What is carbon tax?
Carbon tax is an environmental tax on the carbon dioxide equivalent of greenhouse gas emissions and gives effect to a ‘polluter-pays-principle’ which ensures that the polluter is held accountable for damage caused by greenhouse gas emissions and the costs imposed on third parties.
Who pays carbon tax?
A carbon taxpayer is a person who undertakes a taxable activity listed in Schedule 2 of the Carbon Tax Act, 2019. The tax levied is based on the carbon content of the amount of greenhouse gases emitted (i.e. this includes emissions from the burning of fossil fuels like coal, oil and natural gas) above a certain threshold. It follows that for each tonne of CO2-equivalent emissions (‘’t/CO2e’’), the tax is applied.
Governing legislations
The South African Revenue Service (‘’SARS’’) is responsible for administering and collecting carbon tax. The governing legislations for carbon tax are primarily the Carbon Tax Act, 2019 read together with the Customs and Excise Act, 1964.
Implementation dates
Carbon tax came into effect in South Africa on 01 June 2019 and has since been introduced in phases to allow entities the time to make the necessary structural adjustments to their production processes and overall practices. Phase 1 of the carbon tax has been ongoing from the initial date of effect on 01 June 2019 and is set to run up until 31 December 2025, whilst phase 2 is proposed to come into effect from 01 January 2026 and is expected to run until 31 December 2030.
Phase 2 of the carbon tax
On 13 November 2024, National Treasury published a discussion paper on phase 2 of the carbon tax. This paper proposes several measures to reduce tax-free allowances and strengthen the effective carbon tax rate to encourage behaviour change.
Amongst others, it is proposed that the basic tax-free allowance be reduced by 10 percentage points in 2026 and then by a further 2.5 percentage point reduction per year from 2027 to 2030. Additionally, as a means to stimulate carbon market activities under the carbon tax, an increase of the carbon offset allowance by 5 percentage points from 01 January 2026 is proposed. Another notable proposal includes extending the section 12L energy efficiency tax incentive and the commitment to electricity price neutrality until 31 December 2030.
Recent amendments
Effective from 01 January 2025, the carbon tax rate has increased from R190 per t/CO2e to R236 per t/CO2e. This rate is planned to increase gradually over time with the aim of steadily encouraging emission reductions. Additionally, as of 02 April 2025, the carbon fuel levy is set to increase to 14 cents per litre for petrol and 17 cents per litre for diesel, as mandated by the Carbon Tax Act, 2019.
Conclusion
Therefore, carbon tax leverages market mechanisms with the hopes of encouraging entities to reduce their emissions and invest in ‘greener’’ technologies. Whilst it presents challenges for carbon-intensive industries, one could argue that it also creates opportunities for innovation and long-term sustainability.
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Sources:
National Treasury - Discussion Paper - Phase two of the carbon tax
SARS - Carbon Tax - Frequently asked questions