ANDRE NEPGEN: Real effect of carbon taxes on electricity costs
The question for business leaders should be, ‘how much am I paying for carbon taxes and electricity combined, and for what coverage?’
19 November 2024 - 10:56
byAndre Nepgen
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SA has one of the dirtiest energy profiles on the in the world, which is going to cost us dearly, the writer says. Picture: 123RF
SA is at a critical juncture in energy procurement. The growing effect of carbon taxes and the EU’s looming carbon border adjustment mechanism (CBAM) should be of concern for local businesses. The question we should ask ourselves is whether we’re prepared for the cost of our ongoing reliance on fossil fuels.
SA has one of the dirtiest energy profiles in the world — compared to other major economies, our country is heavily dependent on coal and fossil fuels. We emit roughly one tonne of carbon dioxide equivalent (CO2e) for every megawatt hour of electricity consumed — one of the world’s highest levels of carbon emissions per unit of electricity. In fact, our electricity is twice as dirty as the global median. This heavy reliance on fossil fuels is not only unsustainable from an environmental point of view, but is financially disastrous when you factor in global carbon tax policies.
For a long time our dependence on coal was overlooked, but that is coming to an end. We lag far behind in the global shift towards cleaner, renewable energy. And with rising carbon taxes, that “dirty” status is going to cost us dearly.
The stealth cost of carbon taxes
SA businesses face a carbon tax double whammy. Domestic carbon taxes are increasing faster than inflation — and will rise to R462 per tonne of CO2e in 2030 from the current R190, according to rates published by the Treasury. Meanwhile, tax allowances are being phased out — depending on the nature of the business, allowances currently provide up to 85% relief but could be completely or partially phased out within the next decade or so, if not sooner. Many businesses initially considered carbon taxes a minor expense, but they will soon become a substantial part of operating expenses for those businesses that remain reliant on fossil fuels.
What’s especially worrying is how these costs are being slipped into operations. By 2026 SA carbon taxes will add 6c-9c per kWh to electricity prices. In 2035 they could rise to 34c-72c per kWh, and by 2046 some companies could be paying an additional 166c per kWh more. To give context to these numbers, we typically see businesses paying 133c-150c per kWh in electricity generation costs today.
For companies exporting products such as aluminium, iron, steel and fertiliser to Europe, the EU’s CBAM is another ticking time bomb. CBAM is the penalty that will be imposed on EU importers from countries with lower carbon taxes than in the EU, with the size of the penalty determined by the difference in carbon taxes between the two countries. The issue is that local manufacturing processes for these products are emissions-intensive and are subject to a far lower carbon tax rate than that levied on businesses in the EU. With the EU being SA’s largest trade partner, it is estimated that R52.4bn of SA exports are under threat in the short term because of CBAM. This figure is expected to grow as the scope of CBAM expands to include more and more products over time.
In 2026, when CBAM kicks in, European carbon taxes are expected to be €85 (about R1,630) per tonne of CO2e. This is 15 times higher than our carbon taxes, which are expected to be set at €5.5 (R105) in 2026, after taking tax allowances into account. For the average industry affected by the EU’s CBAM, this translates into an extra 80c per kWh in electricity costs in 2030, ramping up to as much as R1.65 per kWh in 2035. For SA companies exporting to Europe, that tax gap will hit profitability hard and make it nearly impossible to remain competitive unless they decarbonise.
High coverage renewable energy is the only way forward
The outlook sounds grim, but there is a solution. Shifting to renewable energy is environmentally responsible and the best way to avoid the financial burden of carbon taxes. It’s already cheaper than some fossil fuel options, and when one factors in the future cost of carbon taxes switching to renewable energy is the best strategy.
We’ve all been focused on finding the cheapest source of electricity to keep our businesses running, but that mindset needs to change. The real question for business leaders shouldn’t be, “how much am I paying for electricity?” It should be, “how much am I paying for carbon taxes and electricity combined — and for what coverage?”
There are several renewable energy strategies available to SA businesses, including embedded solar, wheeled solar, wheeled wind, traditional aggregators, and product models like the Discovery Green renewable energy platform.
Thinking about coverage is critical: the less renewable energy one has, the more exposed they are to SA carbon taxes, EU CBAM penalties, and above-inflation future utility price increases. Many businesses select the strategy that comes in at the lowest quoted price; however, the lowest price almost always gives the least coverage. In the long run, your business will be more susceptible to increasing carbon taxes and future electricity hikes.
The urgency of action
By 2035, existing electricity generation costs could increase by as much as 28% in today’s terms due to SA carbon tax alone. For industries exposed to CBAM this increase could rise by another 64%. There’s no business in SA that won’t feel the pain of that increase. Every year that goes by without a solid renewable energy strategy in place that offers close to 100% coverage is another year that businesses are digging themselves into a financial hole.
Investing in maximum renewable energy coverage today reduces one’s carbon footprint and protects the bottom line from inevitable carbon tax hikes. The takeaway is simple: the future belongs to companies that balance economic growth with environmental responsibility, and those businesses that have secured as close to 100% coverage of renewable energy will be the most safeguarded. Embracing renewable energy sooner rather than later isn’t solely about saving the planet — it’s a move that will save businesses from compounding taxes.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
ANDRE NEPGEN: Real effect of carbon taxes on electricity costs
The question for business leaders should be, ‘how much am I paying for carbon taxes and electricity combined, and for what coverage?’
