Regulations on carbon tax offsets give some clarity

Questions remain about positive impact on economy.

Amanda Visser | 28 June 2016 12:01

The newly published draft regulations on carbon offsets sets out the procedure for the use of certain projects that will enable taxpayers to reduce their carbon tax liability.

However, industry players say these the development of these projects will be complex, costly and time consuming.

National Treasury said the draft Carbon Tax Bill provides for firms to reduce their carbon tax liability by using offset credits of up to 10% of their total greenhouse gas emissions.

It said in a statement following the publication of the regulations these carbon offset projects should generate sustainable development” benefits and employment opportunities in South Africa.

The idea is to invest in energy efficiency, rural development projects, and initiatives aimed at restoring landscapes, reducing land degradation and biodiversity protection.

Duane Newman, joint managing director of Cova Advisory & Associates, explains that a carbon offset represents a measureable reduction in greenhouse gas emissions of an approved project to compensate for the same amount of a company’s own emissions.

“One carbon credit is representative of 1 ton carbon dioxide equivalent reduced in a carbon project. If a manufacturing project emits 1 ton of carbon, it will try and find a another project which is reducing its footprint by 1 ton of carbon. In effect the carbon emitted is offset.”

National Treasury said in its statement the use of carbon offsets with the carbon tax has been widely supported by stakeholders as a cost effective measure to “incentivise” greenhouse gas emission reductions.

It said investments in public transport, agriculture, forestry and other land use and waste sectors are likely to qualify. The projects should be outside the scope of activities that are subject to the carbon tax.

National Treasury said renewable energy projects have been excluded from the carbon offset scheme, but this “blanket exclusion” could be reconsidered “subject to further consultations and motivations”.

Andrew Wellsted, head of tax at Norton Rose Fulbright, says there are many ways to fulfil the goals of greenhouse gas reduction without simply insisting that all businesses and industries invest directly and immediately in cleaner production facilities.

“In fact, if one is only able to reduce the carbon tax through direct investment, it may well become a significant hurdle to growth for a number of businesses,” he says.

By allowing external investment and accreditation through external projects aimed at reducing emissions is sensible and has been implemented in many countries worldwide.

Newman, who is also chairman of the incentives tax committee of the South African Institute of Tax Professionals, says clear methodologies need to be defined as a carbon offset effectively becomes a tradeable commodity and a basis to reduce carbon tax liability.

“A carbon offset project could potentially reduce a company’s carbon tax liability by up to 10%. One of the requirements of a carbon offset project is sustainable benefits to a community. These terms are rather subjective and thereby liable to interpretation and also misinterpretation.”

The Designated National Authority within the Department of Energy will be responsible for the administration of the carbon offset scheme.

The administrator will oversee the programme, screen and evaluate projects based on the defined criteria and approve the issuance of offset certificates.

The regulations gave clarity on which existing carbon offset projects could count towards reducing carbon tax liabilities.

Cova Advisory says government has been “overly generous” as some projects generating carbon offsets could have been set up 10 years ago. He says there has to be some restriction on the project.

But Newman also says the regulations require an additional layer of approval from the appointed body which adds another layer of complexity to an already complex process.

Besides being complex they are also very costly and time consuming.

“Companies with a carbon tax liability will have to carefully calculate the administrative, compliance and auditing costs of an offset project before they start the journey to determine whether there is a positive benefit after all the costs have been taken into account,” Newman advises.

It also remains to be seen if carbon offsets are the best and most cost effective way to increase investment in public transport, energy efficiency and agriculture.

Wellsted says the carbon tax certainly constitutes an additional cost to business in a gloomy economic epoch. “In my view, the offsets bring some flexibility and optionality to the carbon tax, and are thus positive in this regard.”

He says the adoption of a carbon tax is generally controversial, and in particular, how it will impact business and industry remains a point of debate.

The fact that there are alternatives for entities subject to the carbon tax in the form of carbon offsets are a positive addition to the regulatory framework, Wellsted says.

The regulations were published last week and commentators have until July 29 to respond.