The carbon tax is an important economic instrument in South Africa. Yet it is now uncertain whether the country will continue this or not.
reports There are suggestions that a proposal to suspend the tax may go to the Cabinet. At the same time, the Finance Minister did not mention any such step on February 25. budget speech. So, will it stay or go? For now, the picture is unclear – but what is clear is that eliminating the tax would be economically short-sighted and a step backwards.
This move is against the carbon tax mirror an effort To replace the restructuring of Eskom in December 2025 – namely the expropriation of the transmission system operator's assets, which will also have negative economic impacts. it was overturned by the President state of the nation address On 12th February.
The carbon tax in South Africa came into effect in 2019 and is based on carbon tax act. This gives effect to the “polluter pays” principle by placing a price on the subset of greenhouse gas emissions that contribute to climate change. Although this tax stems from environmental concerns, it has many important economic benefits for the country.
Just share, in 2025 report Titled The Obstruction Playbook, the documents detailed lobbying efforts aimed at limiting the scope and impact of the tax. In this context, it is important to note that the carbon tax is currently largely exempt, with many entities receiving a 95% or more reduction in their liability, so the South African Revenue Service is only collecting a small fraction of that. 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 a carbon tax
International Institute for Sustainable Development estimated For fiscal year 2025, in the energy sector alone, the South African carbon tax cap and allowances resulted in R57.2-billion in foregone revenue. This reflects the significant potential of a carbon tax to contribute to government coffers, if existing exemptions are reduced over time as intended. If revenues from the energy sector are limited, it could provide a major fiscal boost to address energy sector challenges, such as grid upgrades or supporting social elements or the transition to a low-carbon electricity system.
But what about companies that must pay taxes? What are the economic considerations for them? Well, if they reduce their emissions they will reduce their carbon tax liability. This is the primary reason for the tax's existence – it is a financial lever to encourage companies to reduce the environmental damage they cause. For some industries, reducing emissions may be particularly challenging, but this is not a license to maintain the status quo. The tax has received a longer phase-in period to allow time for preparation.
For any company involved in international trade, there are also significant financial dynamics. European Union started it Carbon Limit Adjustment Mechanism (CBAM) in 2023, which will take effect in 2026.
For products imported into 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 home government (through CBAM certificates), but the amount is reduced if the exporter can demonstrate that it has paid an equivalent carbon price to its home government, or more 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 that a South African exporter and an EU importer agree on a fixed total purchase cost for a product, where the EU carbon price for emissions is converted to R10. In Scenario A, the South African exporter can demonstrate that it has paid R10 to the South African Government. In Scenario B, the South African exporter pays no domestic carbon tax, so he sells the product to the EU importer at R10 less, because the EU importer must now pay the equivalent R10 to his government. Comparing the scenarios, the South African exporter would receive the same revenue in each case, but in Scenario A the carbon revenue accrues in South Africa rather than abroad.
Now imagine the same case, but with further implications for business competition. If this exporter can reduce the emissions associated with its product to R6, it can reduce its selling price to R4 to attract more customers, while still earning the same revenue as if the emissions were R10.
Many other countries are considering CBAM-type systems, so these dynamics may soon move beyond the EU. Since the EU carbon price is currently much higher than South Africa's effective carbon tax rate, this would result in a split payment under current policies. But the principle remains: a strong South African carbon tax keeps more revenue in South Africa and incentivizes 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 decarbonization efforts such as the Just Energy Transition Partnership in South Africa. Conversely, if South Africa were to suspend the carbon tax, this could jeopardize such international financial assistance and undermine investor confidence.
presidency response
The suggestion that a carbon tax will increase electricity tariffs is misleading and should be questioned. tax design This clearly includes provisions for electricity price neutrality. Analysis In 2025, Meridian Economics 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 replaces current environmental levies and is limited to an equivalent monetary value.
The government should work in the best interest of the country. As for the President's efforts to change parts of Eskom's restructuring process, he should intervene and stop these efforts to dismantle the carbon tax. The treasury should get the support it needs to revise and improve aspects of the tax system, and not be asked to defend its existence. DM
Richard Halsey is a policy advisor to the South African energy team at the International Institute for Sustainable Development. He has worked as a researcher on energy and equitable transition issues in South Africa since 2012 and has been a lead author on publications covering a range of topics.