South Africa is getting serious about reducing its carbon footprint and accelerating the transition to renewable energy sources. The government recently announced major increases to carbon tax rates over the next six years that will significantly impact fuel and electricity prices for consumers.
The Carbon Tax Act’s Phase 1 Has Been Extended
In the 2022 Budget, the first phase of South Africa’s Carbon Tax Act was prolonged by three years from its original end date of December 31, 2022.
Phase 1 will now run until December 31, 2025 to allow more time for the country to transition to lower-carbon energy sources.
During this extended Phase 1 period, companies will continue benefiting from significant tax-free allowances that reduce their carbon tax liability.
The tax-free allowances range from 60% to 95% for different sectors like energy combustion, industrial processes, and fugitive emissions.
Some sectors like agriculture, forestry, waste management, and land use have a 100% tax-free allowance during Phase 1.
However, to drive further emissions reductions, the carbon tax rate itself will increase annually at a rate higher than inflation, as shown in this table:
Year
Carbon Tax Rate (R/ton)
Annual Increase
2022
144
CPI + 2%
2023
159
CPI + 2%
2024
190
CPI + 2%
2025
236
CPI + 2%
After 2025, when Phase 2 begins, the carbon tax rate will increase annually just by the rate of inflation.
The extension allows South African companies more time to adjust to the carbon tax system and make investments in low-carbon technologies before losing emissions allowances in Phase 2. But it also signals that tax rates will keep climbing to incentivise faster decarbonisation.
Carbon Tax Rates to More Than Triple by 2030
The increases in South Africa’s carbon tax rates over the next several years are truly staggering. What started as a relatively modest tax is quickly becoming a major cost burden aimed at driving down emissions.
In 2019 when it was first implemented, the carbon tax rate was set at R120 per ton of CO2 equivalent emissions.
It increased gradually by inflation plus 2% each year during the initial phase up until the end of 2022.
For the 2023 calendar year, the rate jumped up to R159/ton.
However, this is just the beginning. The projected carbon tax rates from 2024-2030 are as follows:
Year
Carbon Tax Rate (R/ton)
2024
190
2025
236
2026
308
2027
347
2028
385
2029
424
2030
462
By 2030, the rate will have soared to R462 per ton of emissions, a staggering 285% increase over 2023 levels.
This equates to nearly a quadrupling of the tax rate in just 7 years’ time.
Such drastic tax hikes on carbon emissions demonstrate South Africa’s aggressive strategy to penalise polluters and incentivise a shift to renewable energy.
The escalating carbon tax rates will undoubtedly get passed through to consumers in the form of higher prices for fuel, electricity, and products/services from energy-intensive industries. Households and businesses should prepare for the financial impacts in the years ahead.
Fuel Prices Could Double from Carbon Tax Alone
The proposed carbon tax increases will have a major impact on fuel prices for South African consumers. Currently, the carbon tax adds around 10 cents per liter for diesel and 9 cents for gasoline. However, by 2030 these figures could skyrocket:
Diesel Carbon Tax Impact
2023: 10 cents per liter
2030: R1.07 per liter
Gasoline Carbon Tax Impact
2023: 9 cents per liter
2030: 97 cents per liter
Here’s a yearly breakdown of the potential carbon tax costs per liter of fuel:
Year
Diesel Carbon Tax (R/liter)
Gasoline Carbon Tax (R/liter)
2023
0.10
0.09
2024
0.19
0.17
2025
0.24
0.21
2026
0.31
0.28
2027
0.35
0.32
2028
0.39
0.35
2029
0.43
0.39
2030
1.07
0.97
These figures represent just the carbon tax component. They don’t include other fuel taxes, levies and general price increases. So the total impact on pump prices could be even higher for gasoline and diesel by the end of the decade.
South African motorists and businesses relying on transportation should brace for continually rising fuel costs in the coming years as the carbon tax escalates. Adopting more fuel-efficient vehicles and looking at alternative energy sources may be crucial for managing expenses.
Electricity Prices to Surge After 2025
For the first phase of the carbon tax through 2025, the Carbon Tax Act includes provisions to help shield consumers from higher electricity prices. This is accomplished through:
A renewable energy premium tax deduction for electricity generators
A levy on electricity generation
Together, these provisions create a “neutrality” that prevents the carbon tax from immediately impacting electricity rates. This temporary buffer was designed to:
Cushion energy-intensive businesses and consumers from high electricity price hikes
Allow time for increasing the share of renewable energy in South Africa’s electricity generation mix
However, this electricity price neutrality expires at the end of 2025. Starting in 2026, carbon tax costs will be directly passed through to electricity rates from suppliers like Eskom.
Eskom’s Carbon Tax Burden
As a predominant coal-fired electricity generator, Eskom will face a substantial carbon tax liability in the post-2025 carbon tax phase. Here are the projected carbon tax costs for Eskom based on the scheduled tax rate increases:
Year
Carbon Tax Rate (R/ton)
Eskom’s Estimated Carbon Tax (R billions)*
2026
308
6.9
2027
347
7.8
2028
385
8.7
2029
424
9.6
2030
462
10.4
*Estimated carbon tax figures assume Eskom emissions of 225 million tons per year
With carbon tax costs escalating into the billions of rands annually, Eskom will have no choice but to pass these expenses along to consumers through higher electricity tariffs after 2025. Households and businesses should prepare for a significant surge in electricity bills as the next phase of the carbon tax kicks in.
South Africa is taking an aggressive approach to curbing emissions through escalating taxation on carbon-intensive energy sources. Consumers should prepare for the financial impacts in the years ahead as the country transitions to greener sources of power and transportation.