30 April 2014

South Africa: Carbon Offset Scheme for SA Firms

The National Treasury has called for public comment on a set of proposals for a carbon offset scheme aimed at enabling South African businesses to lower their carbon tax liability and make investments to reduce their greenhouse gas emissions.

The Carbon Offsets Paper, published on Tuesday, is part of a set of measures to address climate change. According to the Treasury, "a carbon offset is a measurable avoidance, reduction, or sequestration of carbon dioxide or other GHG [greenhouse gas] emissions."

South Africa has committed to reduce its greenhouse gas emissions by 34 percent by 2020 and 42 percent by 2025.

"To ensure a relatively smooth transition to a low-carbon economy, the carbon tax design incorporates a number of relief measures and a gradual phased-in approach to protect households and the international competiveness of local businesses," the Treasury said.

The proposed carbon tax policy includes a basic tax-free threshold of 60 percent below which the tax will initially not be payable; a factor formula to adjust basic tax-free threshold to reward companies that have taken voluntary actions to reduce their emissions before the introduction of the carbon tax; and additional tax-free allowances for sectors with limited potential for emissions reduction, such as industrial process emissions.

The draft policy also proposes additional graduated relief for trade-exposed and emissions-intensive sectors, and carbon offsets that businesses can use to reduce their carbon tax liability. The overall maximum tax-free threshold is limited to 90 percent.

"Carbon offsets will enable firms to cost-effectively lower their carbon tax liability," the Treasury said. "They will also incentivise investment in least-cost mitigation options in the country, driving investment in greenhouse gas-mitigation projects that deliver carbon emissions reduction at a cost lower than the carbon tax.

"Such projects can generate considerable sustainable development benefits in South Africa, including channelling capital to rural development projects, creating employment, restoring landscapes, reducing land degradation, protecting biodiversity, and encouraging energy efficiency and low carbon growth."

According to the proposed policy, a number of requirements must be met for a project to be awarded a tradeable emissions reduction credit under a specific standard.

The principles of "additionality", "permanence" and "real" will be used to ensure the credibility of carbon offset projects: "additionality" meaning greenhouse gas emission reductions would not have occurred under a "business as usual" scenario; "permanence" meaning emissions are unlikely to be reversed, and "real" meaning emission offsets originate within physical projects, with proof that they have occurred or will occur at a specific point in time.

To be eligible, projects that generate carbon offset credits must occur outside the scope of activities of the entity subject to the carbon tax. Only South African based credits will be eligible for use within the carbon offset scheme, and carbon offset projects registered and/or implemented before the introduction of the carbon tax regime will be accepted subject to certain conditions and within a specific timeframe.

However, specific carbon offset project types should be excluded from the scheme to avoid the potential for double counting of financial benefits from greenhouse gas mitigation. Projects benefiting from other government incentives will also be excluded.

According to the Treasury, disallowed projects would include energy efficiency in company-owned or controlled operations that are covered by the carbon tax, including energy efficiency for projects that benefit from the Energy Efficiency Tax Incentive and renewable energy projects developed under the Renewable Energy Independent Power Producer Programme.

Projects under four different carbon offset standards have been developed in South Africa, including the Clean Development Mechanism, the Verified Carbon Standard, the Gold Standard, and the Climate, Community and Biodiversity Standard.

In order to facilitate the introduction of the carbon offset scheme, it is proposed that carbon offsets developed under these standards will be considered for eligibility if they fulfill specific criteria.

According to the Treasury, the initial focus is expected to be on projects approved along the lines of the Clean Development Mechanism.

The deadline for public comment is 30 June 2014.

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