30 June 2014
National Treasury
Dear Mr Morden,
Promethium Carbon comments
on the Carbon Offset Paper of April 2014
Please find our comments on the Carbon Offset Paper attached hereto.
If you have any questions, please do not hesitate to contact us.
Yours faithfully,
RT Louw
Director
Promethium Carbon
1
Promethium Carbon comments on the
Carbon Offset Paper of April 2014
This document contains Promethium Carbon’s comments on the Carbon Offset Paper
published in April 2014 (the “Paper”).
1 MOTIVATION FOR SUBMITTING COMMENTS TO THE
POLICY PAPER
Promethium Carbon 1 is a leading South African supplier of GHG reduction and carbon services
to both the private and public sectors. The company has been involved in the development of
the South African low carbon economy over the last decade. We have a good understanding of
a number of issues that are relevant to the proposed carbon offset system. These include global
carbon pricing developments, emission reduction potential and the development of emission
reduction plans, as well as the impact carbon pricing will have on a variety of businesses in the
South African economy. This comment paper is submitted as our contribution to the
development of a low carbon economy in South Africa. It is our own position on the matter
and does not represent the views of any of our clients either in the private or public sectors.
2 OBJECTIVE OF OFFSET SCHEME
Our comments contained in this document are made from the following perspective:
GHG mitigation will impose a cost on the South African domestic economy. We need to
address the conversion of the economy to a low carbon economy, and bear the cost thereof, at a
time that there is much uncertainty in the world economy and this will no doubt impact on the
South African economy. The cost of greenhouse gas mitigation can be either a dead-weight cost,
with no other benefits to the economy, or it can be an investment into a new, green, economy.
The offset system has the potential to impact on a number of levels, and this necessitates that
the following be clearly articulated:
1
www.promethium.co.za
2
i.
ii.
iii.
iv.
The first level of impact is to ensure that the money spent on greenhouse gas mitigation
is spent in a way that stimulates the green economy. This will occur if the expense in
greenhouse gas mitigation can be applied as a capital investment in green business rather
than as an operating expense. The objective of the offset scheme must be to stimulate
the development of a green industry as much as possible.
The second level is to ensure that the economic impact of the mitigation actions is
minimised. This will mean that the national economy has access to least cost mitigation
options. This will ensure that the financial burden placed on the economy through the
mitigation objective is achieved with the least possible negative impact.
The third level of impact is to ensure that companies operating in South Africa have
access to least cost mitigation options. In this respect the offset scheme must not be
restrictive in ways that place artificial barriers on companies and limit their access to least
cost mitigation options.
The offset system has the capability to
stimulate investment in greenhouse gas
mitigation in sectors and in companies
that are not covered by the tax net. We
understand that the tax net will
substantially be defined as indicated in
Figure 2. This definition of the tax net
excludes entire industries and many
companies. Initial indications are that less
than 50 companies will be included inside
the tax net. The implementation of the Figure 1: Definition of carbon tax net
offset scheme will allow mitigation
activities in the many companies that are lying outside the tax net.
For multi-sectoral companies it will be important to define the tax net around the taxable
activity to ensure a fair participation. For example agricultural projects should be
allowed even if the farm belongs to a large mining company.
3 COMMENTS ON THE PAPER
A number of our comments on the Carbon Offset Paper impacts on the paper as a whole as it
addresses issues that spread over and impacts on a number of sections in the Paper. These issues
are addressed in this section.
3
3.1 Terminology and Definition Issues
3.1.1 “Methodology”
The term Methodology can be used in a number of contexts in carbon offset discussions. Four
alternative contexts are summarised below:
•
•
•
•
Project methodology – This concept is widely used by a number of carbon offset
standards including the CDM, VCS and Gold Standard. In the cases of these standards,
the term methodology refers to the approved set of rules according to which specific
project types are developed. Methodologies typically contain guidance on issues such as
project eligibility criteria, baseline assessment, assessment of project emissions,
assessment of leakage, emission reduction calculation and monitoring plan.
Standardised methodology – There is a growing movement in all established carbon
offset standards to lower the transaction costs of project registration and emission
reduction verification. One of the most effective tools in this movement is the
development of standardised baselines. The concept of a standardised baseline convers
issues such as automatic additionality for certain project types (so-called “positive lists”)
and pre-approved baseline emission factors (such as grid emission factors).
Schemes or programs – In some cases carbon offset schemes such as the CDM and
VCS are referred to as “methodologies”. For example the VCS Program Guide is the
overarching VCS Program document. It sets out all rules and requirements governing the
VCS Program, including the project registration process, the methodology approval
process, the accreditation requirements for validation/verification bodies, and the
functioning of the VCS registry system.
Standards – Every scheme or program is a separate regulatory framework based on a
specific standard which provides the principles and requirements. These are the
obligations that participants and projects must meet during the project cycle. For CDM
the standard is the Validation and Verification Standard. For the VCS the VCS Standard
sets out all specific requirements for developing projects and methodologies, and for the
validation, monitoring and verification of projects and GHG emission reductions and
removals. The VCS standard uses as its core the requirements set out in ISO 140642:2006, ISO 14064-3:2006 and ISO 14065:2007. South Africa has adopted the whole
series of greenhouse gas ISO standards, including the ISO14064 series (part 1,2 and 3) as
well as ISO14065 and it is known as SANS/ISO14064 and SANS ISO 14065
respectively. Through the SABS technical committees the standards are updated and
revised as per the ISO consultative process.
