Article by: Asif Joosub CA(SA)
Kreston Cape Town | Tax Consultant

Carbon Tax in South Africa __________

Navigating the Transition to Phase 2

South Africa’s Carbon Tax Act, 15 of 2019, came into effect on 1 June 2019, with Phase 1 designed as a transitional period characterised by generous allowances and a modest effective tax rate. The basic tax-free allowance of 60%, combined with additional allowances for trade exposure (up to 10%), performance (up to 5%), fugitive (10%), carbon budget compliance (5%) and carbon offsets (5–10%), meant that the maximum combined allowance could reach 95%. The effective carbon tax actually paid during Phase 1 was therefore minimal — by design, to allow businesses time to adjust.

Phase 1 was originally intended to end on 31 December 2022 but was extended to 31 December 2025. The last filing under Phase 1 is due at the end of July 2026, making this an immediate compliance priority for all registered carbon taxpayers.

Phase 2 commenced on 1 January 2026. While the allowance reductions have not been as severe as initially anticipated in earlier policy discussions, this is not all good news for taxpayers. The rate escalation trajectory is steep: from the current rate of R236 per tonne of CO₂e, the rate is set to increase to R462 per tonne of CO₂e by the end of 2030. This near-doubling of the headline rate over a five-year period alone demands urgent attention as it will materially increase carbon tax liabilities even where allowances remain relatively generous.

The February 2026 National Budget added a further development: an increase to the threshold for taxpayers falling within a particular sector who have previously registered for carbon tax due to diesel generators that are operated during time of load-shedding and electricity supply shortages. To ease the compliance burden on these companies, an emissions threshold of 25,000 tonnes of carbon dioxide equivalent is expected to become effective from 1 January 2026 (due for the filing in July 2027). This proposal was welcomed by carbon taxpayers as, once legislated, it will result in carbon taxpayers in certain sectors who previously fell into the carbon tax net no longer having to register and submit returns if their emissions are below this threshold.

Meanwhile, the Department of Forestry, Fisheries and the Environment continues to develop carbon budget regulations under the Climate Change Act (Act 22 of 2024). These regulations will operationalise mandatory carbon budgets — maximum allowable quantities of GHG emissions allocated to entities over defined budget periods. The significance for carbon tax purposes is direct: the 5% carbon budget allowance for certain industry sectors is linked to compliance with these mandatory budgets, meaning that an entity exceeding its carbon budget faces both, a significantly higher punitive carbon tax rate (of R640 per tonne of CO₂e) and potential consequences under the Climate Change Act. Furthermore, no allowances would be able to be claimed against emissions above the carbon taxpayer’s allocated budget.

Against this backdrop of legislative and regulatory change, SARS is actively upskilling on carbon tax and taking a more assertive approach to compliance. We are seeing SARS challenge taxpayers on their carbon tax submissions — questioning the basis for allowance claims, the accuracy of emissions data, and the methodologies applied. SARS is also querying entities that have not registered for carbon tax and cross-referencing information from DFFE emissions reporting data.

Carbon taxpayers should thus ensure that their carbon tax calculations and filings are carefully considered, well-documented, and defensible. Entities that believe they fall below the registration threshold should document their assessment carefully in case SARS raises a query. Whilst those who know they should be registered but have not yet done so would be well advised to come forward proactively rather than wait to be identified in a SARS compliance initiative.

The combination of a steep rate escalation, changes to allowance rules and rates, punitive rates for exceeding the mandatory carbon budgets, and increased SARS enforcement means that carbon tax can no longer be treated as an afterthought. We recommend the following immediate actions:

• File your Phase 1 return accurately and on time before the end of July 2026.
• Model the financial impact of the rate trajectory to R462/tCO₂e by 2030 and incorporate carbon costs into long-term planning and capital allocation decisions.
• Assess whether the mandatory budget regulations will apply to your business and factor any such impact (incl. the potential punitive carbon tax rate of R640 per tonne of CO₂e) into your calculations;
• Ensure robust methodologies (and verification arrangements) are put in place for claiming allowances;
• Review the quality and defensibility of your carbon tax
• Critically evaluate emissions reduction investments — the steep rate trajectory fundamentally changes the economics of abatement projects, and investments that were previously marginal may now offer compelling returns.

Our new Tax Consultant at Kreston SA Cape Town assists clients across the full spectrum of carbon tax matters, from compliance and return preparation to liability forecasting, allowance optimization and SARS dispute resolution. If your business has not yet grappled with the implications of Phase 2, we encourage you to get in touch.

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*Disclaimer: This article is for general information purposes only and does not constitute professional tax advice. Proposed measures (including National Budget proposals and draft regulations) are subject to change before finalisation. Taxpayers should obtain advice specific to their circumstances.*