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Climate change regulations’ impact on business in SA

Climate change regulations’ impact on business in SA

Sep 9, 2015

By Simon Clarke and Anthony Dane

There is an evolving climate change mitigation regulatory environment in South Africa, with government’s approach stemming from two key objectives – to contribute a ‘fair share’ to the global climate change mitigation effort expressed in terms of South Africa’s international commitment and to be competitive in an increasingly carbon-constrained global economy.

Trading off climate change against other developmental objectives is complex and challenging and its implications are significant to companies and the economy. Companies should be aware of the process and prepare for the requirements to ensure the most appropriate outcome.

Background

The South African Government’s National Climate Change Response Policy (NCCRP), published in October 2011, defines a benchmark range for national greenhouse gas (GHG) emissions.

This policy also outlines a process that includes specifying Desired Emissions Reduction Outcomes (DEROs) for the long (2050), medium (2030) and short (2020) terms. Long-term DEROs, expressed as a range, will be aspirational; while short-term DEROs will be more realistic based on currently available technology.

DEROs will be expressed in terms of absolute GHG reductions at sector and sub-sector level. To achieve these, the NCCRP describes two mechanisms. The first is the implementation of carbon budgets for sectors and companies that typically emit large amounts of GHG emissions. The Department of Environmental Affairs (DEA) is developing the carbon budgets, essentially a GHG emissions allowance or limit that will be set for the country as a whole, then divided up among sectors and allocated to individual companies. The second mechanism is a mix of government policy measures, called the Mix of Measures, which may include regulatory instruments, economic instruments, and other instruments such as capacity building and direct investment by government.

National Treasury is developing the carbon tax and this is expected to be aligned with the DEA’s carbon budget process.

Some of the most important issues related to the budget are:

  • Setting the rules around reporting. These haven’t been defined yet, but consistency in reporting by companies to government will ensure integrity of the system.
  • How the carbon tax aligns with this system and whether the tax and the budget will be compatible.
  • Whether companies below their allocated budgets can trade a portion of their budgets with those that have exceeded their budget, creating an ‘emissions trading system’.
  • How carbon offsets are treated in the budgets and as means of reducing carbon tax liability.
  • Whether reductions in ‘indirect’ emissions from electricity consumption can form part of a company’s efforts to stay within its budget and, importantly, how Eskom is treated as part of the carbon budget system.
  • The threshold for company-level budgets is currently 100 000 tonnes of CO2e per year. It is not clear to what extent this applies to single entities /sites or whole companies. Issues related to competition must also still be addressed.
  • There will also be ‘measures for smaller emitters / sectors not covered by the carbon budgets’. There is no indication of what these will be but some form of carbon regulation will take place for smaller emitters.
  • How significant changes in companies (mergers, acquisitions) are accounted for.
  • How the budget allocation will work for companies that may already have implemented least-cost mitigation options and may now only have expensive options for further reductions.
  • The timing and duration of this process.
  • Which legislative framework will be used by government to regulate climate change going forward. Will the existing Air Quality Act be used or will the DEA develop a stand-alone Climate Change Act?

Actions business should take

A number of important issues must be resolved before the system is implemented, but in the meantime companies can take steps to address the risk. There are three fundamental actions we believe companies should take:

  1. Develop a clear, accurate and credible set of energy and GHG data, including historical emissions and a forecast of future emissions. Review historical emissions as these may need to be restated if the company has undergone any restructure.
  2. Measure savings from emissions-reduction projects that have been implemented and identify and quantify new reduction opportunities. Include potential mitigation projects even if they are not currently financially feasible.
  3. Engage with government and other stakeholders, such as business associations.

By having a robust set of energy and GHG data and an idea of how this may change in the future, you will be able to quantify the impact of future carbon legislation. Companies will also be required to submit their emissions data to government for the carbon budget process so it is important that it’s reliable. Having a clear picture of future mitigation potential will allow meaningful dialogue with government on the budget. As the saying goes, “If you are not at the table, you are on the menu”.

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