The Paper however uses the term “methodology” on a number of occasions in very different
contexts. Using the same term within different contexts causes confusion about the intend and
4
allows for varying interpretations. In the table below the varying interpretations of the term is
summarised.
Table 1: Use of the term "methodology" in the Paper
Application of
term
“Methodology”
Paragraph in
Paper
Comments
Project
methodology
Paragraph 29
The statement is made in this paragraph that projects can be
categorised according to the methodology used. This is normally
the other way around – the methodology is selected according the
type of project implemented.
Paragraphs
30, 31, 32, 36
& 65
Correct use of term methodology
Paragraph 98
This paragraph correctly refers to the use of project
methodologies in South Africa. It is however unclear if this is the
only reference as it appears that it also refers to both standardised
methodologies and issues normally addressed on either a
standards or a program level
Paragraph 100
This paragraph uses the term methodology correctly, but refers to
a ‘positive list’ of approved methodologies. This is confusing as all
methodologies in use must be approved by the program in
accordance with the standard under which they are developed.
Positive lists would be standardised baselines that would form a
sub-set of the approved methodologies.
Paragraph
58
The term methodology is correctly used under the description of
standardised approaches. In this context the term standardised
baseline, as a subset of all methodologies can also be used. The
use of the term standardised baseline will eliminate the possibility
for confusion and make the Paper easier to read and understand.
Paragraph
61
The term methodology is used correctly but the paragraph
actually refers to standardised baselines which is a subset of all
methodologies.
Paragraph
62
This paragraph refers to standardised approach that is not sufficiently
flexible to accept additional methodologies. The situation is that the
standardised baseline is created on the basis of specific
methodologies. A standardised approach can therefore not accept
additional methodologies. Both standardised baselines and
default factors makes the development of projects faster and
cheaper.
Standardised
methodology
5
Application of
term
“Methodology”
Programs or
scheme
Paragraph in
Paper
Comments
Paragraph
98
This paragraph correctly refers to the use of project
methodologies in South Africa. It is however unclear if this is the
only reference as it appears that it also refers to both standardised
methodologies and issues normally addressed on a program or
scheme level
Paragraph
100 & 104
This paragraph refers to both project methodologies and
standardised baselines.
Paragraph
28
The paragraph states depending on the type of methodology used for the
development of carbon credits, they can either be sold in the voluntary or
compliance carbon markets. This should refer to program or scheme.
For example, most CDM credits are sold into the compliance
market and most VCS projects are sold into the voluntary market.
Paragraph
47
This paragraph states there are, however, numerous methodological issues
that must be addressed to ensure an effective implementation of the offset
mechanism that will contribute to the transition to a low-carbon economy.
This refers to issues that relate to administration rather than
methodologies. Whereas standards deal with issues that can
impact on macro scale the project methodologies deal with issues
that impact on the micro project implementation level.
Paragraph
65
This paragraph refers to issues that cover the eligibility of projects
in the proposed carbon offset scheme. Generally these issues are
addressed at the level of the standard and not ay a project
methodology level. A good example in this respect is the
treatment of carbon capture and storage (CCS) in the CDM. The
project methodology for CCS projects could only be developed
after the decision to allow CCS into the CDM has been taken at
the CDM standard level.
Paragraph
97
This paragraph states that an independent expert committee might need to
be appointed to work … on the development of methodologies. Normally
project methodologies are developed by project proponents. We
therefore assume that this paragraph refers to issues such as the
positive lists or even the eligibility criteria of the standard.
Paragraph
98
This paragraph correctly refers to the use of project
methodologies in South Africa. It is however unclear if this is the
only reference as it appears that it also refers to both standardised
methodologies and issues normally addressed on a standards level
In general we feel that the readability and understandability of the Paper will be significantly
enhanced if the term “methodology” is unpacked and used more accurately.
6
3.1.2 “Double Counting”
The concept of double counting is introduced in Box 1 on page 13 of the Paper. Double
counting can refer to the double claiming of credits for the same emission reduction, or to the
claiming of double economic benefit for either the same credit or the same emission reduction.
The first of these two relates to the environmental integrity of the system and the second relates
to the economic integrity.
As the term double counting is used on a number of places in the document, we recommend
that a distinction between these two meanings be made. The term is used in the following
contexts in the Paper:
•
•
Economic integrity: Paragraphs 51, 52, 53, 55 & 67.
Environmental integrity: Paragraphs 92, 110 & Box 2
Double counting is such a serious issue that can impact significantly on the design of the system.
We therefore recommend that the terms be rephrased to provide clarity. This can be addressed
by either talking about “environmental double counting” and “economic double counting”, or
by using different phrases like for instance double counting as referring to environmental double
counting and double dipping as referring to economic double counting.
3.2 Principles and Concepts
The following principles and concepts in the Paper need to be addressed:
3.2.1 Double counting of economic benefit (“double dipping”)
Paragraph 51 states an offset project that is implemented on an activity that is liable to the carbon tax could
result in double counting of the carbon reduction benefit. Paragraph 55 states that if a project is inside the
tax net, double counting (of economic benefit) will occur if the project also generates offset
credits. Paragraph 56 states implementation of these projects can therefore be considered as business–as-usual
for entities covered by the carbon tax to reduce their tax liability.
Our modelling of the potential supply based on the Mitigation Potential Analysis shows that a
large number of projects have marginal abatement cost curves that are higher than R50 per ton.
