Fathima Dawood | Senior Corporate Tax Consultant, PKF Durban

Introduction

Carbon Tax was introduced in South Africa, in June 2019, as part of government’s response to climate change and the associated environmental challenges such as air and water pollution. The tax is designed to facilitate a transition to a low-carbon economy by internalising the cost of greenhouse gas (GHG) emissions.

The regime is premised on the “Polluter Pays Principle”, requiring entities whose activities give rise to emissions to bear the cost of environmental degradation. This has important implications where the ownership of assets and the activities giving rise to emissions reside in different legal entities, raising potential risks of non-compliance with laws and regulations (NOCLAR).

Scope of Application

A carbon taxpayer is any person conducting a taxable activity if:

1. The aggregated installed capacity of emissions-generating equipment equals or exceeds the specified threshold; or
2. No threshold applies to the activity.

The list of taxable activities is set out in Schedule 2 of the Carbon Tax Act. Activities indicated as “N/A” in the schedule fall outside the scope of taxation.

Tax Base

The Carbon Tax is levied on GHG emissions arising from:

• Combustion emissions: from burning fossil fuels such as coal, oil, and gas, as well as wood and waste materials for energy or industrial purposes.
• Fugitive emissions: from unintended leaks and losses during the extraction, processing, storage, and distribution of fossil fuels.
• Industrial processes and product use: including emissions from cement, glass, iron and steel, and aluminium production.

When first introduced in 2019, the effective rate of Carbon Tax ranged from R6 to R48 per tonne of CO₂e, after applying the various allowances. However, the headline statutory rate has since escalated significantly. As of 1 January 2025, the current carbon tax rate is R236 per tonne of CO₂e, up from R190 in 2024 and R159 in 2023.

Looking ahead, under Phase Two (2026–2035), the basic tax-free allowance will reduce by 10% in 2026, followed by further annual reductions of 2.5%, which will increase the effective tax burden well above historical levels. This phased escalation is designed to place increasing pressure on emitters to adopt cleaner technologies and improve energy efficiency.

Industry Exposure

Entities operating in the following sectors may incur liability, subject to the relevant thresholds:

• Manufacturing and construction (≥10MW thermal capacity).
• Mining and quarrying, pulp and paper, textiles, food and beverages, and machinery production.
• Transport: Domestic aviation (≥100,000 litres annually). Road and other forms of transport are excluded.
• Commercial, residential, institutional, agricultural, and forestry operations (≥10MW thermal capacity).
• Waste management: Facilities receiving ≥5 tonnes of solid waste per day or with a capacity ≥25,000 tonnes.

Exemptions and Exclusions

Certain activities do not trigger a Carbon Tax liability, such as:

• Road transport
• Enteric fermentation from livestock
• Refrigeration and air-conditioning
• Sugar cane farming (unless fossil fuels are combusted to generate heat or energy)

Compliance Considerations and deadlines

Carbon Tax is both an environmental and fiscal instrument, and the liability may not always be transparent in group structures. The fact that emissions-generating activities and asset ownership can be housed in different legal entities increases the risk of undetected exposure.

The relevant reporting deadlines to ensure administrative compliance include:

• Reporting via SAGERS by 31 March each year.
• Filing and payment via SARS eFiling by 31 July each year.

Conclusion

Carbon Tax is an area with both financial and reputational consequences. Entities should proactively assess exposure, particularly in complex group structures, and obtain professional guidance where uncertainty exists.

Importantly, while the initial effective range was R6–R48 per tonne, the current rate stands at R236 per tonne of CO₂e (2025) and is set to rise further as tax-free allowances are reduced under Phase Two. Proactive compliance, early adoption of cleaner technologies, and the strategic use of carbon offsets will be critical in managing both financial and operational risk under South Africa’s evolving Carbon Tax regime.