DUANE NEWMAN: Why we need a green budget more than ever

As we approach February’s budget statement, many of us will be hoping finance minister Enoch Godongwana will be able to keep the country firmly on the green path that was presented at the COP26 climate change summit in November.  

Developed nations pledged R130bn towards green funding for this country, and it will be easier to move ahead with energy-saving projects as there will be new rules for carbon credits — but these are only two parts of the jigsaw. 

The reality is that funding for what has been termed the “just transition” from dependence on coal towards renewables will require a much wider and more complex set of instruments and measures than these two instruments alone.

In EY’s latest Climate Cash & Tax Barometer 2021 we looked at funding from both the private sector and the public sector. Each will be essential.

The public sector’s green financing armoury globally includes carbon pricing, green tax expenditure and green recovery support. All of these require greater work, greater clarity, and greater public understanding.

Private-sector climate-change spending globally generally falls into two categories: green investments by companies themselves, and climate finance from the banks.

The barometer focused on the Group of 20 (G20), of which SA is part, and it quantified the support given by the public and private sector. We see that 80% of the G20 nations are to implement some kind of carbon pricing initiative.

In the SA context, the carbon tax is one example of a carbon pricing mechanism; we pay it every time we fill up our cars, while businesses have needed to adopt a rigorous monitoring system to determine their emissions so they can calculate their contributions.

Globally, revenues from carbon pricing initiatives are growing annually and are nearing R600bn. However, it is interesting — and alarming — to note that only 55% of this green tax revenue is earmarked for specific environmental projects. Surely, we would have expected this to be closer to 100%?

In the SA context, it has been clearly stated that the the Treasury’s policy on the carbon tax is what is termed “soft earmarking” — which means it doesn’t directly take the carbon tax collected and allocate it to green programmes. Instead, it merely reports on programmes such as the 12L energy efficiency incentive, while not directly dedicating carbon tax collections to 12L.

In terms of green tax expenditure in the public sector, over R3.3-trillion was allocated by governments over the decade to 2020, but the bulk of this was allocated by the governments of the US and France. SA’s commitment to green tax expenditure has been R4.5bn cumulatively over the past decade.  

Globally, such green tax expenditure takes the form of extra tax deductions being available for environmentally friendly spending in areas such as the purchase of electric vehicles (EVs) and personal tax rebates for replacing energy-intensive fridges or freezers.

In SA, there is growing pressure for lower duties on EVs, which do form an important part of the green agenda, but the design of all support around EVs is still subject to negotiation between business and government. Hopefully, the budget will give some indication of progress being made on this, and a more favourable tax regime will come into force sooner rather than later.  

Meanwhile, what is clear is that many governments are trying to accelerate the Covid-19 recovery — and using this to promote progress to a low carbon economy, with a more intense focus on a green recovery.

Over 500 individual policies have been amended by G20 members since the beginning of Covid-19 to accelerate this green recovery. This equates to more than R6-trillion in green funding, mainly to help finance the transition from fossil fuels to clean fuels.

From a business perspective, what is clear from the Barometer is that there is a direct correlation between the G20’s proportion of global trade, which is 75%, and its share of world emissions, which stands at 73%. Therefore, the large economies dominating world trade also dominate world emissions.

The private sector clearly does have a vital role to play in making green investments and commitments to reduce their own emissions — but only 35% of the so-called top 100 carbon majors have committed financial investment to reduce their carbon emissions. We need significantly more ambition from our large corporates. Currently, it is predicted these global corporates will invest more than R1.5-trillion by 2030.

From analysing the business trends, the reduction of carbon emissions is top of mind, companies are taking real action to meet climate goals, are engaged in understanding their supply chain emissions and are engaged with policymakers to design policy solutions to support business.  

From a pricing perspective, companies are starting to implement internal carbon pricing, but are hesitant in using carbon offsetting to reduce emissions due to the lack of clarity around the legitimacy of some carbon credits.

There is a danger of what we term “greenwashing” — offsetting your carbon footprint using credits that may not have been properly measured and verified. From a private sector finance perspective there is clearly an increase in the issuance of green bonds, and over R21-trillion in global green bonds have been issued in the last seven years. A green bond is a financial instrument that will have energy and carbon reduction targets for the finance to be awarded to the project.

While private and government sector funding around climate change is constantly evolving at both a local and international level, businesses must keep close to these trends and changes to ensure they take advantage of all this funding. 

And as for the coming budget, what’s clear is that it needs to ensure enough support is being provided in the form of grants and tax incentives. For instance, it is important that the vital 12L incentive, which is due to expire this year, be extended — and consideration should be given to increasing its scale and scope.

In addition, the 11D research and development incentive — which also comes to an end this year — needs to be extended.  This is also linked to the green transition, as more R&D in green technologies is needed.

SA played a positive part in the COP26 discussions, and we have been rewarded with mammoth pledges to support our curbs on emissions. However, global temperatures are still rising and we need the words to be matched by actions and expenditure.

Whatever the other major concerns Godongwana may have in these troubled economic times, he owes it to us, and to future generations, to keep us on the green path to a cleaner planet.

• Newman is a partner at EY Cova, a specialist tax consulting business of EY SA.