Why the President needs to stop efforts to scupper South Africa’s carbon tax

The carbon tax is an important economic instrument in South Africa. Yet it is now uncertain whether the country will continue with it.

Reports suggest that a proposal to suspend the tax may be heading to Cabinet. At the same time, the finance minister made no reference to such a move in the 25 February Budget speech. So, will it stay or will it go? For now, the picture is unclear – but what is clear is that scrapping the tax would be economically short-sighted and a step backwards.

This move against the carbon tax mirrors an attempt in December 2025 to change Eskom’s restructuring – namely the asset ownership of the transmission system operator, which would also have had negative economic implications. This was overturned by the President in the State of the Nation Address on 12 February.

The carbon tax in South Africa came into effect in 2019 and is underpinned by the Carbon Tax Act. It gives effect to the “polluter pays” principle by placing a value on a subset of greenhouse gas emissions that contribute to climate change. While the tax stems from environmental concerns, it has a range of important economic benefits for the country.

Just Share, in its 2025 report titled The Obstruction Playbook, documents sustained lobbying efforts aimed at limiting the scope and impact of the tax. In this context, it’s important to note that the carbon tax currently has massive exemptions, with many entities getting up to 95% or more reduction in their liability, so the South African Revenue Service is only collecting a tiny fraction of what it could. And South Africa’s current carbon tax rate (measured in rands per tonne of carbon dioxide equivalent) is very low by international standards.

Economic considerations for the carbon tax

The International Institute for Sustainable Development estimated that for fiscal year 2025, in the energy sector alone, the thresholds and allowances to the South African carbon tax resulted in forgone revenue of R57.2-billion. This demonstrates the significant potential of the carbon tax to contribute to government coffers, if the current exemptions are reduced over time as is intended. If the revenue from the energy sector was ring-fenced, then it could provide a major financial boost to energy sector challenges, such as grid upgrades or supporting the social elements or transitioning to a lower-carbon electricity system.

But what about the companies that should pay the tax? What are the economic considerations for them? Well, if they reduce their emissions then they will reduce their carbon tax liability. This is the primary reason for the existence of the tax – it is a financial lever to encourage companies to reduce the environmental harm they cause. For some industries, reducing emissions may be particularly challenging, but this is not a licence to maintain the status quo. The tax has had a long phase-in period to give time to prepare.

For any companies involved in international trade, there are also important financial dynamics. The European Union introduced the Carbon Border Adjustment Mechanism (CBAM) in 2023, which takes effect in 2026.

For products imported by the EU, the importer must pay for the emissions associated with the product at a rate linked to the EU carbon price. The EU importer pays this carbon price to its own government (via CBAM certificates), but the amount is reduced if the exporter can demonstrate it has paid an equivalent carbon price to its home government, or most commonly, a split between the two. Let’s examine what this means for South African companies exporting to the EU using a simplified bookend example.

Assume a South African exporter and a European Union importer agree on a fixed total purchase cost for a product where the EU carbon price for the emissions converts to R10. In scenario A, the South African exporter can demonstrate it has paid the R10 to the South African government. In scenario B, the South African exporter pays no domestic carbon tax, so it sells the product to EU importers for R10 less, because the EU importer must now pay the R10 equivalent to its own government. Comparing the scenarios, the South African exporter would receive the same revenue in each case, but in scenario A the carbon revenue accrues to South Africa rather than abroad.

Now imagine the same case, but with further implications of trade competition. If this exporter can reduce the emissions associated with its product to R6, it could lower its sale price by R4 to attract more customers while still earning the same revenue as when emissions were R10.

Several other countries are considering CBAM-type systems, so these dynamics may soon extend beyond the EU. Because the EU carbon price is currently much higher than South Africa’s effective carbon tax rate, this will result in a split payment under current policies. But the principle remains: a robust South African carbon tax keeps more revenue in South Africa and encourages South African companies to reduce product emissions to improve competitiveness in international markets.

Another economic consideration is that the presence of a carbon tax aligns with international support for decarbonisation efforts in South Africa, such as the Just Energy Transition Partnership. Conversely, if South Africa were to suspend the carbon tax, it could put such international financial support at risk and weaken investor confidence.

Presidency response

Suggestions that the carbon tax will increase electricity tariffs are misleading and must be interrogated. The design of the tax explicitly includes provisions for electricity price neutrality. Analysis by Meridian Economics in 2025 found that under the proposed phase two design (2026 to 2030) the mechanism changes, but the result is the same: electricity price neutrality is maintained. The carbon tax simply replaces the current environmental levy and is limited to the equivalent monetary value.

The government must act in the best interests of the country. As the President did for attempts to change parts of Eskom’s restructuring process, he should intervene and stop these efforts to scupper the carbon tax. Treasury should have the support it needs to revise and improve aspects of the tax, not be asked to defend its existence. DM

Richard Halsey is a Policy Adviser for the South African Energy Team at the International Institute for Sustainable Development. He has worked as a researcher on energy and just transitions issues in South Africa since 2012 and has been the lead author on publications covering a range of topics.