Carbon tax in the air

South Africa has yet to pass legislation aimed at reducing the carbon footprint but given the country's high emission rate and pressure from international counterparts, such measures are expected.

One of the biggest challenges in formulating such legislation is that the country relies heavily on coal for energy needs and a fine balance would be needed between a reduction system and economic growth reliant on energy consumption.

Options offer challenges

According to Graham Terry, head of the office of the executive president at the South African Institute of Chartered Accountants (SAICA) and author of the recently published book ‘Green', government is essentially faced with two options - carbon tax or a cap-and-trade system.

“Both are methods of carbon pricing, which is based on the principle that the external costs associated with emissions should be included in market costs and prices. While carbon taxes affect the price and let the market determine the quantity of emissions, cap-and-trade systems set the quantity of emissions and let the market determine the price through trading or auctions. Either way, the business community needs to familiarise itself with the risks and opportunities that these systems will bring about. Which ever route government decides to take, there will be a significant impact on business,” he says.

SAICA's national tax committee has established a carbon tax task team to explore which of the models is best suited for South Africa.

Cap-and-trade

Izak Swart, associate director of tax management consulting at Deloitte, states that there is international debate over which system is more suitable. “Depending on who you are talking to, either one will work because there is no simple answer. Ultimately, it is dependent on the country and its economic situation.”

"We believe a cap-and-trade system would be best in the South African business environment, as it provides an incentive to reduce carbon emissions, which may prove more successful, especially given our energy situation in the country. It could also provide an reason to change technologies. A tax can be introduced at a later stage for those who did not take up the incentive approach,” said Swart.

"We understand the current thinking in government is to opt for a carbon tax. The main reason for this is that the South African Revenue Service is seen to be the most efficient department in government and a tax in this instance would be relatively easy to introduce and administer. However, a lot of thought would need to go into a carbon tax, who will pay the tax - the end consumer or the emitter? Also, at what level must the tax be set, given our reliance on coal to produce electricity and our current economic situation?”

Carbon tax

Chaya Lakhani, at PricewaterhouseCoopers Tax Services, argues that carbon tax is indeed the right option for government to pursue. “In the current context of South Africa, it is my opinion that carbon tax will be the most efficient. It would avoid significant year-to-year fluctuations in costs, it can motivate change, the benefit will exceed the cost of implementation, it will not require monitoring emissions by regulatory bodies and will be relatively easy to implement, as it could be built on administrative infrastructure for existing taxes.”

Sustainability reporting

Regardless of which system government decides to implement, experts agree that businesses that want to be competitive and remain in business will need to start adapting their business models for the carbon-constrained world sooner rather than later.

According to Terry, this is where the importance of sustainability reporting becomes apparent. “Relevant, clear reporting will become an increasingly invaluable business tool. The possible implementation of either a carbon tax or cap-and-trade system means that the business community and chartered accountants must get their thoughts around carbon reduction strategies and reporting.”

Chartered accountants (CAs), who have a unique ability to identify and present relevant, accurate financial information to stakeholders, are ideally positioned to utilise these skills in presenting non-financial information. Furthermore, they are also in a favourable position to lead talks within businesses as to mitigation and adaptation strategies. With this in mind, it is clear that CAs will play a pivotal role in this new era of business.

The book Green is a key resource in learning more about carbon trading, sustainability reporting and a host of other sustainability issues and is available through www.saica.co.za. It is complemented by the dedicated sustainability website www.sustainabilitysa.co.za.