Climate Change Regulation 2023 Comparisons

South Africa is a signatory to, and has ratified, the United Nations Framework Convention on Climate Change and the Paris Agreement. South Africa has been an active participant in the global climate change legal regime, and is a member of various negotiation blocs. These include the G77 plus China, as well as the African Group of Negotiators (AGN). The country has also historically negotiated as part of the BASIC Group, a grouping consisting of Brazil, South Africa, India and China. Like many developing countries, the country’s negotiation position has traditionally focused on the principle of common but differentiated responsibilities and respective capabilities (CBDR-RC), and the issue of equity. Its position has traditionally been that it will meaningfully engage in the multilateral negotiations to further strengthen and enhance the international response to the climate change crisis, with a view to limiting the average global temperature increase to below a maximum of 2°C above pre-industrial levels. In its participation, it has always sought to underscore that agreement must be inclusive, fair and effective; and that it must reflect a balance between adaptation and mitigation. Given its high vulnerability to climate change, adaptation is a particular focus area of domestic and global climate policy, with South Africa seeking to champion a global adaptation goal; adequate, predictable, balanced and accessible climate finance for adaptation from developed countries, as well as capacity building and technology transfer for adaptation.

South Africa is a highly fossil fuel intensive economy, with a coal-dominated energy sector. While the country has indicated that it is commencing a journey towards a net zero future in 2050 in its most recent Low Emissions Development Strategy, its position has always been that it needs finance, capacity and technological support from developed countries to do so. South Africa has also been focusing on, and seeking to plan for, the social and equity impacts and considerations of a transition to a lower carbon economy, commonly referred to as the Just Transition. This is in line with the country’s overriding climate policy priorities, namely for it to reduce poverty and inequality. The country has supported the AGN in its request for climate finance that is supportive of Just Transitions, and also takes into account the high debt burden already experienced by many African states. It also stands by the requests of the BASIC group that more finance is needed from developed countries, and that developed countries must take the lead when it comes to mitigation action, focusing on issues of equity and access to the limited carbon space available.

Article 12 of the Southern African Development Community (SADC) Protocol on Environmental Management for Sustainable Development (2014) mandates member states, including South Africa, to adopt the “necessary legislative and administrative measures to enhance adaptation to the impacts of climate change… and to take nationally appropriate voluntary climate change mitigation measures”. Moreover the recently launched Southern African Development Community (SADC) Climate Change Strategy and Action Plan 2020–2030, highlights the need for regional legal integration and harmonisation, particularly in the areas of agriculture, biodiversity and waste. Save for these provisions, at present, there are no regional climate change legal regimes applicable to the African continent broadly, or to the SADC, more specifically.

The National Climate Change Response White Paper and the National Development Plan

South Africa’s foundational climate change policy is the 2011 National Climate Change Response White Paper (NCCRP). It represents the government’s vision for an effective climate change response and a long-term, just transition to a climate-resilient and lower-carbon economy and society. Its objectives include the management of inevitable climate change impacts and the fair contribution towards international mitigation efforts. Its objectives and goals are informed by the country’s international commitments, as well as domestic laws including the South African Constitution, the National Environmental Management Act 1998 (NEMA) and the Millennium Declaration, 2000, together with various other commitments made during negotiations under the United Nations Framework Convention on Climate Change (UNFCCC).

The NCCRP is complemented by a series of climate change objectives within the National Development Plan, 2030 (NDP). The overall objective of the NDP is to eliminate poverty and reduce inequality by 2030. In so doing, it contains a dedicated chapter that seeks to foster a transition to an environmentally sustainable and low carbon society.

South Africa’s Nationally Determined Contribution

Since the publication of the NCCRP and NDP, there have been a host of technical documents, strategies and plans, legislation and an update of South Africa’s Nationally Determined Contribution (NDC) under the Paris Agreement, that have steered climate policy. The most recent iteration of the NDC (which still remains the country’s “First NDC”) is dated September 2021 and contains, amongst other things, South Africa’s revised emissions target. The updated NDC commits the country to an emissions range of 398–510 Mt CO₂e between 2021–2025 and 350–420 Mt CO₂e between 2026–2030. The target range is put forward as being more ambitious than its predecessor because its upper end was reduced in the updated NDC.

