How the new carbon tax will affect petrol and electricity prices

On Tuesday, 5 February, the Standing Committee on Finance adopted the Carbon Tax Bill.

Expected to come into effect on 1 June 2019, the underlying purpose of the carbon tax is to level the playing field between carbon-intensive (fossil fuel-based firms) and low carbon emitting sectors.

It will also provide a platform for consumers and businesses to adjust their behaviour – hopefully resulting in a reduction of emissions.

Speaking to BusinessTech, Ayanda Msimang of law firm Shepstone Wylie, explained that the bill sets the initial marginal tax rate on a taxpayer’s greenhouse gas emissions at R120 per ton carbon dioxide equivalent.

However, it also creates a number of transitional tax-free allowances to ensure a smooth transition to a low carbon economy, he said.

“The total tax-free allowances during the initial phase (which goes up to 2020) can be as high as 95%.

“Considering the listed tax incentives, the carbon tax will range between R6 – R48 per ton carbon dioxide equivalent which is much lower than the initial rate of R120 per ton carbon dioxide equivalent.”

Impact on consumers

While the carbon tax is aimed at industry, there have been concerns about a possible knock-on effect for South African consumers.

According to Msimang, a socio-economic impact assessment study carried out by the department of planning, monitoring and evaluation in 2017 estimated that the introduction of the carbon tax will be revenue-neutral, and have a net zero impact on the cost of electricity during the first phase.

For liquid fuels, the estimated carbon tax will amount to 11 c/litre for petrol and 13 c/litre for diesel assuming a 60% basic tax-free allowance, he said.

“This may affect the prices of petrol and diesel as petroleum producers and refiners will have to factor the carbon tax in their value chain assessment, particularly on diesel as the proposed carbon tax will result in a higher tax on diesel than on petrol due to the higher carbon intensity of diesel fuel relative to petrol,” he said.

“It is, however, unclear at this stage whether the 11 c/litre tax for petrol and 13 c/litre tax for diesel will result in immediate fuel price increases or whether the petroleum industry will be willing to absorb the additional costs.”

Electricity prices and other impacts

Treasury has also stated that the new tax will not have an impact on the price of electricity during the initial phase of the implementation process.

However, since the carbon tax will be revised after the first implementation phase, the price of electricity could well be affected at a later stage.

“For now, it’s difficult to measure the full impact that carbon tax will have on South African consumers and whether it will give rise to other cost increases in the value chain which may indirectly affect consumers,” Msimang said.

“Considering that government will subsidise the initial implementation of the carbon tax with numerous tax incentives of up to 95% during the first phase of implementation, consumers are unlikely to see significant cost increases.

“This means that we are only likely to see the actual financial implications for consumers after the first phase of implementation which is currently projected to be after 2020, and that’s when we can really expect to see any other significant effects or impacts carbon tax will have on consumers in general,” he said.

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How the new carbon tax will affect petrol and electricity prices