Carbon Taxes: the overlooked risk South African businesses can't afford
By Duane Newman
The big risk South African businesses are not talking about is carbon taxes. But failing to plan for the looming taxes that will be implemented from 2026 is arguably a big risk to future profitability and competitiveness.
From 2019, South African businesses exceeding industry-specific carbon tax thresholds paid a carbon tax for each tonne of carbon dioxide (CO2e)1 emitted above the threshold. The carbon tax rate in 2024 is set at R190 for each tonne of CO2e. That said, with existing allowances on fuel combustion, trade exposure and other offsets, businesses can currently secure tax rebates of up to 95% on their carbon emissions.
With many South African businesses paying as little as R9.50 tax per tonne of CO2e, the impact has been minimal. Company CFOs have been comfortably able to ignore carbon taxes. From 2026, however, everything changes.
Tax increase
The latest carbon tax rates published by National Treasury show that South Africa can expect large hikes until 2030 and beyond. The carbon tax rate increased from R120 per tonne of CO2e in 2019 to R190 in 2024. By 2030, it is expected that South African businesses exceeding the carbon tax threshold will be paying R462 per tonne of CO2e emitted.
Allowances phased out
From 2026, South Africa's carbon tax regime will also start phasing out its, currently, very generous carbon tax allowances. Although a phased approach to reducing allowances has been proposed, reducing or entirely removing just the fuel combustion allowance, for example, could increase carbon taxes by as much as 240% before reductions in any of the other allowances are even considered.
South African businesses are currently only taxed on Scope 1 carbon emissions, which include all the carbon emitted directly on the site of any premises directly owned or operated by an organisation or business. But there are also Scope 2 emissions, which include indirect emissions when using electricity produced from coal. Scope 3 emissions, on the other hand, take the carbon footprint of the business' suppliers into account. In Europe and other jurisdictions, businesses are also responsible for carbon tax on Scope 2 and Scope 3 emissions. In time, South Africa is expected to follow suit, presenting potentially huge future carbon tax risks to South African businesses.
For now, Eskom, which is subject to pay a Scope 1 carbon tax on its production of electricity from coal, is able to offset its tax liability through an environmental levy charged to customers. From January 2026, however, Eskom's Scope 1 carbon tax is expected to exceed the revenue it collects from the environmental levy, which will also fall away. Eskom will be allowed to add the costs of its carbon tax to its electricity price, effectively passing on Eskom's carbon costs to consumers. Analysis suggests that the impact on electricity prices could be as much as 11c per kWh in 2026.
Double whammy at home
Working on the published carbon tax rate, in 2026, combined with a phased reduction in allowances could, for example, see a R308 per tonne CO2e emission rate combined with a reduced allowance rebate of, say, 85%. This will potentially increase the cost of carbon for many businesses from R9.50 to R46.20 per tonne.
It is unlikely that many businesses in South Africa are anticipating a carbon tax increase of 386% as soon as 2026.
Tripple whammy abroad
From 2026, businesses exporting to Europe will also be required to pay the carbon price differential between South Africa's lighter carbon tax regime and Europe's more stringent one. When the European Union's Carbon Border Adjustment Mechanism (CBAM) kicks in, European carbon taxes are expected to be around €85 (around R1,630) per tonne of CO2e. This is 15 times higher than our carbon taxes, which are expected to be set at €5.5 (around R105) in 2026, after taking tax allowances into account. It is estimated that CBAM threatens R52.4 billion of South African exports.
Decarbonisation lifeline
The potential scale of South Africa's future carbon tax risk makes decarbonisation (the process of reducing the business' greenhouse gas footprint) essential for business, especially those in carbon intensive industries such as iron, steel, aluminium and cement. Taking proactive steps to transition to renewable energy and working with carbon neutral suppliers, businesses can mitigate significant new financial risks while playing a crucial role in shaping a more sustainable future.
1There are multiple types of greenhouse gases such as carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O), all with varying levels of environmental impact. CO2e is a collective unit of measurement for all greenhouse gases, which expresses their impact on the environment in terms of the equivalent amount of carbon dioxide that would result in the same impact.