SEUTAME MAIMELE AND KEVIN TUTANI: SA needs to get its carbon tax right

In nominal and effective terms SA’s carbon tax is low by both global and EU standards. It has been set at a nominal value of only R190/tonne of carbon dioxide equivalent (tCO₂e) or about $10/tCO₂e. This is expected to increase to R462/tCO₂e by 2030 (about $25-$30/tCO₂e).

However, in effect the country provides for industry-specific tax-free emissions that range from 60%-95%. This reduces the carbon tax that is effectively paid to only R10-R76/tCO₂e, depending on the type of industry. The government’s plan is to gradually reduce tax-free allowances from January 1 2026 to December 31 2030. 

The situation is different in the EU. The average carbon tax rate among European countries was €49.23/tCO₂e by April 1 2024. However, a range of industries that are overseen by the EU’s Emissions Trading System (ETS) have paid an even higher carbon tax — €69.71/tCO₂e since November 22 2024.

The ETS covers traditionally high-emission industries such as power generation, aviation, cement, steel, aluminium and chemicals. Unlike SA, the share of tax-free emissions allowances within the ETS decreased from 80% in 2013 to only 30% in 2020. By 2034 all industries covered by the ETS will no longer receive any free allowances.

To prevent European industries from losing their competitiveness to imports due to its relatively higher carbon taxes, the EU will implement its Carbon Border Adjustment Mechanism (CBAM) in 2026. Through the CBAM, SA and other foreign firms that export to the EU will be obliged to pay the differential between the carbon tax they paid in their home country and the EU’s ETS carbon tax.

So, if SA exporters to the EU have paid only R76/tCO₂e (€3.96) to SA’s government, they will be required to pay an additional R1,260 (€65.75) at the EU’s various ports, to make up for the differential between SA and EU carbon taxes. However, if SA were to charge a tax equivalent to the EU’s CBAM (R1,335 or €69.71/tCO2e), local exporters would not be charged any additional carbon tax in the EU. 

It is also crucial to state that the EU’s CBAM will not  apply to all industries covered by the ETS in its first few years. However, it will initially apply to those industries that are covered by the ETS and are globally notorious for emissions. These include cement, iron and steel, aluminium, and a few more. With time, though, the CBAM will include even more industries. 

As stated earlier, if SA exporters subject to the CBAM pay the SA government the same carbon tax as would be due to the EU’s ETS, they will be exempt from the CBAM tax. This obviously points to the need for SA’s government to be proactive and avoid any revenue leakage that may arise due to the differences in carbon taxes between SA and the EU’s ETS. 

The US, UK, Japan, Canada and other developed countries have also indicated that they are interested in establishing their own CBAM taxes to equate carbon taxes paid domestically and those paid on imports. This serves to emphasise the urgency of being decisive with regards to reconciling SA’s domestic carbon taxes to international realities. 

What should the National Treasury do? 

The National Treasury could look into reforming SA’s carbon tax, which is more ambitious. The price should reflect global carbon pricing and be adjusted for international equity. Recycling mechanisms can then be built in. This would mean increasing the domestic carbon tax to be within the global carbon price corridor of $50-$100/tCO₂e by 2030. Reducing tax-free allowances in line with global trends would also be ideal.

Increasing the SA carbon price would stimulate heavy emitters to reform their business models and operations, as well as reduce the exposure to border carbon adjustments (BCAs) such as the EU’s CBAM. Increasing the domestic carbon tax will have a similar effect to BCAs on local companies, but would enable SA to retain the proceeds of carbon pricing and avoid revenue leakage.

Domestic carbon revenue would stay in SA instead of flowing to the EU, UK and other jurisdictions that are thinking of introducing such mechanisms. This revenue could be recycled to incentivise the decarbonisation of industries locally, prioritising the worst affected sectors such as the iron, steel and aluminium industries.

This can be done by creating a decarbonisation fund at the National Treasury, which will act as an incentive along with the electricity generation levy credit, renewable energy premium credit and energy efficiency savings tax incentive. These should continue beyond 2030. 

The National Treasury, along with the departments of trade, industry & competition and international relations & co-operation, should engage with jurisdictions that are introducing BCAs and negotiate for SA’s industries to be charged lower CBAM taxes. The World Trade Organisation and UN Framework Convention on Climate Change’s principles of special and differentiated treatment and common but differentiated responsibilities, and respective capabilities will be a great foundation to negotiate from.

CBAM taxes on SA’s exports should also be adjusted for cost differences by considering the national currency to the international dollar based on purchasing power parity (PPP). Based on estimates, SA firms can be expected to pay about 55% of the EU CBAM charge by 2034, if it is adjusted for PPP. 

In both cases — adjusting the carbon tax to be in line with global standards with recycling mechanisms, and negotiating for an adjusted carbon price to pay for a lower CBAM charge — the socioeconomic implications of the adjustments need to be considered. 

• Maimele is an economist at economic think-tank Trade & Industrial Policy Strategies. Tutani is principal consultant at public policy research firm Zano Guru Consulting.