South Africa’s Carbon Tax Act
In June 2019, South Africa’s Carbon Tax Act went into effect to help the country meet its climate commitments under the Paris Agreement. To provide an overview of the VCS Program and how Verra plans to support the development of projects in South Africa, we hosted a 90-minute webinar “The VCS Program in South Africa” on 25 August.
The South Africa carbon tax will drive reductions in greenhouse gas (GHG) emissions across the economy, which has the 14th-highest level of emissions globally. It includes an offset component that is expected to drive significant investment directly to emission reduction and/or removal activities throughout South Africa that can also generate additional positive social and environmental impacts.
The first phase of the tax extends until the end of 2022 and has the following features:
- Stationary and some non-stationary GHG sources with a thermal design capacity of 10 MW or more have to pay taxes on their Scope 1 direct emissions for the time period between June 1 and December 31, 2019.
- The tax is set at R127 (approximately US$7/ton), and until 2023, will increase by 2% annually, plus inflation. In phase 3, which starts in 2030, increases in line with inflation are expected, but not confirmed.
- The design of the tax exonerates regulated entities from up to 95% of their tax liabilities via various allowances. One of the six allowances enables companies to use carbon credits, or offsets, for 5 or 10% of their total taxed liability depending on the sector, and as defined in Schedule 2 of the Tax legislation. For example, most entities in the energy sector have to pay 10% of their tax liability if they qualify for all allowances and surrender carbon credits for their entire 10% offset allowance.
- Verra’s Verified Carbon Standard (VCS) Program is recognized as an accredited standard under this regulation, and entities with tax obligations can use Verified Carbon Units (VCUs) to cover a portion of their tax liability. In addition to the VCS Program, entities can also surrender credits issued by the Gold Standard and the Clean Development Mechanism (CDM).
- Demand estimates for offsets currently stand at 10 MtCO2e annually.
- The first deadline for surrendering eligible carbon offsets is 29 October 2020.
The Carbon Offset Administration System (COAS)
The Carbon Offset Administration System (COAS), administered by the Department of Mineral Resources and Energy, was launched 23 July 2020 and serves two main purposes: 1) to define the procedures through which project developers submit eligible projects and list their credits, and 2) to provide a platform through which emitters can surrender carbon credits against their tax obligations. Over the last year, Verra worked with the government, project developers, and market actors to ensure that VCUs from the Verra Registry can be retired and listed in COAS.
The regulations for the type of offsets that can be used to meet compliance requirements were published in November 2019. To be eligible to generate credits for use in lieu of the carbon tax, projects must be located in South Africa. Projects in the transport, waste and agriculture, forestry and land use (AFOLU) sectors, which are not covered by the tax, can generate carbon credits.
The eligibility of carbon credits is as follows:
- Credits issued prior to 1 June 2019 from already registered projects are eligible provided that they are transferred from the registry where they are currently listed to the COAS registry during phase 1 (by 31 Dec 2022).
- Credits issued after 1 June 2019 from already registered projects are eligible provided they are transferred and used within one year after the end of the first phase (i.e., by 31 Dec 2023).
For credits in the Verra registry, this means that once an eligible project has been approved in the COAS, VCUs from this project that are intended to be used for compliance purposes in South Africa, are retired in the Verra Registry and identified as for “use in the SA Carbon Tax system” and subsequently transferred to COAS.
Offset Development and Investment Opportunities in South Africa
The South African carbon tax is likely to drive investment directly into GHG emission reduction and/or removal activities, as has happened due to a similar tax in Colombia. To date, there are 26 VCS projects in South Africa, including projects in the transport, chemical, energy, waste, industrial processing and AFOLU sectors. Collectively, these projects have issued 911,000 VCUs so far. With the domestic market offering both an attractive price and sizeable expected demand for carbon credits, Verra anticipates growth in project activity throughout South Africa.
Verra’s VCS Program is well placed to support projects throughout the entire economy. The VCS Program includes a wide variety of methodologies for different project types, including for projects targeting natural climate solutions, and also allows for development of new methodologies. In addition, the VCS Program includes a number of elements designed to streamline the project development process and lower costs, including, for example, the grouped project approach, which allows the expansion of a project activity subsequent to project validation, and standardized method approaches.
VCS projects contribute to South Africa’s sustainable development. In addition, projects can complete a Sustainable Development Contributions Report which standardizes self-reported Sustainable Development Goals (SDG) contributions. Alternatively, projects can certify against either the Sustainable Development Verified Impact Standard (SD VISta) Program or the Climate, Community & Biodiversity (CCB) Standard. Verified SDG benefits will make VCUs that are labeled with them more attractive and valuable to buyers. In addition, these projects’ sustainable development benefits will positively impact the well-being of the local population.
Verra in South Africa
Verra is very excited about expanding its work in South Africa and looks forward to supporting the development of GHG emission reduction and/or removal projects there, much like we have done in Colombia which introduced a carbon tax and offset mechanism in 2017. To provide immediate and timely support for market stakeholders in the country, we plan to hire a locally based South Africa Manager. In addition, we are exploring ways of working with the South African National Accreditation System (SANAS) to develop a domestic accreditation system that would enable local auditors to provide services to VCS projects.