Unlike many African countries, South Africa’s mitigation target is not expressed as encompassing both conditional and unconditional elements, however at the time that the revised NDC was submitted, government indicated that its ability to meet the more ambitious bottom range of the trajectory would depend on the level of finance available to support the transition. The NDC prioritises the decarbonisation of the carbon intensive electricity sector in the 2020s, followed by a deeper transition for this sector in the 2030s together with a transition in the transport sector towards low emission vehicles. In the 2040s, the focus will be on the more “hard-to-mitigate sectors”.

South Africa’s NDC mitigation targets have been heavily criticised for being low in ambition, although the country’s position is that the targets are based on the principle of CBDR-RC and equity, the right to sustainable development and the needs of those living in poverty. The NDC also has a strong emphasis on adaptation, underscoring the high adaptive costs and the country’s financial needs.

The Low Emission Development Strategy (LEDS)

The NDC is the wider architecture of domestic national policy, and operates alongside the Low Emission Development Strategy, 2020 (LEDS), which provides detail on the policies and measures the country will rely on to achieve its NDC mitigation targets. The LEDS addresses mitigation measures across the energy, industry, agriculture, forestry and other land use (AFOLU) and waste sectors, and seeks to facilitate “a journey towards ultimately reaching a net zero carbon economy by 2050”.

The LEDS discusses a range of measures, highlighting those that are designed to address specific sectors and those that are cross-cutting. The cross-cutting instruments include carbon taxes, sectoral emissions targets and carbon budgets (discussed further in 3. National Policy and Legal Regime (Mitigation)), as well as more sector specific policies and measures. These include the Integrated Energy Policy, that projects current and future energy requirements, and the Integrated Resource Plan (IRP) that identifies the preferred electricity generation technologies to be built to meet projected electricity demand. The IRP acknowledges that almost 80% of greenhouse gases (GHGs) come from the energy sector, and prioritises emissions reduction as one of its goals. While the most recent version allocates a large proportion of the future energy mix to renewable energy, it also contains provision for the introduction of 1.5GW of new coal-fired power generation capacity. Similarly, a Hydrogen Society Roadmap was launched in February 2022 to support the development of a hydrogen economy.

In respect of energy efficiency, a draft post-2015 National Energy Efficiency Strategy promotes energy efficiency within buildings. Similarly, a Green Transport Strategy (2018) promotes sustainable mobility with policies to support bus rapid transit, road to rail and electric vehicles. The now outdated Industrial Policy Action Plan 2018/19 to 2020/21 applies to the industrial sector, and sets out key focus areas for it, one of which is green industry investment. Within the AFOLU sector is the draft Climate Change Adaptation and Mitigation Plan for the South African Agricultural and Forestry Sectors (2015), as well as the draft Conservation Agriculture Policy (2018) and the Agroforestry Strategic Framework for South Africa (2017). Lastly, the National Waste Management Strategy seeks to support national mitigation efforts through the reduction of waste to landfill and the promotion of a circular economy.

The National Adaptation Strategy

With respect to adaptation, a National Adaptation Strategy was finalised in 2020. It operates in the short to medium-term, providing guidance on adaptation across all levels of government, sectors and stakeholders affected by climate variability and change. It partially fulfils the country’s international adaptation commitments by mapping national vulnerabilities, outlining measures to reduce those vulnerabilities, and sets out the necessary resources for action, whilst also indicating progress achieved on adaptation.

The country’s relatively detailed planning instruments for adaptation reflect its global positioning on the need to prioritise and adequately finance adaptation. In 2021, South Africa proposed a global adaptation goal of increasing the climate resilience of the global population by 50% by 2030 and by at least 90% by 2050. It has also pushed for more progress in elaborating the granular details on adaptation and its measurement.

South Africa’s climate change legal regime has been under development for over a decade. Since 2011, when the NCCRP first contemplated the need for climate change-specific legislation, a suite of laws has been published, including:

• the Carbon Tax Act, 2019 (Carbon Tax Act);
• various regulations relating to GHG emissions reporting and related planning measures; and
• a Climate Change Bill, initially gazetted in 2018 for stakeholder consultation and now formally before parliament as B9-2022.

