By Dylan Jessup – Automotive Sector Incentives Manager – EY Cova
South African businesses have been warned that they are taking too long to cash-in on the savings they can achieve through carbon credits, and to appreciate the effort which will be needed to master the process.
Carbon credits are essentially known as market mechanisms for the minimization of greenhouse gas emissions. Carbon credits are a tradable commodity, which is similar in principle to the Production Rebate Certificates that the automotive industry is accustomed to.
For simplicity, one carbon credit equals one ton of CO2e (carbon dioxide equivalent) emission reductions achieved. Carbon dioxide equivalent is the standardised unit of measure for carbon emissions, allowing different sources of emissions to be accounted for in a single unit of measure. As there are various types of GHG’s (greenhouse gases) they are measured in the equivalent of CO2, the most abundant GHG. Therefore, any project which in any way, reduces, removes, or prevents GHG’s from being emitted into the atmosphere, can be registered as a carbon credit project. A few examples of carbon credit projects include introduction of renewable energy, alternative fuels and switching to cleaner fuels – to name a few.
Policy developers or regulatory authorities set the caps on GHG emissions within their own geographical boundaries. For companies to leverage the carbon credit mechanism, as an example, they, can purchase carbon credits to comply with the emission caps or even achieve their own emission reduction targets. This can be a viable option if the cost of implementing emission reduction projects is not financially feasible on its own.
With the Carbon Tax burden in South Africa set to climb and climb, these carbon credits incentivise companies to invest in green projects. Companies can earn credits on eligible projects, and these can be used to reduce their tax liability, or the credits can be traded locally and internationally.
The time to act is now and companies need to start thinking long-term. The Carbon Tax gives companies a long-term perspective on the value of carbon credits, and this should form a central element of their strategic planning.
“The question executives must ask is: how can my company benefit, and is there a global trading market? We must look at the global context.
Issues around carbon emissions, the green economy and climate change are global issues. A lot of global discussion is underway on reducing the emissions of countries and businesses.
There are two main mechanisms for carbon pricing. One is a carbon tax, and the other a ‘cap and trade’ system where you create a trading mechanism. There is a trading price around carbon credits, set by the market.
There are 64 global carbon reduction mechanisms, with a 50-50 split between taxes and emission reduction schemes.
In 2019 about US$45bn was traded in the carbon trading market. About 70 countries have committed to net zero emissions by 2050, and so carbon trading is set to explode in importance.
Covid has reduced emissions everywhere and the airline industry emissions dropped significantly, due to a huge reduction in flights. A key challenge is how countries and companies in this post-Covid world can stimulate growth with the use of carbon pricing? Many companies want to grow their organisations responsibly. The key first step is to understand what is meant by a carbon credit.
A carbon credit is a tradeable commodity that is created from a project that reduces carbon emissions. These credits can be traded should a company have no need for the carbon credit and can become a revenue stream.
Many countries are introducing Carbon Taxes, in line with Paris Agreement obligations. The number of carbon credit programmes are also increasing.
When a carbon price is introduced, businesses are incentivised to reduce emissions. The South African Carbon Tax is off to a very good start. The first compliance deadline was October 2020 with the second in July 2021. The next deadline is in July 2022.
There are 5,4-million offsets (credits) that have been listed in the South African system to date. Some 3-million were returned, so 2,4-million offsets are available in the registry.
When the Carbon Tax first kicked in, most companies did not have the right strategy in place for carbon credit use. It is so important for companies to be proactive and ensure they have a sustainability strategy in place which includes which credits the company can use.
Eligible projects to earn carbon credits cover waste management, forestry and land use, energy efficiency, and renewable energy. Projects have to be within South Africa. You cannot double-claim by also applying for the energy efficiency tax rebate incentive known as S12L.”
Given the nature of the automotive industry, the most likely carbon credit projects would be switching to renewables, switching to alternative fuels or switching to cleaner fossil fuels, such as switching from coal to natural gas. Due to the complexity of these projects and understanding their feasibility, it is important that the door for discussions remain open in order to assess the tangible benefit of carbon credits.
Company: EY Cova
Contact: Dylan Jessup, Manager: Automotive Incentives
e-mail: [email protected]