Fig 1: Carbon Emissions Trading System  Structure (A possible market structure is shown above with a nine-step process from project implementation to using the tax offset.)

There are several planned or ongoing voluntary carbon offset systems in South Africa:

• They allow companies to mitigate their financial liability regarding the proposed carbon tax.
• Emission Carbon Tax through JSE.

In 2013 and 2015, Promethium Carbon executed a program to research the possibility of trading carbon in South Africa. The research was to investigate whether it is possible to implement a carbon offset trading scheme within the horizon as scheduled for implementing the South African carbon tax. The research results show that carbon trading should be done in a process that keeps check of certain things, such as the appropriateness of the project to be traded into the South African system. Therefore, the results concluded that it is possible to introduce a carbon offset trading scheme in the existing infrastructure. However, the infrastructure must have both environmental and economic integrity. The system’s environmental integrity can be achieved by utilizing existing offset standards such as CDM, VCS, or Gold Standard. Economic integrity can be achieved by using the JSE as a trading platform and combining it with either a local registry such as Strate or ESC or an international registry such as Markit or APX.

A set of National Appropriateness Tagging, the Project Eligibility Criteria, is specified as part of the carbon tax regulatory infrastructure. When a project is successfully registered and complies with the project eligibility criteria, it will be traded as a carbon offset under the South African Tax System. When a company cannot reduce its carbon emissions in South Africa, the government allows it to offset these emissions through credits for tax purposes. The custodian of the project eligibility criteria falls into the Independent Technical Committee, which is chaired by the Designated National Authority (DNA). South Africa’s Designated National Authority (DNA) administers the carbon offset system. The committee comprises the National Treasury, Department of Environmental Affairs, Department of Energy, Department of Trade and Industry, Industry (i.e. BUSA), civil society, and Labour. The committee is responsible for developing and evaluating methodologies and, when appropriate, the endorsement of international methodologies for use in South African deals. The committee is also responsible for updating and changing tagging rules, interpretation questions, or objections.

The Johannesburg Stock Exchange (JSE) launched the JSE Ventures Carbon Market in partnership with Xpansiv, a US-based infrastructure provider for global environments markets. The JSE Ventures Voluntary Carbon Market launch was held at Johannesburg Stock Exchange (JSE), Sandton, in the first week of November 2023. JSE is a new trading platform that allows local participants to buy or sell carbon credits and renewable energy certificates (RECs) in local or global registries. These carbon credits are tradeable certificates representing one metric tonne reduction in carbon dioxide emission that companies can use to offset their carbon emissions. Carbon credits are produced through projects such as renewable energy projects and reforestation or afforestation efforts.

When a company in South Africa cannot reduce its carbon emissions, the government allows it to offset these emissions through credits for tax purposes. The JSE Ventures Carbon Market is an upcoming platform allowing such trades. Renewable energy certificates have different units from carbon credits. The carbon tax applies to anyone, including municipalities, with emissions. South African carbon taxpayers can reduce their carbon tax by buying carbon credits and offsetting those carbon credits against their taxable greenhouse emissions.

Carbon trading is likely a major factor in the National Treasury’s increase in tax revenue. Because of this, the country’s Financial and Fiscal Commission has suggested that the Treasury could eventually hike carbon taxes.

So many concerns surround South Africa’s carbon markets, primarily whether the carbon credits and certificates represent the actual carbon reduction. Also, since the markets are voluntary, it might be difficult for participants to believe that the carbon credit transactions are credible and that the markets may help to reduce carbon emissions. Companies may still claim their carbon credits, but their operations do not reduce carbon emissions.

Carbon project developers need to raise sufficient funds to fund the project development, verification, and ongoing costs. Otherwise, their projects will hinder small companies from venturing into these carbon projects due to their high costs.

This Post was submitted by Climate Scorecard South Africa Country Manager Rugare Zhou.

Learn More References

1. https://businesstech.co.za/news/finance/730397/carbon-credits-and-renewable-certificates-what-south-africas-new-trade-platform-means/#:~:text=The%20credits%20are%20generated%20through,through%20credits%20for%20tax%20purposes.
2. Tyler, E., Du Toit, M., and Burchell, Z. 2011. Emissions trading as a policy option for greenhouse gas mitigation in South Africa. Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011
3. Arp, R., Upadhyaya, P. and Naudé, L. 2018. Carbon trading in South Africa: providing flexibility or escape route? Low-carbon policy inputs. WWF
4. South African Carbon Offset Administrative and Reporting System. Synthesis Report Version 3. January 2016