In addition, through the common law, South African courts have read climate change considerations into the legal regime for environmental impact assessments. These are all discussed in more detail in 4.1 Policy/Regulatory Instruments and Spheres of Government/Sectors.

At present, climate change regulation is hampered by a lack of harmonisation between government sectors. The Climate Change Bill, once enacted as legislation, will elevate the existing powers of the Minister of Environment, Forestry and Fisheries (the “Minister”) to include legal authority to impose the country’s GHG emissions trajectory, determine sectoral emissions targets (SETs) and allocate company level carbon budgets. In the case of SETs, these must be determined “in consultation” with the relevant Minister to whom they are issued. Similarly, the determination of the GHG emissions trajectory is to be done “in consultation” with Cabinet. Whilst the duty to engage does limit the Minister’s powers, the Minister is still left with considerable discretion to propose and subsequently negotiate the thresholds of the trajectory and the SETs. It is too early to tell whether this will hinder or help the current levels of policy misalignment within the energy sector, although it is hoped that it may bring legal direction, particularly when it comes to the content of the IRP, its climate change implications, and the country’s future energy supply mix.

As noted earlier, South Africa negotiates within multiple blocs under the UNFCCC, and it formulates common positions within these blocs. It has not, however, concluded any dedicated bilateral agreements under the regime yet, specifically in terms of Article 6.2 of the Paris Agreement relating to “co-operative approaches” to facilitate the transfer of GHG emissions reductions from one country to another.

Department of Forestry, Fisheries and the Environment (DFFE)

The DFFE plays a central co-ordinating and policy-making role as the designated authority for environmental conservation and protection in South Africa. It monitors national environmental information, policies, programmes and legislation related to climate change, and provides guidance on and alignment between policies and international climate change obligations. It is responsible for co-ordination and management of all climate change-related information such as mitigation, adaptation and monitoring and evaluation programmes. The DFFE is responsible for the implementation of the UNFCCC, Kyoto Protocol and Paris Agreement, on behalf of the South African government. It is the national climate change focal point under the UNFCCC and is the co-ordinating entity for reporting under the Paris Agreement. Its climate change mandate is derived from NEMA and the NCCRP. The DFFE manages the South African GHG Emissions Reporting System (SAGERS), which is a component of the National Atmospheric Emissions Inventory System (NAEIS), which included the related National GHG Inventory Management System (NGHGIS).

Department of Mineral Resources and Energy

The Carbon Offset Regulations designate the Director-General of the Department of Minerals and Energy, or their delegate within the Clean Energy branch of the Department of Mineral Resources and Energy, as the administrator of the Carbon Offset Regulations and the Carbon Offset Administrative System. The administrator is responsible for granting extended letters of approval, listing carbon credits, overseeing listing procedures, transferring ownership of the listed credits within the system, and the retirement of credits for utilisation under the South African carbon tax. The Department also functions as the Designated National Authority under the Clean Development Mechanism (CDM). It was established to support the development and implementation of CDM projects under the Kyoto Protocol but this role is currently evolving to include the future carbon market mechanisms developing pursuant to Article 6 of the Paris Agreement. 

National Treasury

This body designed the carbon tax legal regime that is implemented by the South African Revenue Services, and continues to guide its evolution and amendment.

Presidential Climate Commission

In September 2020, Cabinet approved the appointment of the Presidential Climate Commission (PCC). The PCC’s mandate is to be formalised within the Climate Change Bill, which provides that it must consist of representatives of government, organised labour, civil society and business to advise on the Republic’s climate change response, the mitigation of climate change impacts and adaptation to the effects of climate change towards the attainment of the just transition to a low-carbon and climate-resilient economy and society. It is also charged with monitoring and evaluation of progress towards the government’s emissions reduction and adaptation goals.

As noted in 2.2 National Climate Change Legal Regime, mitigation policy is primarily regulated by the Carbon Tax Act, regulations for emissions reporting and pollution prevention plans. In due course, when the Climate Change Bill is finalised, it will be the overarching legislation that regulates the country’s mitigation response.

