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Introduction and Background

New laws may be in the pipeline in South Africa to address climate change after the South African Finance Minister’s (“the Minister”) Budget speech on 11 February 2009. In the 2009 Budget speech, the Minister announced specific additional measures which South Africa will implement in responding to climate change. The proposals the Minister made will require reforms of some fiscal and environmental legislation because some of the measures he announced are not currently provided for in law. As a result, this article considers the contents of the 2009 Budget speech, focusing specifically on the various market-based instruments (“MBIs”) the National Treasury proposes to implement and extend in an attempt to encourage energy efficiency and reduce harmful emissions. It will also briefly discuss legislative and administrative implications of this proposal.

Before discussing the relevant aspects of the speech and attendant legislative implications, we first set out the background to the Minister’s announcement.

Minister’s announcement flows from the draft policy paper titled ‘Framework for Considering Market-Based Instruments to Support Environmental Fiscal Reform in South Africa’ (“the Framework”) which the National Treasury published in April 2006. The Framework contains a detailed theoretical and practical overview of the possible future use of MBIs to support environmental fiscal reform in South Africa and outlines the role that MBIs could play in supporting sustainable development and addressing climate change.

In every Budget speech since the Framework was published, the Minister of Finance (“the Minister”) has announced tax incentives aimed at implementing measures to address climate change and sustainable development. For example, in the 2008 Budget speech, the Minister stated that there was much to be done to develop specific and practical measures to support sustainable development, both on the tax and the spending side of the budget.  The 2009 Budget speech is different because some of the additional measures which the Minister announced have proposed time frames within which they will be implemented. The 2009 Budget speech is also important in that it emphasises South Africa’s commitment to fight climate change.  We discuss the measures announced by the Minister below.

Future Developments
Recognising that climate change requires both global and policy responses, in the 2009 Budget speech, the Minister announced specific additional measures which South Africa will take to encourage energy efficiency and reduce harmful emissions in response to climate change. These additional measures include:

• the introduction of an incentive for investing in energy-efficient equipment;
• increasing the levy on plastic shopping bags;
• a proposal to increase international air passenger departure tax;
• adjusting excise duties on motor vehicles in order to take into account carbon emissions; and
• the introduction of favourable tax treatment for income derived from the sale of certified emission reductions (“CERs”).

We discuss the key measures proposed by the Minister in response to the challenge of climate change in detail below.

Incentive for investing in energy-efficient equipment

National Treasury proposes that investments by companies in energy-efficient equipment should qualify for an additional depreciation allowance of up to 15%.  This allowance will be a Supplementary Depreciation Allowance. A company will qualify for the Supplementary Depreciation Allowance if there is documentary proof of the resulting energy efficiencies.

The resulting energy efficiencies which will be taken into account for the Supplementary Depreciation Allowance will be the energy savings for a period of two to three years after the energy-efficient equipment was installed or used. In addition, for a company to qualify for the allowance, its resulting energy efficiencies will have to be certified by the Energy Efficiency Agency.

It should be noted that accelerated depreciation allowance schemes already exist in various contexts in South Africa. Accordingly, the Supplementary depreciation allowance proposed by National Treasury will be an extension of existing depreciation allowance schemes. The Supplementary Depreciation Allowance is aimed at incentivizing and encouraging the adoption and use of energy efficient technology in the production processes. 

There is no specific time frame within which this Supplementary Depreciation Allowance will be introduced. What is clear is that in future, hopefully not in a too distant future, investing in energy-efficient equipment will be rewarded.

Adjusting excise duties on motor vehicles in order to take into account carbon emissions

National Treasury views improved fuel efficiency as important in curbing the growth in greenhouse gas emissions. As a result, it recommends that the existing ad valorem excise duties on motor vehicles be adjusted to incorporate carbon dioxide emissions as an environmental criterion. The proposed adjustment will become effective from 1 March 2010.

In this regard, fuel inefficient cars will be very expensive. For example, a vehicle producing more than 300g/km in emissions will incur an extra 12% in emissions tax. As a result, individual consumers and companies will have to ensure that they use fuel efficient vehicles in future.

There are two main objectives in adjusting excise duties on motor vehicles.  The first is to minimize greenhouse gas emissions into the atmosphere and the second is to encourage the production and purchase of vehicles using cleaner technologies.

 Introduction of favourable tax treatment recognizing income derived from the sale of CERs

In an attempt to encourage South African companies to take advantage of the clean development mechanism established in the Kyoto Protocol, National Treasury proposes that income derived from the sale of primary Certified Emission Reductions (“CERs”) be tax exempt, or subject to capital gains tax instead of normal income tax. Secondary CERs are to be classified as trading stock and taxed accordingly.

There is no specific time frame of when this tax reform will be implemented. Once it is implemented, it is hoped that trade on CERs will increase, as it is currently very low. Most importantly, it is hoped that that increased trade in CERs will in turn reduce the emission of greenhouse gases into the atmosphere.

Legislative reforms
The above measures will require different legislative amendments. Given the fact that tax legislation will intersect with environmental legislation in this regard, there will be a lot of fiscal and environmental legal reforms that will require some alignment. The alignment of legislative instruments will of necessity require the coordination of the roles and responsibilities of different national, provincial and local authorities in this process. In addition, it should be noted that the proposed MBIs will not necessarily replace existing regulatory measures, instead they will complement them. Accordingly, in order to draw some benefit from any of these MBIs in future, it will be important to seek appropriate legal advice before venturing into a project.

Conclusion
From the foregoing, it is clear that South Africa will in future make greater use of MBIs in responding to the challenge of climate change. As a result innovation and going beyond regulated performance levels will be rewarded and companies who simply comply with minimum regulatory standard will be at loss.

Claire Tucker is a director and Wandisile Mandlana an associate in the Corporate Department at Bowman Gilfillan.