Discovery’s double blow warning to certain businesses in South Africa

 ·27 Oct 2024

South African businesses are bracing for a double blow as carbon taxes are set to rise significantly, and the tax allowances that have offered critical relief are likely to be phased out.

By 2034, according to research by Discovery Green in partnership with EY Africa’s Sustainability Tax division, companies may face a 60% increase in their electricity generation costs directly tied to carbon taxes.

South Africa’s carbon tax is anticipated to rise by 143% by 2030, pressuring industries already struggling with high emissions and coal-dependent energy sources.

Currently, tax allowances provide up to 85% relief depending on the industry, cushioning businesses from the full impact of the carbon tax.

However, these allowances are set to diminish, with a full phase-out possible by 2026.

As Andre Nepgen, Head of Discovery Green, explains, this looming change places the burden of carbon taxes squarely on companies.

South Africa’s Carbon Tax Act, which was signed into law in 2019, began with a modest R190 per tonne carbon tax, supported by incentives.

With the second phase of the Act approaching, the tax will increase to R462 per tonne by 2030, a shift that could force businesses to reassess their operational and energy strategies to mitigate cost increases.

South Africa’s carbon intensity is particularly high due to its heavy reliance on coal, which emits roughly 1 tonne of CO₂ equivalent per megawatt-hour, nearly twice the global average.

This reliance makes local electricity generation highly carbon-intensive, with coal currently accounting for nearly 80% of the country’s electricity.

The upcoming changes will also introduce Scope 2 taxes on indirect emissions from the carbon content of purchased electricity, adding a new layer of cost to businesses that rely on coal-based electricity.

Without allowances, some industries could face a 340% increase in domestic carbon tax payments over the next five years, placing significant strain on financial resources.

In addition to rising domestic carbon taxes, businesses exporting to the European Union will encounter further costs due to the EU’s Carbon Border Adjustment Mechanism (CBAM).

The CBAM will require importers to pay the difference between South Africa’s carbon tax and Europe’s, which is anticipated to reach €85 (R1,630) per tonne by 2026.

With South Africa’s carbon tax projected to be only €5.5 (R105) per tonne after allowances are factored in, this gap means that South African exporters, particularly in energy-intensive sectors like steel and aluminium, could face increased costs to maintain EU market access.

Research estimates that R52.4 billion in exports to the EU could be affected in the short term, with broader impacts as the CBAM expands to cover additional industries by 2034.

This escalating financial impact underscores the urgency for South African businesses to accelerate their adoption of renewable energy.

The move to high-coverage renewable energy sources is not just a carbon reduction measure; it has become an essential strategy for maintaining competitiveness and managing the rising costs associated with carbon taxes.

Renewable energy provides a path to mitigate Scope 2 carbon taxes, offsetting the reliance on carbon-intensive coal-generated electricity and, ultimately, reducing tax liabilities.

Investing in cleaner energy options offers long-term protection from volatile energy prices and aligns with global sustainability expectations.

According to Nepgen, the shift to renewable energy is critical for businesses aiming to control operational costs amid increasing carbon taxes.

The projected rise in carbon taxes by 2034 means that carbon-related expenses could account for more than 35% of a company’s electricity generation costs.

By proactively reducing reliance on coal and embracing renewable energy solutions, South African businesses can shield themselves from the full financial impact of both local carbon taxes and international trade policies like the CBAM.

As these tax allowances phase out and carbon taxes increase, it has never been more pressing for businesses to reassess their sustainability strategies.

The high upfront cost of renewable energy may be daunting, but it promises long-term savings and market resilience in an increasingly climate-conscious global economy.

By positioning themselves at the forefront of sustainable practices, South African businesses can safeguard their profitability and contribute to a more sustainable future while meeting the challenges of a rapidly evolving regulatory landscape.


Read: South Africans are poorer today than they were in 2014

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