If you take into consideration that the economic benefit of implementing a project inside the tax
net will range from R12 per ton (90% tax free threshold) to R48 per ton (60% tax free
threshold), then the introduction of the carbon tax will not stimulate the implementation of
these projects. If these projects are however allowed to gain offset credits, then they may be
implemented.
The supply and demand section is confusing and in some parts contradictory. Many of the
projects included in the supply analysis appear to fall under the exclusions. As a result the
7
analysis appears to be flawed and should be reviewed. The total supply of carbon offsets in
accordance with the eligibility criteria proposed by National Treasury is estimated at
approximately 13 MtCO2e per annum. This falls short of the anticipated low end range of the
demand at 18 MtCO2e per annum. More detail on the waterfall graph and the underlying values
is contained in Annexure 2. The total supply of carbon offsets in accordance with the eligibility
criteria proposed by National Treasury is estimated at approximately 13 MtCO2e per annum.
This falls short of the anticipated low end range of the demand at 18 MtCO2e per annum. More
detail on the waterfall graph and the underlying values is contained in the Annexure.
MtCO2e
0
10
20
30
40
50
0
10
MtCO2e
20
30
40
50
MAC Supply 100%
High Cost >150
Negative MAC
Eligible projects facing barriers
Offsets within Tax Net
Additional within Tax (50%)
Prior 2015 (excl N2O, 50% of 41%)
12L Excluded
REIPPP
Industrial Gasses (future)
Positive List
Total Supply of Offsets
Anticipated Demand - Low
Anticipated Demand - High
Supply based on rules in Offset Paper
Based on Promethium Carbon proposal
Figure 2: Modelling of supply and demand
It must therefore be realised that it is not axiomatic that the implementation of projects inside
the tax net will result in automatic double counting of economic
benefit (double dipping).
Double counting has a negative and wasteful connotation.
However the layering of incentives is not necessarily negative and
can in a number of instances create the enabling framework to
generate the actions required. Many policies and incentives do
currently not result in actions and the intended purpose is not
reached. Instead of continually revising incentives that are not
working it would help to rather layer the existing policies until the
intended goal of job creation, manufacturing improvement,
exports or emission reductions are met.
3.2.2 Co-benefits
The issue of co-benefits in carbon offsets is very important, but
sometimes contentious. The origin of this conversation lies in the
Figure 3: South Africa's
Sustainable Development
Framework
(A National Framework for
Sustainable Development in
South Africa)
8
Kyoto protocol, which states in Article 12: The purpose of the clean development mechanism shall be to
assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate
objective of the Convention. This requirement led to the formation of Designated National
Authorities (DNA’s) in all of the non-Annex I countries that ratified the Kyoto Protocol.
The sustainable development criteria used by the DNA for
the approval of projects implemented in South Africa 2
include environmental, economic and social criteria.
Co-benefits are mentioned in a number of areas in the
Paper.
Paragraph 11
Projects that have little co-benefits and low value,
such as the mitigation of industrial gasses, should
also be excluded.
Box 2
Co-benefits defined as: In addition to
reducing GHG emissions and mitigating the
effects of climate change, offset projects should
have the potential to deliver additional social and
economic benefits. Within the South African
context offsets can contribute towards charting the
pathway to a low-carbon economy and creation of
green jobs and investment in non-fossil fuel-based
energy generation
Paragraph 68
Industrial gas-related credits have been disallowed
in the EU ETS from 2013, due to low value
credits with little co-benefits flooding the market.
Example
projects:
of
impact
of
Take a company that is
implementing a fuel switch on a
boiler that traditionally ran on
coal. If the emission reduction
is achieved by simply switching
coal with natural gas, the only
impact (other than GHG
emission reduction) will be an
increased operational cost.
Money paid to the natural gas
supplier will be used to develop
the gas fields in Mozambique.
If the switch is made to biomass
fuel on the other hand, the
money spent will be used to
establish a domestic biomass
supply industry. This will assist
in creating the low carbon
economy in SA.
It is important to note that the conversation has drifted from the need to align projects with the
sustainable development criteria of the country to “co-benefits”. Whereas this is representative
of many discussions in the popular media, it is concerning to see it embedded in a government
document.
It is also important to note that the statement that projects with “little co-benefits” may still
make significant contribution towards the sustainable development and other policy objectives
of the country. Issues such as the need for green growth as described in Chapter 5 of the
National Development Plan 2030 should be brought into this discussion.
2
http://www.energy.gov.za/files/esources/kyoto/dnaapproval.pdf
9
Conversion of the domestic economy to green economy is not normally recognised as a cobenefit. It is however important that contributions in this respect be recognised. This means
that if a project has no visible community based social impacts, but it can assist in creating an
industry focussed on green technologies, it should still be recognised as a project with significant
co-benefits.
It is especially important to note that the National Development Plan was published after the
establishment of the DNA and the definition of the mandate of the DNA. The mandate of the
DNA and the criteria against which they evaluate projects should be re-visited in the light of the
publication of the NDP 2030. This issue is of importance in respect to projects that have limited
social co-benefits but can make significant contributions to the development of green industries
in South Africa. One example of such projects can be found in the numerous industrial energy
efficiency projects that can participate in the offset scheme.