The Carbon Tax Act

The Act had a long gestation period, which formally commenced in 2010 after the publication of a draft discussion paper, titled Reducing Greenhouse Gas Emissions: The Carbon Tax Option, 2010. This discussion paper was followed by a suite of technical papers and public debate on the merits of a domestic carbon tax, a revised policy paper, and a series of draft and final Bills between 2015 and 2018, culminating in the Act’s promulgation in 2019. The reason for noting this long evolution period is that the design of the tax is seen as relatively complex and cumbersome, partially a result of extensive negotiations and compromises reached over the years leading to the inclusion of mechanisms to reduce tax liability and avoid unintended consequences.

The Act is being implemented in two phases with the first phase (recently extended) running to the end of 2025, and the second commencing in 2026 and concluding at the end of 2030. The tax rate is currently ZAR159/tonne of CO₂e and will continue to increase for the 2023 to 2029 tax periods, including currently ZAR236/tonne of CO₂e in 2025 and finally increasing to ZAR462/tonne of CO2e in 2030. After 31 December 2030, the carbon tax rate must be increased by an amount to be announced by the Minister of Finance in the national annual budget. The tax is levied and collected for the benefit of the National Revenue Fund, and funds are not ring-fenced. 

The Act imposes a tax on direct emissions from emitters which undertake any of the activities listed in Schedule 2 to the Act which are conducted in South Africa, above the thresholds prescribed for those activities. These activities are derived from the IPCC activity classification, and align with the listed reportable activities on which emitters are required to report their GHG emissions. The agriculture, forestry, land use and waste sectors are excluded from paying carbon tax during the first phase of its implementation (up until 2025), largely due to administrative difficulties in measuring and verifying emissions from these sectors, but they will likely be included in the second phase. The tax base is determined per tax period and consists of the sum of the taxpayer’s GHG emissions resulting from its fuel combustion, industrial processes and fugitive emissions. Taxpayers calculate their tax based on reported emissions, which are determined using emissions factors that quantify the estimated emissions associated with each activity.

In the first phase of the tax, a series of allowances and deductions are available to taxpayers to facilitate a transition. These include a basic tax-free allowance of 60% which initially applies to all emissions, a trade exposure allowance, a carbon offset allowance, a performance allowance and a carbon budget allowance. These allowances vary per activity and Schedule 2 to the Act indicates the maximum permitted allowance for each activity, typically ranging between 5 and 10% for each allowance. A suite of regulations has also been published that regulate some of the allowances, namely the Carbon Offset Regulations, 2019, Regulations on the Allowance in Respect of Trade Exposure, 2020; as well as the Emissions Intensity Benchmark Regulations, 2020 for the performance allowance.

The carbon tax is levied in terms of the Customs and Excise Act, 1964 as an environmental levy. The tax is paid to, and administered by, the South African Revenue Service (SARS). The Customs and Excise Act requires that every carbon taxpayer must obtain a licence for their “customs and excise manufacturing warehouse”.

In the second phase of the carbon tax, the National Treasury has indicated it intends to increase the offset allowance by 5% in 2026, together with a sharp increase (as described above) in the currently legislated trajectory, accelerating to higher levels by 2035, 2040 and up to potentially USD120 beyond 2050. The basic tax-free allowance will also be reduced. Indirectly, this will likely drive the demand for domestic carbon offsets that meet the eligibility requirements of the regulations, so that taxpayers can reduce overall tax liability.

GHG Reporting Regulations

In the absence of any dedicated laws regulating climate change impacts, the then Department of Environmental Affairs (now DFFE), used empowering provisions under the existing National Environmental Management: Air Quality Act, 2004 (NEMAQA), to regulate GHG emissions. In 2017, the National GHG Reporting Regulations were published requiring the reporting of GHG emissions by emitters to enable the DFFE to obtain information about GHG emissions in the country, to meet international reporting obligations, and to establish a national inventory of emissions, to be used as a basis to implement more complex regulatory instruments, including the carbon tax and, in time, carbon budgets.

The GHG Reporting Regulations apply to the categories of emission sources listed in Annexure 1, and to data providers, as defined in the Regulations. A data provider who is required to monitor and report GHG emissions, is any person in operational control of, or conducting any activity that meets or exceeds the emissions thresholds in Annex 1 to the Regulations.

