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Wednesday, July 17, 2013 - 08:13
Cost factor

The carbon tax is to be introduced on 1st January 2015. It is probably the biggest change since the introduction of capital gains tax in 2001.
All South African companies – big and small; public and private - will have to work out the commercial implications of this tax. There may not be direct liabilities, but they will need to consider how carbon tax might affect their supply chain, as well as the extent of their electricity usage, for example.
The tax will be levied at the rate of R120 per tonne of CO2e (carbon dioxide equivalent of so-called ‘greenhouse gas’), rising 10% a year (making it R12 in year two; R13.20 in year three; and so on).
The Department of Environmental Affairs (DEA) is working on the legal and practical details of a reporting obligation for businesses that operate a facility causing more than 100 000 tonnes of greenhouse gas per year, or consume energy requiring the electricity sector to produce more than 100 000 tonnes of greenhouse gas a year. Businesses should operate on the assumption that the carbon tax will apply from the first tonne of carbon dioxide. While the legal architecture of this reporting obligation is still unclear, the DEA will probably have the authority to audit the emissions of a business if it believes they have been under reported. It will have the powers to impose penalties for non-compliance, which may include civil damages and criminal charges – even claims against directors’ liability in certain circumstances.
The carbon tax will be applied to industry on a sector-by-sector basis with different variables applicable to each. The significance of this scheme is that certain industries will enjoy more exemptions than others. For example, a sector that uses fuel with greater carbon intensity than the fuel used in another sector might enjoy a greater exemption in its carbon tax liability. The sectors to which the carbon tax will apply include electricity, petroleum (coal to liquid, gas to liquid), petroleum (oil refinery), iron and steel, cement, glass and ceramics, chemicals, pulp and paper, sugar, agriculture, forestry and land use, waste, fugitive emissions: coal mining, and a final category labelled ‘other’.
It will be possible to reduce the emissions on which the carbon tax is payable, for example, by utilising the available reliefs, implementing emissions and/or energy savings (by implementing more efficient practices) or selling an emitting facility. South African emissions-intensive businesses will qualify for the following relief (during the first phase of the carbon tax implementation, namely between 1st January 2015 and 31st December 2020):
60% tax free threshold;
tax relief for emissions-intensive businesses exposed to international competition;
tax relief for emissions-intensive businesses which have structural or technical difficulties in reducing their emissions intensity (also referred to as relief for “process emissions”); and,
carbon tax relief where carbon credits are purchased to offset their carbon tax liability.

At present there are no tax incentives for emissions-intensive businesses to invest in carbon capture and sequestration machinery or technology. The policy paper states that, to the extent that the carbon tax will apply to gross emissions as opposed to net emissions, a tax rebate for approved sequestration activities will be considered.
Even if your business is not directly subject to the new carbon tax, it may have an impact on your costs. For example, electricity prices or other inputs may increase in price due to a supplier being subject to the carbon tax. Businesses may respond to this challenge in several ways: retrofit their operations to reduce their energy consumption thereby qualifying for the soon to be introduced energy efficiency savings tax allowance in section 12L of the Income Tax Act, No 58 of 1962, or adjust their prices to deal with the impact of the carbon tax. Section 12L will introduce a deduction of 45c per kilowatt hour on proven energy efficiency savings.
In certain long-term agreements, prices may be locked-in for the period of the agreement and will likely continue to apply well after the introduction of the carbon tax. This has potentially disadvantageous results, e.g., a manufacturer of goods subject to carbon taxation on the emissions associated with the manufacturing process might be constrained from passing on this cost increase to clients as a result of a long-term sales agreement which locks in the price of the goods. Those who will be adversely affeccted may wish to seek legal advice as to whether their current long term contracts do or do not provide for the variation of prices on account of the carbon tax. Future long-term contracts should have clauses that properly deal with adjustments to price on account of the carbon tax.
Every business will need to have a strategy to factor in the costs (direct or indirect) of the carbon tax. In addition, attention should be given to managing financial impacts such as a changing cost base, acting on opportunities to pass through costs and identifying and responding to tax implications. By Mansoor Parker, Executive: Tax, and Andrew Gilder, Senior Associate: Environment –at Edward Nathan Sonennbergs.

Copyright © Insurance Times and Investments® Vol:26.7 1st July, 2013
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