South Africa’s current world class permit and approval systems such as the Environmental
Impact Assessment (EIA) does safeguard projects and developments through a rigorous process
that includes stakeholder consultation and evaluation of sustainable development. All current
carbon credit programs or schemes have a requirement to comply with the laws of the host
country. Carbon credits cannot be issued if the authorisations are not in place. We do therefore
not understand the duplication of these requirements.
We therefore highly recommend that the reference to co-benefits be removed from the Paper
and replaced with the requirement to align the offset scheme with a broader set of South African
policy objectives through the current authorisation and permit approvals already in place.
3.2.3 System Symmetry with respect to generation and use of offset credits
The South African constitution dictates that everybody has the right to administrative fairness.
This principle is important as global trends in carbon offsets leans towards an imbalanced system
where the administrative burden on carbon offsets is significantly higher than the administrative
burden on the emissions being offset.
The international practice of having more administrative requirements imposed on the
generation of offsets than on the accounting for offsets has some justification in the fact that
offsets are often generated in diverse international locations whereas emission accounting takes
place in specific jurisdictions. Japan is spearheading the simplification of administrative
requirements in the generation of offsets through the simplified requirements of the Joint
Crediting Mechanism (JCM). This offset mechanism allows for simplified methodologies and
administrative requirements that are enabled by the fact that the offsets are jurisdiction specific.
Figure 5 below shows how such an imbalance can be created in the South African carbon offset
scheme.
10
Offset standards can improve by being
closer aligned with the accounting of
emissions against which they are used.
Carbon tax M&V can be improved by
mandatory approval of monitoring plans
and verification
Verified
Carbon
Standard
Proposed SA
carbon tax M&V
Clean
Development
Mechanism
Administrative Burden due to Environmental Integrity Requirements
Low
Optimal
High
Figure 4: Asymmetry in administrative requirements for generation and use of offsets
Paragraphs 114 to 120 of the Paper lists a number of steps that the project owner must go
through in order to be able to generate credits. This places a significantly higher burden on the
project owner and the generator of the credits than on the emitter who will use the credits to
offset his emissions. These issues are summarised in Table 2 below.
Table 2: Administrative burden on offset generator
Proposed carbon offset project life Comments
cycle
Paragraph 115: Application to become
a recognised offsets developer (project
proponent) with an offset registry
account submitted to the administrator.
Such a step will not contribute towards either the
environmental integrity or the economic integrity of the
system. It will, on the other hand, introduce an additional
administrative burden on the offset developers and may even
create an artificial hurdle that could exclude good projects
from the system. We therefore recommend that this
requirement be removed.
Paragraph 116: Submission of carbonoffset project ideas to the administrator
for pre-screening to ensure that eligibility
criteria being met.
The current system of host country approval for CDM
projects at the DNA allows for the application by the project
owner for a voluntary, non-binding, letter of no-objection.
This step was particularly useful in the early days of the CDM
when international project developers and sponsors, who did
not know the South African system, needed confirmation that
they can invest in the development of projects in South
Africa. This step could be useful as a voluntary step but
should NOT be a mandatory step.
Note that inclusion of this step will force the DNA to
develop a full CDM and VCS and GS and CCBA capability.
11
Proposed carbon offset project life Comments
cycle
The CDM and VCS require project validation either prior to
implementation or prior to the first verification. It appears
the National Treasury considers that the validation of projects
is not required. If these standards are to be used, then the
validation step will automatically need to be included.
Paragraph 117, 118: Verification of an
implemented project by a recognised
third-party verifier and submission of
offset project verification (audit) reports
to the administrator for approval.
This requirement is in line with leading international practice.
The South African Accreditation Service (SANAS) has
already developed a program to accredit GHG validation and
verification entities against ISO14065. This accreditation is in
line with worldwide accreditations and should reduce the cost
of local verifiers while maintaining international credibility.
In addition skills in GHG verification can be exported.
Paragraph 119: Carbon-offset project
approval and issuance of credits into the
registry by the administrator.
The approval of the verification reports is required under the
CDM but not under the VCS. We recommend that the South
African system does not require an additional level of
approval. Using accredited verifiers relieves this burden while
maintaining credibility in the system.
Paragraph 120: Sale of carbon-offset
credits. Prior to the use of credits to
lower their carbon tax liability, entities
will have to obtain a certificate from the
administrating entity of the carbon-offset
programme.
It is not clear whether this is an additional certificate. If the
certificate referred to in this paragraph is a certificate relating
to the national appropriateness of the project, it will add
value. If it is another certificate about the amount of emission
reduction achieved, as in paragraph 90, it will introduce
unnecessary duplication into the system.
The objective of the administrative structure
of the offset system must be to mitigate the
risks for both the project implementers and
for the country with respect to the integrity of
the system. Figure 6 gives an indication of
the risks that need to be managed in the
system. The risk of erroneously including a
project in the offset system impacts on the
environmental integrity of the system whereas
the risk of erroneously excluding a project is
much more difficult to quantify and impacts
on the environmental integrity. The CDM is
biased towards a high risk of erroneous
exclusion. The design of the South African
system should guard against propagating this
risk of erroneous exclusion of projects.
Risk of erroneous inclusion
Issue not addressed: Implementation
of carbon-offset project by the project
developer.
High
Unregulated
Schemes
Ideal
Position
Clean
Development
Mechanism
Low
Low
Risk of erroneous exclusion
High
Figure 5: Risks associated with the offset schemes
12
3.3 Timing Issues
3.3.1 Short to Medium term
The Paper states that the carbon tax will be implemented on 1 January 2016. As the offset
mechanism is one of the mechanisms designed to allow companies to mitigate the impact of the
carbon tax on their business, it is essential that the offset mechanism be ready for
implementation by the same time the carbon tax is being implemented.