Reporting boundaries are based on operational control, and notwithstanding that reporting is done at the level of operational control, data providers are required to register all emitting facilities where activities exceed the prescribed installed capacity thresholds, within 30 days of commencing the activity. They must then submit GHG emissions data on an annual basis, including IPCC emission sources and related activity data. Reporting must be done using the South African GHG Emissions Reporting System (SAGERS).

Pollution Prevention Plans

In 2017, the DFFE also published a Notice under NEMAQA, declaring a basket of six GHGs to be “priority pollutants” under the country’s existing air quality management laws. This declaration unlocked the power of the Minister to require activities resulting in the release of these pollutants to submit “pollution prevention plans” in terms of the dedicated Pollution Plan Regulations, 2017. The use of this mechanism was intended as an interim mechanism pending more detailed empowering legislation under the Climate Change Bill (discussed below).

The regulations require that that any person who conducts a listed production process that results in GHG emissions (of the priority pollutants) of more than 0.1Mt annually, must submit a pollution prevention plan to the DFFE. Amongst other things, these plans must include GHG mitigation measures for direct emissions and the proposed emissions reductions that will be achieved by these measures. Progress on implementation must be reported annually. It is not an offence to fail to implement the plan’s mitigation measures. It is an offence, however, to fail to submit a plan or a progress report or to submit false or misleading information, with an associated penalty of five years imprisonment and/or a fine of up to ZAR5 million upon conviction.

In due course, it is envisaged that legally binding carbon budgets will be issued to emitters under the Climate Change Bill, and that the existing pollution prevention plans will be converted into plans used to support the implementation of carbon budgets. In this context, pollution prevention plans operate as transitional instruments, which support emitters in preparing to implement emissions reduction measures, encouraging them to start budgeting for longer-term capex and opex costs.

The Climate Change Bill

After a four-year gestation period, the Climate Change Bill is now formally before Parliament, with the government hoping for it to be enacted before the end of 2023. The purpose of the Bill is to enable the development of an effective climate change response and a long-term, just transition to a low-carbon and climate-resilient economy and society. The Bill traverses all sectors of the economy, with a strong focus on achieving co-operative governance, adaptation planning, and the regulation of emissions from the private and public sectors. It introduces provisions requiring the mainstreaming of climate change across all decision making and planning within government. It further establishes the PCC (as discussed in 2.4 Key Policy/Regulatory Authorities), which is chaired by the President. It also creates Provincial and Municipal forums to engage on climate change and imposes climate change mitigation and adaptation assessment and response measures on provinces as well as metropolitan and district municipalities.

SETs

The Bill further legislates the “national emissions trajectory” by including it as an annexure, and requires its regular review every five years. The Minister of Forestry Fisheries and the Environment (Environment) is required to identify sectors and sub-sectors which are subject to SETs. These quantitative GHG emission reduction targets are based on the national emissions trajectory and will be allocated to an emitting sector or sub-sector, on a five, ten and 15-year basis. Ministers responsible for sectors and sub-sectors that have been allocated SETs are mandated to develop and implement policies and measures (PAMs) to ensure emissions from within a sector or sub-sector remain within the limits of the SET. The relevant Minister must also report to the Presidency on its progress in achieving the SET.

The scope of coverage of SETs is extensive, including agriculture, forestry, fisheries, co-operative governance, traditional affairs, economic development, energy, environment, health, human settlements, international relations, mineral resources, national treasury, public enterprises, public works, rural development, land reform, science, technology, trade, industry, transport, water affairs and sanitation. If implemented fully and presuming the reporting and transparency approach is effective, the sectoral approach to emissions management may go a long way in co-ordinating the national mitigation effort and also mainstreaming climate considerations into existing policy instruments.

Carbon budgets

The Minister is also required to identify activities which cause climate change and to issue “carbon budgets” to persons who conduct those activities above the prescribed threshold. The wisdom of and mechanism for carbon budgeting has been hotly debated in South Africa for some years. The budgets will be applied at a facility level and set a maximum threshold on GHG emissions, over three successive five-year periods. When setting a carbon budget the Minister must take into account:

• the socio-economic impacts of imposing the carbon budget;
• the best available science, evidence and information;
• the best practicable environmental options available and alternatives that could be taken to mitigate the emission of greenhouse gases;
• national strategic priorities;
• the alignment of the carbon budgets with the national emissions trajectory; and
• progress on the implementation of the greenhouse gas mitigation plans.

