Status: Applies a 60% allowance to emissions under a certain threshold.
Proposed Change: A phased reduction of 10 percentage points in 2026, with further 2.5 percentage point cuts annually from 2027 to 2030. Post-2030 reductions are also under consideration based on South Africa’s climate targets.
Performance Allowance:
Current Status: Provides incentives for companies exceeding emissions benchmarks.
Proposed Change: For combustion emissions, the performance allowance will increase from 5% to 10% starting in 2026.
Carbon Offset Allowance:
Current Status: Allows companies to reduce their tax liability by investing in external emission reduction projects.
Proposed Change: The allowance is set to increase to 20% for process and fugitive emissions and 25% for combustion emissions, with the option to phase this increase gradually. Expanding this allowance aims to bolster South Africa’s carbon offset market and incentivise reductions in sectors not directly covered by the tax, like agriculture and waste management.
Trade Exposure Allowance:
Current Status: Supports industries vulnerable to international competition by mitigating carbon tax impacts.
Proposed Change: Raises the trade intensity threshold for a full 10% allowance from 30% to 50%, effective 2026.
Carbon Budget Allowance:
Current Status: Offers a 5% allowance for voluntary participation in carbon budgeting.
Proposed Change: With mandatory carbon budgeting starting in 2026, the 5% allowance will be removed, replaced by an equivalent increase in the carbon offset allowance. This change reflects a shift toward regulated emissions budgeting, removing the need for a voluntary allowance.
Electricity Generation Levy:
Current Status: An existing levy of 3.5 cents per kWh applies to non-renewable electricity generation.
Proposed Change: Elimination of the levy in 2026. The carbon tax will replace the levy, supporting price stability for consumers.
Electricity Benchmark:
Proposed Change: A technology-neutral benchmark is proposed, with an emissions intensity target of 0.94 tCO₂e/MWh for 2026–2030, tightening to a range of 0.6–0.9 tCO₂e/MWh by 2031.
Rationale: These benchmarks are designed to incentivise cleaner power generation and reduce emissions across the grid.
Key Changes Beyond Tax-Free Allowances:
Other proposals aim to foster a low-carbon economy:
Green Hydrogen Production: Extending the 100% depreciation allowance on solar PV systems to green hydrogen to encourage alternative fuel development.
AFOLU and Waste Sector Exemptions: Maintaining the exclusion of agriculture, forestry, land use, and waste sectors due to current challenges in emissions estimation, while working with environmental authorities to develop more accurate methods.
Revenue Recycling and Support Measures
– Although carbon tax revenue is not earmarked, funds will likely be directed to support strategic goals in the low-carbon transition, including:
– Investments in grid expansion to accommodate renewable energy
– Reskilling programs for workers transitioning out of fossil fuel industries
– Improving access to affordable, clean energy for low-income households
– Expanding sustainable public transport
– Supporting community renewable energy projects
– Strengthening municipal infrastructure resilience against climate impacts
Public Consultation
The National Treasury has invited public input to help shape the final framework for Phase 2, balancing environmental goals with economic considerations. The proposal reflects a substantial commitment to climate action, with a focus on a just and sustainable shift to a lower-carbon economy for South Africa.
* Disclaimer: The journalist unpacked key changes with the use of AI and prompts on LM Notebook.
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