Experience has shown that there is an anticipation effect associated with the introduction of
carbon tax, leading to enhanced investment in emission reduction projects prior to the
implementation of the carbon tax. The same will exist with the offset scheme. It is therefore
essential to clarify both the tax design and offset mechanism as soon as possible to allow for
offset project investment to commence.
The Paper states in paragraphs 14 and 93 that a South African offset scheme can be developed
in the medium term. It then continues in paragraphs 94 through 120 to describe what such a
system could look like. We assume that this medium term does not refer to the time between
2016 and 2020 as we do not think it will be feasible to design such a system in a period prior to
the introduction of the tax in 2016.
The table below shows the time it took to develop some of the world’s offset (and similar)
schemes:
Offset Scheme
Time to develop
Comments
CDM
Basic rules –
4 years
First project 8 years
Refinement - ongoing
The basic rules of the CDM were agreed upon at the
Marrakesh Accord in 2001. This is 4 years after the
adoption of the Kyoto Protocol on 1997.
The first project was registered in November 2004.
Work to improve the CDM is ongoing.
Japan’s Joint
Crediting
Mechanism
(JCM)
(previously
known as the
Bilateral Offset
Crediting
Mechanism
(BOCM))
3 years to signing of
first bilateral agreement
Work on the BOCM started in 2010/2011 and the first
bilateral agreement signed in 2013. Note that this system is
significantly simpler than the CDM.
13
Offset Scheme
Time to develop
Comments
Californian
offset scheme
Draft basic rules 4 years.
Adaptation of rules –
6 years.
First methodology –
5 years.
First credits issued –
7 years
The development of the Californian scheme started in
2006 when the California Global Warming Solutions Act,
Assembly Bill 32 (AB32) was tabled in the State legislature.
Publication of the draft rules in December 2010.
The first protocols 3 were approved in 2011. Adoption of
the rules of the scheme was in December 2012.
The first credits were issued in November 2013.
To date methodologies for only 4 project types have been
developed. This is indicative of the barriers faced by
special schemes. 8 years after implementations on 4.3
million tons of credits have been issued 4. This amount
excludes the 6.6 million tons of “Early Action” credits
generated under earlier schemes.
Section 12L of
the South
African Income
Tax Act
4 years to
implementation
The section was first introduced in the beginning of 2009
and was implemented in December 2013.
The analysis above shows that it will be impractical to consider the development of a South
African offset scheme in the next 18 months.
3.3.2 Medium to Long term
The international community has committed itself to reach an agreement about the regulation of
greenhouse gas emissions by 2015, the so-called Durban Platform. This agreement will be
implemented in 2020 and is expected to be binding on the majority of countries in the world. It
is important to realise that this development will impact on any carbon pricing and offset scheme
implemented in South Africa.
The Paper sets out the principles of a South African scheme that will take at least 3 to 5 years to
develop. This will mean that the scheme will be ready for implantation by the time South Africa’s
domestic carbon pricing and offset schemes will have to be adjusted for alignment with the
outcome of the Durban Platform.
We recommend that the development of a South African scheme be delayed until such time as
there is clarity on what the details of the Durban Platform agreement will be and that the South
African scheme is based on those developments. In the meantime credible existing offset
3
4
The Californian system uses the word “protocol” in the same way as the CDM uses the word “methodology”.
http://www.arb.ca.gov/cc/capandtrade/offsets/offsets.htm
14
schemes and programmes currently operational in South Africa should be allowed to continue
providing credits to offset against carbon tax liability.
3.4 Role of the DNA and the Regulatory Structure
3.4.1 Role of the DNA
The Offset Paper further suggests that the Designated National Authority perform the following
roles:
Table 3: Proposed roles of the DNA
Paragraph Role of DNA
Comments
13
The DNA has to screen carbon offset This would require the DNA to duplicate the
projects for eligibility under the carbon function of the auditor. The issue is discussed
tax regime.
in more detail below.
89
It is proposed that the projects obtain a
certificate stating the CO2e reduction
achieved and that the certificate be issued
by the DNA.
90
It is proposed that the DNA expands its
functions to include issuance certificates
stating the CO2e reduction achieved for
the purposes of the domestic carbon tax
regime following the issuance of CERs
by the CDM Executive Board.
91
The DNA will have to validate projects This proposal implies the following:
implemented under non-CDM standards i. The level of validation under the non-CDM
like the VCS or GS in a similar way as
schemes is insufficient. We do not think
which CDM projects are validated.
that this is the case. Many of the CDM
requirements are unique to the CDM as the
system is designed to operate in all the
developing world jurisdictions in the world
to generate offsets that are acceptable to all
developed world jurisdictions. The stringent
requirements of the CDM leads to an
unhealthy asymmetry in the system as
described in Figure 5 above.
ii. It assigns the roles of both regulator and
auditor to the DNA. This is a conflict and is
described in more detail below.
92
The DNA should oversee the entry of This requirement constitutes a duplication of
the role of the independent auditor. The
offsets into a South African registry.
system should require a certificate from the
independent auditor before credits can be
issued into the registry.
This requirements in paragraphs 89 and 90 are
duplicating the functions of the auditors and
the registry. It will not add value to the system
as it will not increase the environmental
integrity of the system as this is already
guaranteed by the underlying offset standard.
