Besides the Climate Change Act being signed into law, the National Treasury’s Discussion Paper on Phase Two of the Carbon Tax, released in November 2024, was the most important climate document of the year. The proposals presented in this paper could reshape the country’s approach to emissions reduction and significantly impact businesses.
As the year draws to a close many business owners and leaders will take a much-deserved break. The one thing to contemplate while lying on the beach or sitting next to the fire is how to take your business forward in a country committed to fighting climate change.
Due to our heavy reliance on fossil fuels South Africa is one of the world’s top 20 carbon emitters, with per capita emissions rivalling those of developed nations such as Australia and the UK. However, South Africa is committed to addressing climate change and thus proposed significant reforms to its carbon taxation framework in the Discussion Paper on Phase Two of the Carbon Tax released in November by the National Treasury.
The reforms come at a critical time. The Intergovernmental Panel on Climate Change (IPCC) has warned that without deep reductions in greenhouse gas emissions global surface temperatures will exceed the crucial 1.5°C and 2°C warming thresholds.
South Africa responded by committing to achieve a net-zero carbon economy by 2050, submitting ambitious targets through its Nationally Determined Contributions (NDCs) that aim to reduce emissions to 350-420 million tonnes of CO₂ equivalent (tCO₂ e) by 2030. (According to Statistica South Africa produced 397 million (tCO₂ e) in 2023.)
If signed into law, the financial implications would be significant. The carbon tax rate could increase from R190 per tCO₂e this year to R462 by 2030
This substantial hike would be accompanied by a systematic reduction in tax-free allowances, with the basic allowance of 60% potentially decreasing by 10 percentage points in 2026, followed by annual decreases of 2.5 percentage points through 2030. For emissions-intensive industries like cement, steel, and mining, these changes would present immediate financial challenges requiring strategic planning and investment.
The discussion paper outlines core principles that balance environmental necessity with economic pragmatism. The polluter-pays principle ensures accountability for greenhouse gas emissions, while economic efficiency aims to reduce emissions at the lowest possible cost.
New incentives for green business growth
The National Treasury has proposed various incentives for sustainable business practices. Companies have a limit (currently between 5 and 10%) on how much they can reduce their carbon tax by using the carbon offset allowance. This mechanism allows companies to reduce carbon tax liabilities by investing in projects that reduce greenhouse gas emissions elsewhere.
From 2026, the proposed change will allow companies to use offsets to reduce up to 25% of their carbon tax for combustion emissions and 20% for process emissions. This would create opportunities for businesses to invest in external mitigation projects, from renewable energy installations to forestry programs.
Under the proposals, companies that exceed emissions reduction benchmarks would qualify for additional tax deductions and financial benefits.
Another financial incentive is to extend the 100% depreciation allowance for renewable energy projects to green hydrogen projects. Green hydrogen has the potential to transform hard-to-abate industries that rely heavily on fossil fuels, such as steel manufacturing and shipping.
This means companies in all sectors can deduct the entire cost of these projects, significantly lowering their tax bill and making it much cheaper to invest in cutting-edge technologies.
Keeping up with global standards
For export-oriented industries, the proposed reforms present challenges and opportunities for differentiation in global markets. As trading partner countries implement carbon border adjustment mechanisms, South African businesses that quickly adapt their production processes could position themselves as environmental leaders.
To align with international standards, the paper suggests a revision of the trade exposure allowance, which would be available only to sectors with trade intensities above 50% (up from 30%) from 2026.
What will you do?
Treasury’s discussion paper builds on the Climate Change Act which coordinates South Africa’s response to climate change and sets out additional mitigation and adaptation policies. This legislative framework and the proposed carbon tax reforms could create a comprehensive approach to achieving the country’s climate goals while supporting economic growth and innovation.
As the proposals are debated and refined, businesses should prepare for change. While the final implementation may differ from the current proposals, the end destination is clear: South Africa is committed to strengthening its climate action through more robust carbon pricing.
Companies that anticipate and plan for these changes will be better positioned to thrive in a carbon-conscious economy. Where is your company headed in 2025?
What was Phase One of South Africa’s Carbon Tax?
Phase One of South Africa’s Carbon Tax was implemented on 1 June 2019 until 31 December 2022. It marked the introduction of a tax aimed at reducing greenhouse gas emissions in line with South Africa’s commitments under the Paris Agreement. The second phase is set to run from 1 January 2026 to 31 December 2030.
Author:
Muhammad Jassat
Senior Climate And ESG Specialist
Brought to you by
Six Capitals ESG Advisory is a proud member of the Alternative Prosperity Group, a Level 2 B-BBEE contributor.
