Background: What Is It and Why Do We Have It?

South Africa introduced its Carbon Tax as part of a broader strategy to meet its Nationally Determined Contributions (NDCs) under the Paris Agreement, adopted at COP21 in 2015 and ratified by South Africa in 2016.

The Carbon Tax places a financial cost on greenhouse gas (GHG) emissions, designed to incentivise companies to reduce emissions, adopt cleaner technologies, or support climate-positive initiatives. As a market-based instrument, it seeks to change behaviour while giving businesses flexibility in how they comply.

When Did the Carbon Tax Begin?

The Carbon Tax came into force on 1 June 2019, marking the start of a transitional or “soft launch” phase. During this period, companies benefited from generous tax-free allowances - with most liable for only 5–15% of their actual carbon tax liability.

The tax currently applies to several high-emitting sectors, including:

• Energy
  
• Mining
  
• Cement and lime
  
• Ceramics
  
• Aluminium
  
• Pulp and paper
  
• Petrochemicals
  

Emissions are calculated and reported according to frameworks set by the Department of Forestry, Fisheries and the Environment (DFFE) and the Department of Mineral Resources and Energy (DMRE), and enforced by the South African Revenue Service (SARS).

Goals of the Carbon Tax

The tax is intended to:

• Put a price on carbon to reflect its environmental cost
  
• Drive behavioural change by rewarding cleaner, more efficient operations
  
• Encourage investment in low-carbon technologies
  
• Support national and global climate goals, particularly South Africa’s commitments under the Paris Agreement
  
  

Phases of Implementation

The tax is being implemented in three phases to allow businesses to gradually adapt, with a clear signal that compliance expectations will increase over time.

Phase 1 (2019–2025)

Originally intended to end in 2022, this phase was extended to 31 December 2025.

• Starting rate: R120/tCO₂e in 2019
  
• Up to 95% of emissions exempt through various allowances
  
• 5-10% offset allowance permitted, promoting investment in sustainability initiatives
  
  

Phase 2 (2026–2030)

A much stricter compliance regime will come into effect from 2026:

• Tax rate increases sharply year-on-year with an annual compound increase of 14.4% from 2025 to 2030.
  
• Allowances will be reduced or removed, increasing the share of emissions that companies are taxed upon.
  
• Offset usage expands to 10–15%
  
• Stronger alignment with carbon budgets, the Climate Change Bill, and other national climate policies
  
  

Phase 3 (2030 and beyond)

While Phase 3 proposals have not been officially published, it is envisioned to continue the trend of Phase 2 with increasing Carbon Tax Rates, a reduction in allowances and an increase in the amount of offsets companies can use - all intended to incentivise faster adoption of cleaner technologies through higher penalties.

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Carbon Tax Rates: 2024–2030

The 2022 Tax Amendment Bill gazetted carbon tax rates through to 2030, providing price certainty and allowing emitters to prepare accordingly. The steep increases were also intended to catch up with international rates.

Carbon Tax Rate (R/tonne CO₂e)

From 2026 onwards, as allowances begin to fall away, companies will be taxed on a much larger portion of their emissions at higher rates. This is designed to incentivise faster emissions reductions and drive deeper decarbonisation.

How It Works: Allowances and Offsets

To cushion the economic impact during the transition, a range of allowances are available to reduce the effective tax burden. While the South African Government did not ratify all the proposals in the 2025 Budget, it is speculated that they will adopt many of the suggestions in the coming years.

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The Offset Mechanism

One of the most valuable tools is the carbon offset allowance, which enables companies to offset part of their carbon tax by purchasing verified carbon credits. These credits:

• Must be retired via the Carbon Offset Administration System (COAS) and retirement certificates produced to SARS;‍
• Must be developed within the borders of South Africa;
• Must originate from approved registries such as Verra, Gold Standard, or the Clean Development Mechanism (CDM); and‍
• Cannot be from other voluntary registries if they are to be used for tax reduction purposes

Key benefits of using offsets:

• Typically cheaper than the tax rate (e.g. in 2024, offsets traded at R155–R175/tonne vs a tax rate of R190/tonne, a 9-19% discount)
  
• Help companies reduce their effective tax liability in the interim as emissions reductions projects take time to implement
• Support local sustainable development, including clean energy, reforestation, land restoration, and waste-to-energy projects
  
• Enhance corporate sustainability performance and stakeholder reputation
  
  

What Must Companies Do?

Each year, companies must:

• Report emissions to SARS by the end of July for the previous tax year (calendar year basis: 1 Jan – 31 Dec)
  
• Calculate taxable emissions after applying relevant allowances
  
• Retire eligible COAS-registered carbon credits to reduce tax owed
  
• Pay the remaining tax to SARS — or face penalties for non-compliance
  
  

Strategic Choices for Companies

As carbon prices rise and allowances fall away, companies face three choices:

1. Reduce emissions through the implementation of low emitting and clean technologies;
2. Pay the full carbon tax on their emissions - which will increase annually and apply to a greater portion of emissions; or
   
3. Purchase COAS-registered carbon credits - often at a discount to the tax rate, while directly contributing to national climate efforts
   

Employing the third route alongside emissions reductions and tax payments not only reduces financial exposure but also offers strategic and reputational value by:

• Supporting sustainable projects such as clean energy, reforestation, waste-to-energy, and land restoration
  
• Creating local jobs and rural economic opportunities
  
• Demonstrating environmental leadership — instead of merely complying with a tax
  
  

Conclusion

South Africa’s Carbon Tax is entering a critical enforcement phase. From 2026, companies that have not taken proactive steps to reduce emissions or incorporate offset strategies will face significantly higher costs.

However, the system is designed not only as a penalty but also as a pathway to impact. By using the tools available — especially the carbon offset mechanism — companies can meet compliance requirements, reduce their financial burden, and contribute meaningfully to South Africa’s transition to a low-carbon economy.

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Stuart McMaster
Head of Tech and Operations, Green Asset Exchange

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Get in touch:
If you would like to purchase, develop or trade South African Carbon Tax compliant Carbon credits, reach out to us at info@greenassetexchange.com

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Disclaimer:
This article is provided for informational purposes only and does not constitute financial, tax, or legal advice.

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