It will also not contribute to the administrative
integrity of the system as this is guaranteed by
the registry.
15
Paragraph Role of DNA
Comments
97
The DNA could act is the administrator The role of the DNA should be such that it
of the scheme and approve the issuance does not create the possibility of conflict of
of credits. They can be assisted by an interest. See detailed discussion below.
independent expert committee.
98
As the administrator of the scheme, the These roles of the DNA could create conflict
DNA must:
of interest. See discussion below.
•
pre-screen projects for their
eligibility;
• evaluate independent verification
reports;
• Issue carbon credits.
Additionally, the DNA or an appointed
independent expert committee would be
responsible for development and
evaluation of methodologies and, when
appropriate, also an endorsement of
international methodologies for use in
South Africa
Modern regulatory practice requires that the regulator remains independent of the market
participants. This is a requirement based on the need for the regulator to remain objective and
without conflict of interest under all conceivable circumstances. The National Development Plan
requires that South Africa institute a far-reaching review of current infrastructure regulators to clarify roles,
strengthen accountability, update legislation and regulations, and reform institutional design. These
requirements need to be considered in the design of the carbon offset system.
The figure below shows what the relationship between the regulator and the different market
participants could be in a potential South African offset scheme.
16
Private sector
Independent
auditor
Implementation
Operation
Verification
Issuance
Registry
Trading &
Retirement
DOE (DNA)
Letter of
approval
Project Owner
Government
Project Owner
SARS
Collect tax +
Offset
cancellation
account
Project
Owner
Project Owner
Independent
standard
CDM, VCS, GS,
CCBA or
ISO14064-2
(new local scheme)
Department of Energy (Designated National Authority)
Treasury - Tax and offset regulations
Parliament - Carbon tax law
Figure 6: Relationship of regulator to market participants
The proposals contained in the Paper, as discussed in Table 3 above do not lead to a separation
of the roles of the regulator and the market participants as it assigns a number of market
participant roles to the DNA.
Paragraphs 90 and 101 state that the DNA has the capacity to assess projects for CDM eligibility,
and that this capacity should be utilised. It is important to note that this capability extends only
to the assessment of projects against the South African sustainable development criteria as
shown in Figure 4 above. The DNA does not have the capacity to consider any of the other
CDM eligibility criteria such as the applicability of the methodology, the establishment of the
baseline, the calculation of the project emissions and leakage, or the monitoring plan. We do not
believe that these functions should be added to the tasks of the DNA, as these are the tasks of
the accredited auditors.
The Paper refers to the role of the DNA as that of an “administrator”. We however believe that
if the system is properly regulated, it would not need an administered. We recommend that the
DNA act as the regulator to the system and a not as the administrator or a participant in the
system. This will ensure that the administrative integrity of the system is guaranteed.
3.4.2 Structure of the South Africa Carbon Offset System
Paragraph 95 of the Paper states that the following is required for an offset system:
17
i.
ii.
iii.
iv.
v.
an administrator of the programme and possibly an independent expert committee;
accredited independent third-party verifiers;
accreditation body for third-party verifiers;
a carbon-offset registry; and possibly
a carbon trading platform.
The Paper does not create a clear picture on where the limits of responsibility of the proposed
South African administrator as described in paragraphs 94 to 120 are. We recommend that the
South African carbon offset system be given a strong regulator. The role of the regulator and its
position in the existing infrastructure is shown in the figure below:
Responsibility of
South African
carbon offset
regulator
Application of approved
international standards
under existing regulation
Private sector
activities already
regulated in SA
• Registration
• Verification
• Issuance
• Project
eligibility
• Vintage
• Industry
classification
• Listing on
exchange
Offset Trading
• Validation
RSA Localisation
CDM, VCS, GS, etc
Emission Reduction
Project
• Trading
• Clearing &
settlement
• Other tax
incentives
• Retirement
International
Registry
(CDM, Markit, APX)
South African
Registry
(ESC, Strate, JSE)
Offsets used in
carbon tax system
Existing
international
regulators
South African
carbon offset
regulator
Existing financial
system regulators
Figure 7: Demarcation of the duties of South African carbon offset regulator
3.4.3 Accreditation Bodies
The Paper states in paragraph 106 that SANAS is the country’s single accreditation body. It is
important to note that SANAS is a member of the International Accreditation Forum (IAF). As
such, entities that are accredited by SANAS are recognised as being accredited in other countries
where members of the IAF operate. Similarly South Africa recognises entities accredited by
18
other accreditation bodies. Using accredited validation and verification entities lowers the
overall cost as competence is confirmed periodically and not through every single project.
3.5 System Alignment and Efficiency
The carbon offset scheme needs to be developed within the framework of the NCCRP. The
NCCRP requires that initiatives relating to the management of climate change risks in South
Africa be managed within the context of the parameters specified in the Policy. A number of
these parameters are relevant to the development of the offset scheme. These are:
•
•
•
•
•
Developmental
Transformational, empowering and participatory
Dynamic and evidence-based
Balanced and cost effective
Integrated and aligned
In addition to this the NCCRP lists a number of strategic priorities. The following of these
priorities are relevant to the development of the offset scheme:
•
•
•
•
•
•
•
•
•
Risk reduction and management
Mitigation actions with significant outcomes
Policy and regulatory alignment
Integrated planning
Informed decision-making and planning
Technology research, development and innovation
Facilitated behaviour change
Behaviour change through choice
Resource mobilisation
The objectives of the offset scheme, as articulated in the Paper are:
1) Access to least cost mitigation options (paragraph 45)
2) Low carbon growth, including investment in clean energy technologies, energy efficiency
and rural development with its sustainable development benefits (paragraph 46).