It is currently unclear precisely who will be allocated carbon budgets (because the required listing of GHGs and emitting activities is contingent on promulgation of the Climate Change Act) and what range factors will inform levels of allocation, but it is anticipated that budgets will be allocated at an aggregated entity level, taking into account GHG emissions per emitting activity at each facility operated or owned by the aggregated entity, and that allocation levels will be based on a facility’s grandfathered (historical) emissions.

It is anticipated that regulations on carbon budgets that set out the process for their determination and allocation will be published once the Bill is promulgated. In its current form the Bill does not have any penalty provisions for exceeding a carbon budget. Discussions surrounding its development have suggested that exceeding a carbon budget will result in the imposition of a higher carbon tax rate under the Carbon Tax Act, and that associated penalties will be included in the latter. It has been proposed that this rate be ZAR640/tonne CO₂e applied on all emissions that exceed the carbon budget.

To date, the DFFE has been running a voluntary carbon budget programme and many entities already have experience in working in a carbon budget environment and reporting thereon. Currently, entities which participate in the voluntary carbon budget programme enjoy a 5% carbon tax allowance. This allowance will fall away when the carbon budgets become legally binding. As noted earlier, once carbon budgets become legally binding, emitters will have to pay a higher tax rate on the emissions in excess of the budget.

The DFFE is currently working towards an allocation methodology for Phase 2 carbon budgets, including the following three proposed approaches, each of which is sub-divided into various technical options:

• fixed reduction – budgets are sector-wide fixed reductions;
• mitigation potential – budget is underpinned by the mitigation potential assessed in the national mitigation model; and
• benchmarking – budget is a benchmarked intensity determined at a company level and underpinned by performance data at facility level.

At present, there are no statutory mechanisms regulating adaptation. When the Climate Change Bill comes into operation, it will require provinces, as well as district and metropolitan municipalities, to undertake a climate change needs and response assessment, and to develop climate change response implementation plans based on those assessments. These will be dual adaptation and mitigation plans. The mainstreaming of climate change into provincial and municipal planning instruments, will potentially facilitate better budgetary planning and implementation of these measures. 

The Bill also has a comprehensive chapter on adaptation planning, something relatively unique amongst climate change laws worldwide. It includes the development of adaptation objectives and scenarios for the country, requirements for the development and review of the adaptation strategy and plan, and a duty on certain departments to develop sector adaptation plans.

In addition to the above, South Africa’s high court, in the case of Earthlife Africa Johannesburg v Minister of Environmental Affairs 2017 2 All SA 519 (GP) (also known as the Thabametsi case) has interpreted Section 24O of NEMA, as including climate change as a “relevant consideration” within environmental impact assessments (EIAs). This means that whilst the country’s EIA Regulations and their empowering statute do not expressly refer to climate change, the common law requires that new developments must take climate change into account where it is a relevant consideration. The court applied this ruling both in relation to mitigation as well as adaptation, meaning that if a development occurs in an area that is highly vulnerable to climate change and/or the development is likely to be impacted by climate change, this should be assessed and addressed in the relevant specialist studies, and the authorities have a legal duty to take these risks and impacts into account when making a decision on the application.

South Africa intends to participate in Article 6 of the Paris Agreement and has historically participated in the international carbon market including through the Verified Carbon Standard (VCS) and the Clean Development Mechanism (CDM). At present there is a relatively healthy national carbon market as a result of the carbon tax. Under the Carbon Tax Act, there is a 5–10% carbon offsets allowance. In terms of this allowance, tax liable entities are entitled to reduce their tax liability by purchasing and retiring carbon offsets in accordance with the prescribed Offset Regulations. These regulations permit taxpayers to reduce their tax liability by using carbon offsets generated under the CDM, the VCS and the Gold Standard, as well as any domestic standard approved by the Minister of Mineral Resources and Energy. Offsets must be generated within South Africa and meet various eligibility requirements. The Regulations require that the offset project must concern an activity that is not itself subject to the carbon tax. They also contain a negative list of activities in respect of which carbon offsets are ineligible under the allowance, including certain renewable energy projects; HFC-23 and N₂O destruction projects; nuclear, geological carbon capture and storage activities, and a temporary CDM certified emission reduction. Similarly, if a project has received any allowance for energy efficiency measures under Section 12L of the Income Tax Act, such a project is ineligible. There are also restrictions relating to offset projects already in operation at the time that the tax came into effect. The Regulations further set out the administration of the offset system, including the development of an offset registry, its maintenance and oversight, and the process by which taxpayers may claim their carbon offset allowance. 

