Walking back the carbon tax is a step backwards for South Africa’s climate gains

Cabinet is currently facing intense lobbying to abolish or temporarily suspend South Africa's carbon tax. This would be a grave mistake. Instead of scrapping this vital policy tool, Treasury should retain the tax and urgently refine its design, particularly for the electricity sector, to deliver real emissions reductions while protecting affordability and equity.

Affordable, adequate, and clean electricity is essential to both our economic recovery and our climate goals. The electricity sector remains South Africa's largest source of greenhouse gas emissions, accounting for over 40% of the national total. As we transition from a coal-dominated monopoly to the competitive South African Wholesale Electricity Market (SAWEM), effective price signals are crucial to guide supply, demand, dispatch, and investment toward cleaner options.

Yet, as currently designed, the Phase 2 carbon tax (effective from 2026) fails to incentivise meaningful additional mitigation in this critical sector. Meridian Economics argued in their September 2025 briefing note and reinforced in a November 2025 follow-up, that the design ensures price and revenue neutrality: Eskom offsets its carbon tax liability via the Renewable Energy (RE) Premium (replacing the Environmental Levy in place since 2009). The result is no change in dispatch decisions, merit order, supplier behaviour, or investment signals for clean capacity. Coal plants continue to dominate, locking in high-emission infrastructure and delaying the shift to renewables and other low-carbon technologies.

This dilution of the carbon price comes at the worst possible time. With SAWEM's rollout, market mechanisms will increasingly determine outcomes. Weakening or abolishing the tax now risks perpetuating reliance on carbon-intensive assets, inflating long-term costs, and heightening vulnerability to global carbon border measures, such as the EU's Carbon Border Adjustment Mechanism (CBAM), which could impose severe levies on South African exports if our decarbonisation path appears weak. It would also erode investor confidence in our transition.

We must honour our international obligations under the Paris Agreement. South Africa's second Nationally Determined Contribution (NDC), finalised and submitted in October 2025, sets an emissions range of 350–420 MtCO₂e for 2026–2030, with a further range of 320–380 MtCO₂e for 2031–2035, alongside our 2050 net-zero goal. While these ranges represent a step forward in declining emissions trajectories compared to prior periods, the NDC does not explicitly mandate sector-specific mitigation from the power sector, and the upper end of the ranges (particularly in 2035) does not significantly constrain emissions from electricity generation in the coming years. Sectoral Emission Targets (SETs) under the Climate Change Act remain in draft and face serious implementation hurdles. Without a strengthened carbon tax providing economy-wide price signals, we risk falling short of the deeper power sector cuts needed to align with net-zero by 2050, manage transition risks, and maintain credibility internationally.

Meridian Economics has shown that better alternatives exist to enhance the tax's effectiveness without sacrificing affordability. These include incorporating the full Calculated Carbon Tax (CCT) into Eskom generators' market bids (using SAWEM transitional features like vesting contracts) to shift the merit order toward cleaner sources and send strong investment signals for non-emitting capacity. Other options involve removing the RE Premium offset to pass through incentives for consumer-side efficiency or switches to green suppliers. Revenues, such as the difference between the CCT and the Environmental Levy Equivalent, could be recycled through the Central Purchasing Agency to distributors or used for targeted subsidies (e.g., offsetting the proposed Legacy Charge, supporting households, grid expansion, or reskilling in coal regions). These approaches deliver stronger mitigation at the system and consumer levels, ensure a level playing field for independent power producers (IPPs), and build broader political support by addressing regressive impacts.

Abolishing or suspending the tax would surrender an established lever for energy reform, fiscal stability, competitiveness, and decarbonisation. Climate damages, stranded assets, and transition risks would burden the fiscus, and ultimately the public, far more than a well-designed tax ever could.

Rather, retain the tax, enhance its design for the power sector as Meridian Economics has recommended, and strategically deploy revenues to subsidise electricity prices, support key transition elements, and advance inclusive growth. This aligns mitigation with affordability, cuts long-term risks, unlocks private sector and IPP potential for a clean, reliable electricity system, and strengthens South Africa's standing in a carbon-constrained world, even as the formal NDC ranges allow some flexibility in the power sector's path.

Our Paris commitments, economic future, and climate security demand nothing less. Cabinet and Treasury should resist short-sighted pressures and seize this opportunity to send the right signals to investors and the market.

Note: This argument for retaining and reforming the carbon tax—rather than abolishing it amid current lobbying—draws particular strength from Dr Emily Tyler's recent LinkedIn post, which can be viewed here, which succinctly captures the risks of dilution or removal at this pivotal moment and calls for strategic revenue deployment to enhance political acceptability, equity, and transition support while preserving mitigation incentives.