South Africa’s Treasury outlines options to shield power utility Eskom from cost impact of carbon tax

The Treasury’s discussion paper on phase two of the carbon tax policy outlines possible measures to ease immediate financial pressure on Eskom

What: Eskom has expressed concerns that the carbon tax could drive up electricity prices.

Why: South Africa’s Treasury has published a discussion paper on carbon tax detailing phase two of the tax policy proposals introduced in the 2024 Budget.

What next: The proposed measures are designed to keep electricity prices stable as the carbon tax is gradually phased in, says the Treasury.

The National Treasury of South Africa on Wednesday (November 13) released a discussion paper on carbon tax for public input, detailing phase two of the tax policy proposals introduced in the 2024 Budget in February.

Proposed measures offer options aimed at shielding South Africa’s state-owned power utility Eskom from the cost impact of the carbon tax, set to take effect on January 1, 2026.

The Treasury’s discussion paper outlines possible measures to ease immediate financial pressure on Eskom, which has cautioned that the tax could drive up electricity prices, News24 reported. These measures aim to keep electricity prices stable as the carbon tax is gradually phased in.

Introduced at a low rate in 2019, the carbon tax aimed to encourage industries to adopt less carbon-intensive practices in anticipation of 2026 rate increases. Eskom was initially exempt, as it could offset its existing electricity generation levy against the tax.

During the first phase of the carbon tax, the tax is revenue neutral and has no impact on the price of electricity owing to complementary measures to ensure revenue neutrality (zero impact), the Treasury’s paper explains. This is achieved by providing a credit for the payments of the electricity generation levy and a credit for the renewable energy premium built into the electricity tariff under the Renewable Energy Independent Power Producers Programme (REIPPP).

However, from January 2026, Eskom will be required to pay the carbon tax, which will initially cause a 1.6% increase in electricity prices. Since the tax will only apply for a quarter of the 2025/26 fiscal year, the immediate effect on prices in that year is limited. However, starting in 2027, when the tax applies for the full year, the effect on tariffs will be four times as high.

Eskom’s options

South Africa’s Electricity and Energy Minister Kgosientsho Ramokgopa has recommended postponing the carbon tax for Eskom to help alleviate cost pressures related to its substantial proposed 36% tariff increase. Ramokgopa said he intended to present his proposals to the National Energy Regulator of South Africa (NERSA) later this month, according to News24.

The Treasury’s paper advises that the electricity generation levy be removed in 2026, making way for the gradual implementation of the carbon tax. The levy currently generates approximately ZAR8bn (around $478mn) each year for the Treasury. By replacing this levy with the carbon tax, which will increase annually starting in 2027, the Treasury believes there will be a stronger incentive for Eskom to reduce carbon emissions.

“In the current design, the carbon tax liability is zero for Eskom as it is outweighed by the deduction of the electricity levy and the renewable energy premium. In this [recommended] option, the carbon tax will start to apply and managers of electricity generators will start to factor in the level of carbon emissions in their business decisions. There will now be an incentive to lower carbon emissions to reduce their carbon tax liability,” the Treasury said.

The government introduced the electricity generation levy in 2009, applying it at a rate of 3.5 cents per kWh for electricity generated from non-renewable sources, including coal, petroleum-based fuels, natural gas, and nuclear power. The levy was intended to encourage demand-side management, address electricity supply shortages, and act as an initial step towards establishing a carbon tax to support long-term climate goals. Electricity generated from renewable sources and eligible cogeneration systems is exempt from this levy, the Treasury says.

Another option for Eskom is to keep the electricity generation levy and postpone the carbon tax for another five years. This, however, is not the recommended option, writes News24.

Ambitious goals

The included proposals on phase two of the carbon tax design from 2026 to 2035 are based on South Africa’s Nationally Determined Contribution (NDC) commitments, SA News reports.

“Carbon tax is an integral part of the package of policy measures aimed at addressing climate change as recommended in the 2011 National Climate Change Response Policy and the 2012 National Development Plan,” the Treasury said.

The NDCs outline specific policies, measures, and financial needs to help South Africa transition to a low-carbon, climate-resilient economy. Suggested carbon tax changes will introduce adjustments in tax-free allowances to help industries transition smoothly.

“To help achieve South Africa’s NDC commitments for 2025 and 2030, revisions to the carbon tax rates for the 2nd phase from 1 January 2026 to 31 December 2030 were necessary,” the Treasury’s paper said.

According to the Treasury, South Africa ranks among the top 20 emitters worldwide, with per capita emissions similar to those of developed countries because of its heavy dependence on fossil fuels. However, the country has committed to ambitious climate targets aimed at lowering emissions and contributing to global efforts to limit temperature increases, with a strong push toward the 1.5°C goal.

Under the Paris Agreement, South Africa has pledged to reduce emissions to a range of 398 to 510mn tonnes of CO2 equivalent (CO2e) by 2025, 350 to 420mn tonnes by 2030, and aims to achieve net-zero emissions by 2050.

Proposed incentives

The Treasury’s document suggests adjustments to several components, such as the basic tax-free allowance, carbon offsets, the electricity levy, the renewable-energy premium, and the energy efficiency savings tax incentive.

Currently, a 60% tax-free allowance to emissions under a certain threshold applies to all carbon emitters. The Treasury proposes a phased tax-free allowance reduction of 10 percentage points in 2026, with an additional 2.5pp cut annually from 2027 to 2030. Post-2030 reductions are also under consideration based on South Africa’s climate targets.

The paper also suggests various incentives to encourage a transition to a lower-carbon economy, in addition to the gradually decreasing tax-free allowance. These include performance-based incentives that would increase the tax-free threshold for emitters implementing mitigation efforts, a generous allowance for carbon offsets, a higher tax rate for emitters exceeding their carbon budget, which will become mandatory in 2027, and an increase in the trade exposure allowance.

“Increasing the effective carbon tax rate by gradually phasing down the basic tax-free allowance and adjusting incentive-based allowances such as the performance allowance will go a long way towards strengthening economic incentives in the power sector to prioritise dispatch of the most efficient power plants, as more supply capacity becomes available,” the Treasury said.

The draft proposals will be revised to consider public comments after the consultation process is concluded on December 13, and announcements will be made in the 2025 Budget.