SA is at a critical juncture in energy procurement. The growing effect of carbon taxes and the EU’s looming carbon border adjustment mechanism (CBAM) should be of concern for local businesses. The question we should ask ourselves is whether we’re prepared for the cost of our ongoing reliance on fossil fuels.
SA has one of the dirtiest energy profiles in the world — compared to other major economies, our country is heavily dependent on coal and fossil fuels. We emit roughly one tonne of carbon dioxide equivalent (CO2e) for every megawatt hour of electricity consumed — one of the world’s highest levels of carbon emissions per unit of electricity. In fact, our electricity is twice as dirty as the global median. This heavy reliance on fossil fuels is not only unsustainable from an environmental point of view, but is financially disastrous when you factor in global carbon tax policies.
For a long time our dependence on coal was overlooked, but that is coming to an end. We lag far behind in the global shift towards cleaner, renewable energy. And with rising carbon taxes, that “dirty” status is going to cost us dearly.
The stealth cost of carbon taxes
SA businesses face a carbon tax double whammy. Domestic carbon taxes are increasing faster than inflation — and will rise to R462 per tonne of CO2e in 2030 from the current R190, according to rates published by the Treasury. Meanwhile, tax allowances are being phased out — depending on the nature of the business, allowances currently provide up to 85% relief but could be completely or partially phased out within the next decade or so, if not sooner. Many businesses initially considered carbon taxes a minor expense, but they will soon become a substantial part of operating expenses for those businesses that remain reliant on fossil fuels.
What’s especially worrying is how these costs are being slipped into operations. By 2026 SA carbon taxes will add 6c-9c per kWh to electricity prices. In 2035 they could rise to 34c-72c per kWh, and by 2046 some companies could be paying an additional 166c per kWh more. To give context to these numbers, we typically see businesses paying 133c-150c per kWh in electricity generation costs today.
For companies exporting products such as aluminium, iron, steel and fertiliser to Europe, the EU’s CBAM is another ticking time bomb. CBAM is the penalty that will be imposed on EU importers from countries with lower carbon taxes than in the EU, with the size of the penalty determined by the difference in carbon taxes between the two countries. The issue is that local manufacturing processes for these products are emissions-intensive and are subject to a far lower carbon tax rate than that levied on businesses in the EU. With the EU being SA’s largest trade partner, it is estimated that R52.4bn of SA exports are under threat in the short term because of CBAM. This figure is expected to grow as the scope of CBAM expands to include more and more products over time.
In 2026, when CBAM kicks in, European carbon taxes are expected to be €85 (about R1,630) per tonne of CO2e. This is 15 times higher than our carbon taxes, which are expected to be set at €5.5 (R105) in 2026, after taking tax allowances into account. For the average industry affected by the EU’s CBAM, this translates into an extra 80c per kWh in electricity costs in 2030, ramping up to as much as R1.65 per kWh in 2035. For SA companies exporting to Europe, that tax gap will hit profitability hard and make it nearly impossible to remain competitive unless they decarbonise.
High coverage renewable energy is the only way forward
The outlook sounds grim, but there is a solution. Shifting to renewable energy is environmentally responsible and the best way to avoid the financial burden of carbon taxes. It’s already cheaper than some fossil fuel options, and when one factors in the future cost of carbon taxes switching to renewable energy is the best strategy.
We’ve all been focused on finding the cheapest source of electricity to keep our businesses running, but that mindset needs to change. The real question for business leaders shouldn’t be, “how much am I paying for electricity?” It should be, “how much am I paying for carbon taxes and electricity combined — and for what coverage?”
There are several renewable energy strategies available to SA businesses, including embedded solar, wheeled solar, wheeled wind, traditional aggregators, and product models like the Discovery Green renewable energy platform.
Thinking about coverage is critical: the less renewable energy one has, the more exposed they are to SA carbon taxes, EU CBAM penalties, and above-inflation future utility price increases. Many businesses select the strategy that comes in at the lowest quoted price; however, the lowest price almost always gives the least coverage. In the long run, your business will be more susceptible to increasing carbon taxes and future electricity hikes.
The urgency of action
By 2035, existing electricity generation costs could increase by as much as 28% in today’s terms due to SA carbon tax alone. For industries exposed to CBAM this increase could rise by another 64%. There’s no business in SA that won’t feel the pain of that increase. Every year that goes by without a solid renewable energy strategy in place that offers close to 100% coverage is another year that businesses are digging themselves into a financial hole.
Investing in maximum renewable energy coverage today reduces one’s carbon footprint and protects the bottom line from inevitable carbon tax hikes. The takeaway is simple: the future belongs to companies that balance economic growth with environmental responsibility, and those businesses that have secured as close to 100% coverage of renewable energy will be the most safeguarded. Embracing renewable energy sooner rather than later isn’t solely about saving the planet — it’s a move that will save businesses from compounding taxes.
• Nepgen is head of Discovery Green.
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