3) Cost effective transition to low carbon economy (paragraph 47)
19
3.6 Boundaries and Definition of the Tax Net
The issue of the access of project owners to offsets based on the position relative to the tax net
is problematic. Firstly, the Paper is not consistent with respect to this issue. Paragraphs 11, Box
1, 51, 52, 53, 54 and 57 refer to “taxable activities” as the demarcation of the tax net. There are
examples where a single company can have activities within areas that are taxable as well as areas
that are non-taxable. Examples are companies that own both forests (non-taxable) and paper
mills (taxable), or mining operations (taxable) and farming operations (non-taxable), or industrial
operations (taxable) and waste disposal facilities (non-taxable). In the cases of these companies,
offset can be generated in their non-taxable activities.
Paragraph 67 however uses the term “activities that are owned or controlled by companies that are covered
by the carbon tax” in. This is a clear departure from the rest of the Paper and if this is the intent, it
will sterilise the abovementioned companies from generating offsets.
We believe that the intent is not to sterilise a large portion of the potential supply of offsets and
therefore recommend that the wording from paragraph 67 is changed to be in line with the rest
of the document.
We further recommend that projects inside the tax net be eligible to generate offsets as is
discussed elsewhere in this document.
3.7 Nitrous Oxide Projects
Paragraph 68 refers to the exclusion of nitrous oxide credits. This recommendation is based on
alignment with international schemes such as the European Union Scheme. The Paper states:
Industrial gas-related credits have been disallowed in the EU ETS from 2013. We think it is important to
highlight the fact that not all nitrous oxide projects are excluded in Europe, but only projects
implemented on adipic acid plants. The European Union states 5: The ban will apply to projects which
destroy two industrial gases: trifluoromethane (HFC-23) produced as a by-product of chlorodifluoromethane
(HCFC-22) production, and nitrous oxide (N 2O) from adipic acid production. As South Africa
has no adipic acid plants, all of South Africa’s nitrous oxide projects should be allowed.
5
http://europa.eu/rapid/press-release_IP-11-56_en.htm
20
4 ALIGNMENT WITH OTHER POLICIES
4.1 Common GHG Accounting Standards
South Africa is in a process of developing a host of greenhouse gas management processes.
There is however a lacking communality
ISO 14064 Part 1
GHG Protocol
International emissions
in the use of greenhouse gas accounting
Domestic emissions
standards. The standards proposed in
the Paper (CDM, VCS and GS) are built
Company
Section 12L
on a coherent suite of greenhouse gas
of Income Tax Act
CDM/VCS
Methodologies
accounting principles. This suite of
Offset project
standards starts with the IPCC guidelines
and moves up through the ISO standards
to the individual CDM and VCS project
methodologies.
It is important to
understand that these standards are all
IPCC Guidelines
well developed and coherent.
Country
Figure 8: GHG accounting standards
Figure 9 shows the relationship of the
standards and methodologies to each other. We have included the Section 12L boundary in the
diagram but please keep in mind that Section 12L relates to energy efficiency and not greenhouse
gas mitigation.
The principles of accounting are also important for the definition of the carbon tax and this issue
should be addressed at the level of the design of the tax.
4.2 Alignment with the Z-factor
The Z-factor, as proposed in the Carbon Tax Policy Paper, will either penalise or reward
companies in specific sectors based on their performance against sector baselines. Whereas the
principle is sound and will achieve the goal of rewarding early movers and companies that make
significant improvements in their emission reduction efforts, there are some problems with the
proposed design.
The first problem with the proposed design is that companies can be severely penalised because
of investment decisions and legacy issues that date back to a time when there were no carbon
constraints on the economy. We believe that this will not be fair or useful and we suggest that
the Z-factor be re-defined in order to allow it to be rewarding to efficient companies and not
penalising towards companies that are stuck with legacy systems.
The second issue with the Z-factor as currently proposed is the cap of 5%. This cap hinders
companies achieving least impact mitigation options. It is therefore proposed that this cap is
21
removed and that companies should choose whether an emission mitigating project is used as an
offset or in the Z-factor calculation.
The third issue relates to the use of industry benchmarks. Promethium Carbon has calculated
benchmarks for a number of heavy emitting sectors and these case studies have proved that
benchmarking in most of the South African industry is not possible. We have however had huge
success in calculating facility based benchmarks on an ex-post basis. The concept of an ex-post
benchmark or baseline is very straightforward. It uses 2 sets of verified data to derive the
benchmark. The first set of data is the actual emissions of the facility. This information is
generally available and must be generated by tax paying companies for the DEA mandatory
reporting. The second set of data is verified emission reduction activities. The origin of this data
is the information of the interventions the company made to establish its emission reduction
programme. This data can be verified according to ISO14064 Part 2. The ex-post benchmark is
then simply the sum of the verified emissions and the verified emission reduction. In other
words, it is where the company would have been with it emissions if the emission reduction
activities were not implemented. Practically, this suggestion can be translated as follows to the
current formula to calculate the Z factor:
Z = Y / X (Carbon Tax Policy Paper)
Where;
-
X is the average measured and verified carbon intensity
Y is the agreed benchmark carbon emissions intensity
As per the proposed ex-post calculation approach, the Z factor will be calculated as follows:
Z = (VE+ΣER)/VE
Where:
-
VE is the Company’s Verified Emissions in year x;
ΣER are the total Emission Reductions achieved by the company in year x;
In this way, the company’s emission performance (X = VE + ΣER) is measured against an
internal benchmark (Y = VE). This removes the need for baselines and benchmarks based on
historic performance on facility, sub-sector and sector level.
