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How South Africa's carbon tax may affect businesses

Written by Ella Copeland South Africa is among the top 20 polluters in the world, emitting approximately 500 million metric tonnes of greenhouse gas in 2010. Currently in the process of a...

http://www.africanbusinessreview.co.za/finance/1111/s-carbon-tax-may-affect-businesses


How South Africa's carbon tax may affect businesses

- Finance - Aug 17, 2012

Written by Ella Copeland

South Africa is among the top 20 polluters in the world, emitting approximately 500 million metric tonnes of greenhouse gas in 2010. Currently in the process of a carbon boom, the majority of South Africa’s energy is produced by burning fossil fuels, meaning the top 40 largest companies in the country were responsible for 207 million tonnes of carbon dioxide, directly emitting 20 percent of South Africa’s carbon output.

In a white paper released in February 2012, the South African government proposed a crackdown on big polluters with a new Carbon Tax, which would see companies taxed on the amount of carbon they emit. According to experts, this forward thinking plan is what South Africa needs to save itself from potentially catastrophic changes in its climate, such as rising temperatures, droughts and extreme rainfall.

Despite this threat to South Africa’s future, concerns about the potential effect on industry within its infrastructure have put the brakes on implementation of the carbon tax proposals. With a decision expected later this year, we are looking into the potential effects on business in South Africa and who will be most threatened.

Current proposals: the figures

As part of proposals in February 2012, the South African Government is considering a tax rate of R75 per tonne of CO2, rising to approximately R200 per tonne over time.  This is considered to be “feasible and appropriate to achieve the desired behavioural changes and emission reduction targets”.

According to a report by Trucost, a research group which helps businesses to understand environmental risk,  carbon costs could amount to almost US$974 million if the top 40 largest companies were to pay the carbon tax rate of R75 (US$8.97) per tonne of CO2e for direct operational emissions globally. This would equate to 0.2 percent of revenue or 1 percent of earnings before interest, taxation, depreciation or amortisation (EBITDA) on average across all 40 companies.

At a higher future carbon price of R200 (US$23.91), direct carbon costs could amount to more than US$2.5 billion globally. This could equate to 0.5 percent of revenue on average across all 40 companies, or 2.7 percent of earnings.

To address the initial concerns raised by businesses, the South African treasury proposed a 60 percent tax-free threshold on emissions for all sectors, including electricity, petroleum, iron, steel and aluminum. Plans state that the levy would increase by 10 percent a year until 2020, while all sectors bar electricity will be able to claim additional relief of at least 10 per cent.

Following an outcry from businesses, the South African government are currently consulting on their proposals, but have assured the public that the success of businesses is at the forefront of their considerations. "We have had a number of engagements with different stakeholders and will continue to have engagements. There is no decision yet on the carbon tax. We are listening very carefully," stated Finance Minister Pravin Gordhan to the Progressive Business Forum in June.

How will companies be affected?

Of all 13 recognised sectors in the South African FTSE/JSE 40 Index, only five key sectors accounted for 97 percent of total emissions from the top 40 companies:Basic Resources, Oil & Gas, Food & Beverage, Industrial Goods & Services and Telecommunications. The remaining 3 percent of emissions came from eight sectors.

Experts fear that South African companies may be held back economically by carbon taxation, which could act as a barrier to industrial and commercial progress. A country which is particularly dependant on fossil-fuels for its generation of energy, it is believed that South African companies will find it difficult to influence reductions in emissions. For example, energy-intensive industries, which form the bedrock of the South African economy, have little control over the carbon intensity of electricity, which represents a large portion of their emissions.

Liesel Van Ast, Research Editor at Trucost, highlighted potential negative effects on companies: “Protecting energy and carbon-intensive industries to the extent that business-as-usual (BAU) greenhouse gas emissions continue could weaken BASIC ministerial climate negotiations and exacerbate climate change impacts such as changes in water availability, increased floods and droughts, biodiversity loss and crop losses or lower agricultural production in South Africa.”

Van Ast believes that maintaining BAU emissions added to climate change impacts could result in lower productivity, potentially leading to food price volatility, operational and supply chain disruption, loss of license to operate (e.g. mines), and increased vulnerability to extreme weather events.

Companies with carbon-intensive operations, products or supply chains are likely to be concerned about their ability to compete against lower carbon sector peers in South Africa, or against competitors in countries that do not price carbon yet. This could limit their ability to pass on some or all of the tax to business customers or consumers.

However, companies providing low-carbon alternatives are likely to benefit, according to Van Ast:“They can start by measuring energy use and carbon emissions from operations, suppliers and products to identify the main sources of carbon risk. This can help identify the most cost-effective opportunities to reduce emissions, inform mitigation plans, and set baselines for targets to reduce emissions. Companies that are able to demonstrate sound carbon monitoring and management are likely to be better positioned to maintain market share and profitability during the shift to a low-carbon economy.”

He highlights the benefits of moving to renewable energy:“The current electricity levy for power generated from non-renewable sources has gone up to 3.5c/kWh, providing an incentive to switch to renewable energy. Companies can improve energy efficiency and may be able to install on-site renewable energy technologies and building design improvements to reduce dependence on the carbon-intensive grid. For example, retailer Pick n Pay introduced daylight harvesting with natural lighting and solar power at its new distribution centre.”

In addition to renewable sourcing, there are energy efficiency initiatives which could result in financial support from the government:“Revenue recycling could help ensure some of the taxes reward businesses that help shift to a low-carbon economy and are used to address environmental or social issues.“

Whilst the Treasury has not earmarked revenues from the tax, it will ‘consider’ spending some of the revenues to address environmental concerns: “It is likely to provide incentives to support energy-efficiency initiatives and uptake of cleaner-energy technologies, and to introduce measures to assist low-income households. A tax-free threshold and additional tax relief is likely to help protect carbon-intensive trade-exposed sectors, such as petroleum, iron and steel.” says Van Ast.

Trucost provide data and insight to help its clients understand the economic consequences of natural capital dependency.

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