The regulated carbon tax price linked to an offset market has stimulated a carbon market for domestic offsets. Under this market, offsets are sold at a rate pegged below the carbon tax rate, with the rate depending on the nature and attributes of the offset project, as well as other market dynamics. The exclusion criteria under the Offset Regulations have also stimulated market action within specific sectors, for example the requirement that the offset cannot be in respect of an activity that is already subject to the carbon tax, has disincentivised industrial process efficiency offset projects, but there has been an increase in projects that are not currently subject to the carbon tax and land-based activities, such as soil-agricarbon projects.

The impact of the CBAM is currently unknown but many thinktanks, as well as government, have expressed concern and are looking into its impact. Early analysis suggests it may be notable, with almost USD1.5 billion of exports at risk, as the EU is one of South Africa’s major export destinations. The country’s iron, steel and aluminium industries are particularly at risk. 

Through the BASIC Group, in 2021, South Africa, expressed “grave concern regarding the proposal for introducing trade barriers, such as unilateral carbon border adjustment”. These were perceived as being discriminatory and against principles of international environmental law. In 2021, at the G7, President Rhamaphosa further called for caution in a one-size-fits-all approach to disinvestment from fossil fuels and the imposition of non-tariff barriers or discriminatory taxes that would unfairly harm developing economies.

The climate change regulatory landscape in South Africa has not been deeply influenced by the TCFD, but civil society is increasingly pressuring the private sector to report in line with it. The TCFD is also referenced in the National Treasury’s draft Technical Paper entitled Financing a Sustainable Economy (2020), which acknowledges it as an important source for the government’s work on sustainable financing, including the development of a green finance taxonomy. The Prudential Authority, which is responsible for the regulation and supervision of financial institutions, has also recommended that these institutions consider climate-related risks as part of their governance, risk management and internal and external reporting frameworks. Although not a regulatory requirement, it has encouraged them to identify any consequential impacts on their strategies and business plans, to take appropriate action to build resilience, and to incorporate the recommendations of the TCFD as part of their disclosure frameworks.

At present there are no reported cases of directors being held liable for climate change-related fiduciary failures or offences in South Africa.

In relation to fiduciary duties, these have been partially codified as the duties of good faith, honesty and loyalty and a duty to exercise reasonable care, skill and diligence. The Companies Act, 2008 provides that a director of a company must exercise the powers and functions of a director in good faith, for a proper purpose and in the best interests of the company. Commentators have also suggested that it includes the awareness of wrongdoing. The “business judgement rule” presumes that a director has exercised their duties in the best interests of the company and with reasonable care, skill and diligence if the director has taken reasonably diligent steps to become informed about the matter, either had no conflict of interest in relation to the matter or complied with the rules on conflict of interests, and made a decision, or supported the decision of a committee or the board (with regard to the matter) on a rational basis for believing, and did believe, that the decision was in the best interests of the company. This rule effectively shields honest directors from liability for unsound decisions, on the basis that innovation must be promoted by balancing corporate commercial risk and directors’ accountability for the decisions that lead to such risks. It can also however, soften the duty of care, skill and diligence required and may result in courts exercising restraint when holding directors liable for business decisions, including in relation to climate change, so long as they were made in good faith, with care and on an informed basis.

In the climate change context, directors might breach these duties, especially where physical or transition climate risks present a foreseeable and material financial risk to the company and its directors have either failed to consider this risk, or failed to exercise reasonable care and skill in responding to it. Given the volume, depth and availability of research dealing with climate change and company risk, it will be increasingly difficult for directors to escape liability for bad decisions under the business judgement rule.

