THE RING-FENCING OF CARBON TAX REVENUES VERSUS THEIR INTEGRATION INTO GENERAL GOVERNMENT FUNDS

The South African Carbon Tax was implemented in June 2019 in a phased approach. Phase 1, which ends in December 2025, focused on building the tax framework and excluded Scope 2 and 3 emissions as well as emissions from mobile combustion. This phase included numerous tax-free allowances and relatively low Carbon Tax rates to allow businesses to acclimatise to the tax.

Phase 2, which starts in January 2026, aims to reduce tax-free allowances and substantially increase the Carbon Tax rate. The substantial revenue yielded by the tax necessitates a deliberate and thoughtful allocation strategy.
Ring-fencing the South African Carbon Tax implies that the revenue collected from the tax is specifically allocated to the implementation of initiatives and projects designed to reduce Greenhouse Gases (GHG) and alleviate climate change [1]. However, the South African Government does not operate under this model. South Africa has a 1 pot tax system. This means that revenue from all taxes is placed in a single state fund and used for numerous Government expenses. There is no specific allocation to separate sectors. The National Treasury decides and allocates funds to sectors that they believe could benefit from it.

There have been many concerns around this strategy and the accurate allocation of funds. Due to this, the National Treasury has introduced revenue recycling to balance the Carbon Tax. Revenue recycling is a way of using the funds from a Carbon Tax to alleviate the negative impacts the tax has on businesses and households [2]. This has been implemented through various initiatives such as energy efficiency savings tax incentives, credit for the electricity levy, support for the installation of solar water geysers, and enhanced basic electricity for low-income households [3].

There are various advantages to ring-fencing the Carbon Tax. Ring-fencing the tax ensures that the funds generated are actually used to address climate change, thus resulting in impactful investments. Allocating the revenue to GHG reduction initiatives increases accountability and transparency in the way the funds are used. It can generate incentives for industry to invest in reduced-carbon technologies leading to sustainable development [1]. It can also promote public support of the tax, since the money is being used for the right purposes.

With the various advantages come a number of disadvantages to ring-fencing the Carbon Tax. Ring-fencing can infringe on the Government’s flexibility to allocate funds during economic instability. The costs involved in establishing a separate fund for revenue from this tax is substantially high [1].

I strongly believe that the revenue generated by the Carbon Tax should be ring-fenced. In this way we know that it is being used for the intended purpose, which is to reduce GHG emissions and mitigate climate change. Not ring-fencing the Carbon Tax revenue opens up a huge risk for misallocation of funds. With all of the tax revenue being pooled into one fund there is no transparency regarding what portion of the Carbon Tax revenue is being used for actual GHG reduction initiatives. Misallocation of the funds will ultimately defeat the intended purpose of the Carbon Tax.

The main purpose of the Carbon Tax is to recycle all revenue into Greenhouse Gas reduction initiatives. In 2022, approximately R1.6 billion in Carbon Tax revenue was received by the Government [2]. The portion of this revenue that was actually used for GHG reduction initiatives is not known – since all tax revenue is pooled into a single fund [2]. This further highlights the need to ring-fence the revenue from the Carbon Tax in order to promote transparency of the revenue acquired and the utilisation of that revenue for the intended purpose, which is ultimately to develop low carbon technologies and initiatives to mitigate climate change. The success of the Carbon Tax is embedded in ring-fencing the revenue generated from it. Pooling the revenue from the tax into the general budget just opens the door to corruption and mismanagement of funds.