The move comes after the government considered stakeholder comments submitted in response to a discussion paper on phase 2 of the carbon tax in late 2024. Phase 2 will begin at the start of 2026, with the amount of approved carbon credits allowed to be used against the carbon tax increasing to 10% for fugitive and process emissions and to 15% for combustion emissions, up from the current 5% and 10%.
The government will also consider future allowance increases in response to changes in the carbon market and associated standards.
The original discussion document proposed an increase in offset allowance by up to 15 percentage points, but there were some concerns around the likely shortage of credit supply in the short term.
The carbon tax increased from 190 South African rand per tCO2e ($10.37) to 236 rand per tCO2e at the start of 2025. Earlier this year the Johannesburg Stock Exchange transacted 10,000 tCO2e of eligible carbon credits at $8.25 per tCO2e.
Other measures aimed at easing potential supply crunches include the extending of the tax-free allowance to the end of 2030. Under previous proposals, the allowance was to be reduced from 2027.
The budget also extends the utilization period for carbon credits generated from projects approved before the introduction of the carbon tax in 2019 until December 31, 2028. Previously, credits from these projects had to be used by December 31, 2025.
Under the carbon tax projects approved under the Clean Development Mechanism (CDM), Gold Standard and Verra are eligible to be used as part of the carbon offset allowance. But the government will evaluate and consider other standards for inclusion with the aim to increase the supply of credits. The budget specifically calls out concerns around the potential lack of Afforestation, Reforestation and Revegetation (ARR) credit supply.
Currently, 40 projects across chemical industries, energy demand and industries, manufacturing industries, metal production and waste handling and disposal are approved to supply credits into the carbon tax.
The budget itself had been delayed by three weeks, triggered by debate around potential tax increases. When presenting the budget to parliament on Wednesday March 12, the Minister of Finance Enoch Godongwana said the delay was “regrettable” and had stimulated an “unprecedented level of public debate around the difficult policy trade-offs”.
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