In relation to climate change statutory offences, the failure to submit a pollution prevention plan is a Schedule 3 offence under NEMA. This means that the director liability provisions in that Act will also apply, and consequently directors can be held personally liable if it can be proven the director failed to take all reasonable steps to prevent the commission of the offence. The Climate Change Bill has also been designed as a specific Environmental Management Act, meaning that the director liability provisions in NEMA have the potential to apply to it. In order for these provisions to be formally binding, Schedule 3 of NEMA will need to be amended to include reference to carbon budgets under the Climate Change Act (once it is promulgated). It is considered unlikely that this will happen as the current compromise is that there will be no “double penalty” for exceeding a carbon budget, and rather the penalty will just be a higher carbon tax rate; however, finality on this position will only be known closer to the time of the Bill’s finalisation in Parliament and enactment.

South Africa falls somewhere between the two extremes of having a definite environmental shareholder liability regime and having no guidelines. It is true that there is no legislation that deals specifically with the issue and there is no case law directly dealing with the point either; however, drawing from other cases which recognise shareholder liability as well as by careful analysis of the statutory duties created generally towards the environment, there is a possibility that, in certain circumstances, a shareholder may be held liable for the environmental impacts of a company’s activity. South African courts do not lightly disregard a company’s separate personality; courts will, however, in exceptional cases “pierce the corporate veil” such that the factual control of a parent company over its subsidiary is acknowledged and/or members of the company may personally become liable for the actions of the company, in spite of their separate identities. In such cases there must be fraud or improper conduct, and the plaintiff must be unable to obtain another remedy.

There are also provisions within NEMA that enable the authorities to take recourse against any person who was or is in “control” of any activity that has caused or is causing pollution or environmental degradation, including theoretically, damage as a result of climate change. It has been speculated that these provisions could empower a court to also pierce the corporate veil if the parent/subsidiary control element is proven.

While the King IV Report on Corporate Governance for South Africa (King IV) advises boards of directors to report on sustainability issues, and whereas the Johannesburg Stock Exchange recently launched climate change disclosure guidance for listed companies, “environmental reporting” is not a corporate compliance and governance obligation in South Africa. ESG-related reporting is currently voluntary. It is, however, increasingly part of the suite of requirements imposed upon private companies by financial lenders, and large-scale emitters accordingly often display their willingness to disclose such information to secure financing.

Climate change due diligence within corporate transactions is still in its infancy but is growing. Lenders and purchasers are increasingly seeking assurance that the target has the appropriate authorisations in place, including, for example, licensing under the Customs and Excise Act for the purposes of paying the carbon tax, GHG reporting, and pollution prevention plans. Similarly, due diligences are also assessing the incorporation of climate change within EIAs for new developments, seeking assurance that these have been adequately addressed in the EIA, and confirmation of the extent of the legal and operational risk posed by these anticipated impacts.

South African legislation tends to be relatively low on green incentives and high in disincentives. In relation to incentives, the Income Tax Act, 1962 provides for fiscal incentives for renewable energy technologies including:

• an accelerated depreciation allowance for movable assets used in the production of renewable electricity generation and biofuels; and
• an additional deduction for expenses incurred in respect of supporting infrastructure (roads and fences) in large-scale renewable energy production.

In 2023, National Treasury also published draft legislative amendments to give effect to two proposed renewable energy tax incentives. The first is an enhanced renewable energy tax incentive in terms of which corporate taxpayers will be able to claim a 125% tax deduction in the first year for qualifying capital expenditure in respect of all renewable energy projects. The second is a rooftop solar tax incentive, in terms of which individuals will be able to receive a 25% tax rebate of the cost of any new and unused solar PV panels, up to a maximum of ZAR15,000.

Other fiscal measures for a green economy include the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP), which is a competitive auction system in which Independent Power Producers (IPPs) bid for projects. If successful, IPPs obtain 20-year power purchase agreements with the national utility, Eskom. IPP payments are typically protected in the case of Eskom defaulting on the payments with South African government standing as a sovereign guarantee.

The Income Tax Act, 1962 provides the following additional fiscal incentives:

• a deduction of certain scientific or technological research and development expenses; and
• a deduction of energy efficiency savings resulting from activities in the production of income.

In relation to disincentives, in addition to the carbon tax, the Customs and Excise Act imposes a levy relating to CO₂ emissions upon the purchase of new motor vehicles manufactured in South Africa.