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GCX Africa Comments on National Treasury Carbon Offsets Paper

On the 29th of April 2014 The National Treasury published the Carbon Offsets Paper for public comment. Below is the official response from GCX Africa submitted to The National Treasury.

The Carbon Offsets Paper outlined proposals for a carbon offset scheme that will enable businesses to lower their carbon tax liability and make investments that will reduce greenhouse gas (GHG) emissions.

GCX Africa participated in a round table discussion with WWF, PWC, Promethium Carbon, Blue World Carbon and PACE to discuss their various responses to Treasury.  The closing date for submissions was the 30th of June 2014.

GCX Africa’s submission to The National Treasury on the Carbon Offset Paper

Ring-fencing of  Carbon Tax

Firstly good initiative in light of Treasury refusing to ring fence carbon tax income. The fact that the tax will not be ring fenced for mitigation and adaptation projects or activities may well have a perverse outcome. For example the tax could be used to fund Coal 3 (the next giant coal power station to be built)! The fact that Eskom is in such dire financial trouble makes this situation a real possibility. Now that the tax has been delayed there is more time to revisit the ring fencing issue.

At least when purchasing carbon offsets, taxed companies will know where some of their taxable income is going. Companies will be able to choose projects that fit their corporate profile, fit their CSI strategy and invest in regions where they are situated and where their workforce may reside.

We also believe that the tax free threshold should be reduced to 50% while the upper limit for offset allowances should be increased to 20%. This will drive the demand for offset credits, which will result in more projects being registered and greater volumes of verified emissions reductions being achieved.

Carbon Offset Demand and Supply

Several studies have been conducted to ascertain the demand for carbon offsets under the Carbon Tax. Several independent studies suggest there is potential demand for over 30MtCO2e per annum during the first phase of the carbon tax. This equates to approximately 150MtCO2e over the first phase.

The potential carbon offset supply figures stated in the paper, range between 15 MtCO2e to 54 MtCO2e per year. These suggest that either an undersupply of carbon offsets or an oversupply of offsets is possible. In both cases the studies do not take account of the eligibility criteria detailed later in the paper.

A more recent study takes into account the eligibility criteria (Blue Word Carbon, 2014). The study assesses the offset supply from all eligible and currently registered projects under the allowed standards (CDM, VCS, CCBS and GS). The study suggests that the actual offset supply is more likely to be in the region of 11.5 MtCO2e over the first five year phase of the Carbon Tax. This suggests that an undersupply of approximately 140 MtCO2e over the first five year period is plausible. This will lead to an increase in the price of offsets due to the high demand for credits, which may inhibit any arbitrage opportunity afforded by the offset scheme.

Depending on the “likeability” of the projects (CSI and BBBEE Value), companies may be interested in paying a premium above the effective carbon tax price (R120/ton CO2e) for these projects.

Eligibility Criteria

GCX agrees with the majority of the eligibility criteria listed in the paper. However it is not immediately clear why all REIPPP projects have been excluded from the eligible project types lists.

From discussions with several consultants and partners, it is our understanding that the National Treasury believes that these projects are subsidized. To be fair we would agree that some of these projects are in a sense being subsidized. However several of these projects are supplying electricity at rates close to that of Eskom’s Generation costs (R/kWh). Additionally several of these projects are also well below Eskom’s average IPP R/kWh purchasing cost. We would recommend that all projects that bid below Eskom’s average IPP R/kWh purchasing cost be included as eligible.

Considering the offset shortfall mentioned above, inclusion of REIPPP projects already registered under carbon standards should be considered.

Another issue would be the implementation of Scope 2 & 3 Carbon Reduction Projects by companies that are liable to the carbon tax. The carbon tax is only applicable to Scope 1 Emissions Sources. Does this allow these companies to implement and trade offsets implemented on their Scope 2 & 3 Emissions Sources as this will technically not be double counting.

Management of the Scheme

Although GCX agrees that a centralized body is required to manage the Carbon offset registry, we question whether the DNA currently has the capacity and skills to manage all the functions designated to it in the paper. Significant upskilling and/or hiring of highly skilled personnel will need to take place before the implementation of the Carbon Tax in January 2016.

Acceptance Arrangements

We believe that it is not necessary for a working relationship to be established with the selected carbon standard bodies. Would project eligibility not be the responsibility of the project developer and the DNA?

The DNA will be setting the project requirements and will only issue a Letter of Acceptance if the Project Description (VCS), PDD (CDM) and/ or Passport (GS) complies with the set requirements.

Thinking of local voluntary projects we have been involved in, it should only be necessary to simply add a paragraph on the sustainability criteria set by the SA DNA and send the Project Documentation to the DNA. The DNA would then check the documentation and if/when satisfied, the DNA would issue the Letter of Acceptance. Or would involvement of the carbon standards really be required?

Independent Verification Bodies

Will these independent bodies need to be South African based?

If so, this may lead to a similar situation as that encountered with the Section 12L Tax Allowance programme, where there were only three accredited bodies, which may create bottlenecks for Validation and Verification. A solution to this would be to allow validation/verification bodies that are currently accredited by the four major carbon standards (CDM, VCS, CCBS & GS) to conduct this work. Whether this will be allowed is not clearly stated in the paper.

Registry

The costs of registration and issuance are not stated in the paper. Will these costs be covered by treasury?

Can credits registered on the South African Market be sold internationally? Can they be moved to other registries?

How will the carbon market be regulated? Will entities other than liable companies and project owners be allowed to trade within the offset market?

Will income from projects registered under the scheme by consider tax-free, as per CDM projects? We recommend that this would be the case.

Eligible Standards

The inclusion of the four major carbon standards is a positive move by Treasury as the integrity of these standards has proven in the international market.

We do however feel that the implementation of projects under these standards can exclude smaller community based projects, which have a high social value but a low carbon value. The cost of implementing and registering these smaller projects often is prohibitive. There is a carbon standard developed locally that promotes these types of projects. The standard is known as Credible Carbon, it only supports the development of projects that in addition to carbon reduction, have a positive social impact.

We believe that the inclusion of this standard in the list of eligible standards, will positively impact on the broader sustainability as well as the carbon reduction goals of South Africa.

Additional Concerns

The carbon tax is designed to progress South African towards a low carbon future. Our concern is that the purpose of the tax will not be realized, should companies be allowed to pass the cost of the Carbon Tax and Carbon Offsets onto their customers. We strongly believe that the electricity and Gas to Liquid industries, given their dominant positions (monopoly and protection) will definitely be in a position to pass the tax on thereby removing any punitive impact and pressure to reduce their emissions. GCX suggests a provision in the paper to force these players to take up their full offset quota, thereby not only guaranteeing that environmental and social objectives of met, but also passing on the benefit of any cost savings resulting from the reduced price of offsets versus carbon tax to the already overburdened South African consumer.

Conclusions

Overall we believe that the implementation of an offsetting mechanism for the Carbon Tax is a positive step by the Treasury. However several points on eligibility, management of the scheme and registry need to be clarified.

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