South Africa promotes carbon markets after abandoning carbon levy on coal power

For years the principal objection of South African business leaders to the introduction of green taxes was that they would be just another tax, raising the cost of business, without curbing polluters or benefiting the environment. Now the South African Government has followed international trends and proposes tax incentives to curb climate change through the carbon markets and energy effiiciency measures.

In the draft Taxation Laws Amendment Bill 2009, an income tax incentive is proposed for any business that takes part in a UN Clean Development Mechanism (CDM) project. The incentive applies to the sale of carbon credits and would exempt the revenue from that sale from income tax.

In addition, the amendments open the way for businesses to obtain ‘notional deductions for income tax purposes for energy efficiency savings from certified baselines based on energy efficiency certificates issued by the National Energy Efficiency Agency. In other words investments in energy efficiency would become tax deductible provided an audited baseline had been certified for the company’s energy usage prior to the investment being made. The agency designated to provide these certifications – the Energy Efficiency Agency – already exists but has capacity issues.

With this move South Africa would be following international trends and could potentially help increase the number of CDM projects registered in Africa and South Africa to date. John Ledger, Chairman of the Sustainable Energy Society of South Africa welcomed the proposed changes.

However the key reasons for Africa’s and South Africa’s limited number of CDM projects is are capacity constraints at the Designated National Authority, the national body responsible for coordinating CDM/JI projects, as well as the high upfront costs associated with the registration and certification process for CDM projects. These costs limit the viability of all but the larger CDM projects and are the reason that few smaller projects have been registered to date.

The value of the proposed exemption of carbon credits is likely to have a small impact on the state’s revenue, and the move comes in the context of the Government’s decision to delay the implementation of the environmental levy of 2 cents per kWh on electricity generated from non-renewable resources (i.e. most of Eskom’s electricity) by a year.

Nevertheless, South Africa is no stranger to the concept of environmental taxes; in 2003 years of lobbying of then Environment and Tourism Minister, Valli Moosa, led to the imposition of a levy on most types of plastic shopping bags. Despite opposition from unions who feared massive job losses in the plastics sector, the measure proved effective, leading to a drastic reduction in plastic refuse and a series of cottage industries, sponsored by retailers, to produce re-useable bags.

For some years, the treasury has also investigated opportunities to provide better tax write-offs for environmental research and development but so far nothing has come of it. As early as the mid-1990s the Department of Environmental Affairs and Tourism with the help of British consultants investigated a whole range of ‘economic instruments’ as a means of promoting cleaner production but the time was not deemed right.

The same Treasury that is seeking to use tax relief to incentivise South African companies to invest in CDM projects is funding the massive capital expenditure programme of the state-owned utility Eskom, the largest emitter of greenhouse gases on the continent.

Eskom, despite many public pronouncements to the contrary, is focusing 99% of its capacity expansion efforts on coal. This comes despite Government commitments to curb emissions by 2020 and reduce them thereafter. South Africa's greenhouse-gas emissions rank in the top 20 in the world, contribute 1.8% to global emissions and are responsible for 42% of Africa's emissions.

With the newly-appointed Minister of the Environment also being an ardent pro-mining promoter, the motives behind the South Africa Government's overall approach to using economic instruments to promote greener behaviour and business may be brought into question.

17 Jun 2009 | Sourced: Markus Reichardt