We need to understand the Paris Agreement first. The Paris Agreement is a legally binding international treaty on climate change adopted by 196 countries in Paris in 2015 and entered into force in November 2016.
Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.
In order to limit global warming, a significant reduction of greenhouse gas emissions such as carbon dioxide (CO2), Methane (CH₄) and Nitrous Oxide (N₂0).
That’s where net zero comes in; by ensuring that the amount of greenhouse gas emissions being released into the atmosphere are reduced and ultimately equal to the amount being removed in order to significantly reduce the amount of harmful emissions that contribute to global warming.
The 2021 Glasgow Climate Pact, forged at the COP26 climate change conference, recognised that reaching net zero emissions by 2050 is essential and the key to keeping temperatures to 1.5°C of warming.
In short, the plan is to remove carbon, not just reduce it, hence the term net zero.
The Paris Agreement established a process for countries to set out their plans to reduce emissions known as Nationally Determined Contributions (NDCs), in which many governments have set a target for achieving net zero.
Some of these NDCs have been codified in legislation, leading to penalties if they’re not reached. In South Africa the Climate Change Bill is meant to be the overarching legislation to drive implementation of our NDC’s.
Others are not legally binding but still demonstrate national and sectoral commitments, such as the UK and US targeting 100% clean electricity by 2035.
During 2021, South Africa’s NDC target range for 2025 was updated from its original value of 398-614 Mt CO2-eq, to a range of 398-510 Mt for 2025 and its 2030 mitigation target range was updated from 398-614 Mt CO2-eq to a range of 350-420 Mt CO2-eq. In addition, South Africa’s NDC also includes various policy instruments to achieve our targets eg carbon tax.
Governments around the world are using sustainability tax measures to reduce emissions, meet their commitments on carbon neutrality and tackle climate change, as well as to raise revenue and fund important policy objectives. While these goals are shared, the policies established to achieve them vary greatly.
The following is an extract from the Minister of Finances’ Budget Speech in February 2023:
“The carbon tax is South Africa’s main mechanism to ensure the lowering of greenhouse emissions. The carbon tax rate will increase from R134 to R144 (approximately $9 per tonne), effective from 1 January 2022. As required by legislation, the carbon fuel levy will increase by 1c to 9c per litre for petrol, and 10c per litre for diesel, from 6 April 2022.
The first phase of the carbon tax, with substantial allowances and electricity price
neutrality, will be extended to 31 December 2025. However, in line with our commitments at COP26, the carbon tax rate will be progressively increased every year to reach $20 per tonne. In the second phase from 2026 onwards, the carbon tax rate will have larger annual increases to reach at least $30 by 2030, and the allowances will rapidly fall away.” The nominal and net carbon tax rate has been subject to much debate between the various business, NGO and government stakeholders. It is clear that global carbon pricing mechanisms will have an impact on the South African rates set.
The upcoming Climate Change Bill will make it compulsory for taxpayers to participate in the carbon budget system. Greenhouse gas emissions allowances are allocated to emitters, and emitters should stay within these budgeted allowances, else they could face a sizable carbon tax penalty.
A key design feature of the carbon tax system is the carbon offset allowance which provides flexibility to firms to reduce their carbon tax liability by investing in projects that reduce their emissions. During the first phase of the carbon tax, carbon offset projects developed under three international carbon offsets standards were allowed to be utilized. In terms of the proposed Carbon Offsets Programme developed by the Department of Mineral Resources and Energy and currently under consultation, South Africa plans to develop a framework for potential domestic standards to ensure generation of carbon credits which can be used as part of South Africa's allowable carbon offsets.
In the South African context, it’s clearly stated that National Treasury’s policy on the carbon tax is what is termed ‘soft earmarking’ - which means that they don’t directly take the carbon tax collected and allocate it to green programmes. The proposed increases in carbon tax and other green levies are expected to be much higher than inflation over the next ten years.
Carbon-neutral means purchasing carbon credits to offset companies greenhouse gas emissions. Carbon-neutral allows for emissions to be emitted with no specified level of reduction in emissions required.
Net-zero means reducing own and supply chain emissions in line with latest climate science (so called Science Based Targets), and balancing remaining residual emissions through purchasing carbon credits.
Companies in South Africa face so many challenges of power outages, industrial action, high inflation and interest rates, and a volatile currency. The pressure is building from a global and local point of view in relation to expanded Environmental Social Governance (ESG) reporting, carbon tax/pricing issues, investor ESG requirements and financiers moving to green financing. So how should companies practically think through this challenge?
The upcoming Climate Change Bill will make it compulsory for taxpayers to participate in the carbon budget system.