Green Economy Journal Issue 63

FINANCE
South Africa’s carbon market
STARVING,
with an
COAS listings
(million CTOs/year)
COAS stockpile
(million CTOs/year)
COAS retirements
(million CTOs/year)
FINANCE
INSATIABLE DEMAND
Figure 1. The flow of CTOs through COAS over time.
Startling insights into the supply and demand dynamics of South Africa’s expanding
carbon market were recently revealed in The Brundtland South African Carbon Market
Analysis. These include the stockpiling of carbon tax offsets, a significant supplydemand
gap extending to 2043, and the need for increased carbon credit generation
at a significant scale.
BY BRUNDTLAND CONSULTING
on the energy and industrial sectors, as they will aim to reduce
their emissions by 5% to 10% through using CTOs. The demand
projection also considers the implication of South Africa’s Nationally
Determined Contribution (NDC) and assumes a linear trajectory to
net-zero emissions in 2050.
This illustrates that there is a need for increased carbon credit
generation at a significant scale. It is crucial to acknowledge that
engaging in projects that generate carbon credits can be challenging,
considering the expertise required for project implementation,
the complexity to measure and verify emission reductions and the
regulatory compliance requirements. Further, the eligibility criteria
for carbon credits under the South African Carbon Tax is restrictive, for
example, excluding activities that had received an energy efficiency
allowance under section 12L of the Income Tax Act.
At the leading edge
The supply and demand dynamics of South Africa’s expanding carbon
market will affect many local companies as they face increasing
carbon taxes and tougher competition for the already-tight supply
of CTOs that will be in ever-greater demand.
CTO supply-demand gap (million CTOs/year)
To curb its future greenhouse gas (GHG) emissions, South
Africa applies – among others – a combination of carbon
tax and carbon market policies. These essential tools for
combatting climate change motivate organisations to reduce
their GHG emissions to avoid paying higher taxes and incentivise
investment in cleaner technologies and practises.
Introduced in 2019, South Africa’s Carbon Tax Act covers 90% of
local GHG emissions and includes an offset allowance to offset 5%
to 10% of taxable emissions. This increased the local demand for
carbon credits and boosted the local carbon market, in which the
listing, transfer and retirement of eligible carbon credits as carbon
tax offsets (CTOs) is facilitated by the Carbon Offset Administration
System (COAS).
The recent Brundtland South African Carbon Market Analysis
investigated the movement of carbon credits as CTOs across the
COAS registry between 2019 and 2022 and revealed important
insights into the supply and demand dynamics of our expanding
local carbon market.
Increased CTO stockpiling
Almost none of the CTOs currently listed in the COAS will expire.
Instead, their value increases each year due to annual carbon tax rate
hikes, which – as per the amended Carbon Tax Regulations – increases
from R159 for the 2023 tax period to R462 for the 2030 tax period.
As such, holders of CTOs are likely to sell or retire these only later,
when it is more financially attractive. Brundtland’s analysis shows
that a significant number of CTOs are being stockpiled in the COAS
registry. In fact, CTOs retired on COAS decreased by 52% in 2023
(at the end of the 2022 tax filing season), as holding onto the CTOs
may be more lucrative.
In addition, the listing of new CTOs dropped by 29%. A potential
factor in reduced listing activity may be the stockpiling of carbon
credits on the registry of the issuing carbon standard. These
changes have led to a more than doubling of the stockpile, as
shown in Figure 1.
CTOs from some project types are only eligible until the end
of the 2025 tax period, end of phase 1 (extended). These CTOs
constitute a lower share of listings in 2023 compared to 2022.
The largest share of CTOs in the stockpile are eligible for use after
2025. This will enable companies who have accumulated CTOs to
capitalise on the substantial tax rate increase of 30% which occurs
from 2025 to 2026.
Supply-demand deficit
Analysis further shows that the criteria for post-2025 eligible CTOs
significantly limit the supply, advancing the gap between supply
and demand. Currently, several projects generate pre-2025 eligible
CTOs, however, few projects are generating post-2025 eligible CTOs.
Although it is expected that this group of CTOs will increase, this
supply is only additional to a subset of currently eligible projects,
resulting in the dip in supply seen in 2026 in the graph on next page.
Brundtland’s analysis further revealed a continuous supply-demand
gap for CTOs, extending at least until 2043. The cumulative deficit
amounts to approximately 143.5-million CTOs for the period 2023
to 2050, also illustrated in the graph below.
Demand for carbon credit generation
The demand for CTOs is expected to increase between 2026 and
2035, primarily driven by higher demand from the energy sector.
The projected demand analysis considers the effect of carbon tax
WATCH VIDEO
Mind the Gap, a deficit of 143.5-million CTOs across the various tax phases.
THOUGHT [ECO]NOMY
greeneconomy/report recycle
THE SOUTH AFRICAN CARBON TAX EXPLAINED |
Brundtland Consulting
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