Figure 9 below shows the use of the ex-post baseline concept applied to an evaluation of the
effectiveness of the actions taken by mining companies under the Energy Accord of 2005. It is
clear from the graph that, in the absence of the construction of the ex-post baseline, it would
appear that the actual emissions are significantly lower than the ex-ante baseline. Comparing the
actual emissions with the ex-post baseline however shows less of a reduction. It is therefore
22
clear that the use of the ex-post baseline gives a far more accurate indication of the actual
emission reduction achieved.
13.50
Net GHG emissions (MtCO2e)
13.00
12.50
12.00
11.50
11.00
10.50
10.00
9.50
2006
2007
2008
2009
2010
2011
2012
2013
Ex-ante baseline
Ex-ante emission forecast
Ex-Post baseline
Actual emissions
Figure 9: Ex-post baseline applied to mining sector
We have performed this analysis in a variety of scenarios ranging from single facilities through
to the country as a whole and have come to the conclusion that the methodology is robust can
be applied with a very high degree of confidence as basis for a Z-factor calculation.
4.3 Alignment with NCCRP
Although the Paper focusses on the design of a carbon offset system to be used against the
carbon tax obligations of a company, it is important to remember that offset trading is also
proposed to be used against carbon budgets as contemplated in paragraph 6.1.6 paragraph 6.5 of
the NCCRP.
We understand that there is a programme undergoing under the Department of Environmental
Affairs that looks at the design of the “DERO process”, and that National Treasury will not
comment on the links between carbon tax (and therefore the offset system) until this process has
been revealed. We do however believe that the integration between the elements of the NCCRP
can be described in fairly simple terms if it is mapped as in Figure 10 below.
23
START
DERO
(NCCRP
paragraph 6.1.2)
MIX OF
MEASURES
(NCCRP
paragraph 6.1.5)
DESIRED EMISSION
REDUCTION OUTCOME
Non-market based
Market based
Section
12 L
Carbon
tax
Carbon
offsets
Section 29
of Air
Quality Act
Other
DIFFERENCE
IN DESIRED
AND
ACHIEVED
EMISSION
REDUCTION
OUTCOMES
Reporting of emissions through
South African Air Quality
Information System
SAAQIS
AERO
CARBON
BUDGET
ACHIEVED EMISSION
REDUCTION OUTCOME
OUTCOME
Figure 10: Relationship between carbon offsets, carbon tax and other non-market measures in a
carbon budgeting approach
Figure 10 explains that the process starts with the setting of a budget, the Desired Emission
Reduction Outcome, or DERO. The “Mix of Measures” is then implemented. This consists of
a number of interventions including both market based and non-market based interventions.
This is however where the NCCRP stops. The element needed to complete the picture is the
“Achieved Emission Reduction Outcome”, which we have abbreviated to “AERO”. The
differential between the target, the DERO, and the outcome, the AERO, should provide the
control signal to Government to adjust the parameters of the different measures. Examples of
the adjustment could be the level of carbon tax or the amount of offsets allowed.
Certain of the provisions of the Paper works directly against the objectives of the NCCRP. We
have summarised these in Table 4 below:
Table 4: Alignment of the offset scheme with the NCCRP
Paragraph
Requirement
Detracting from targets and objectives
65
This paragraph lists certain industries and
project types that are eligible to generate
offsets to the exclusion of other project
types. Examples of project types that are
No contribution is made towards achieving the
objectives by selecting project types.
Irrespective of the type, each project needs to be
judged on its eligibility. Limiting to project types
will lead to market failure as good projects could
24
Paragraph
67
Requirement
Detracting from targets and objectives
not listed and therefore excluded are
industrial energy efficiency, fugitive
methane, spontaneous combustion in coal
mining operations.
be excluded.
Projects inside the tax net not eligible to
generate offsets
Double counting of economic benefit (double
dipping) from projects implemented inside the
tax net can be prevented with additionality
requirements. The exclusion of these projects
detracts from the following objectives of the
NCCRP:
• Developmental – Many of the projects inside
the tax net can have significant developmental
impacts. Example: if a company switch fuel
from coal to biomass, the fuel switch project
can be inside the tax net but the project that
generates the biomass can be outside the tax
net.
• Transformational – The transformation of the
SA economy can be significantly enhanced by
providing access to projects within the
boundaries of the tax net.
• Cost effective – There are many cost effective
projects that will be excluded if projects inside
the tax net are excluded.
• Mitigation with significant outcomes – the
nature of large companies is that they have
access to large projects that can have
significant outcomes. If these projects are
excluded, many mitigation options will be lost.
• Technology research, development and
innovation – Many of the innovation
opportunities lie within the boundaries of
large companies that will pay carbon tax. This
is because these companies have (a) the
resources to do R&D, and (b) opportunities
to implement the projects that result from the
R&D.
• Resource Mobilisation – Companies within
the tax net will have the resources to
implement significant projects. If these
companies are excluded, the access to these
resources will be lost.
In addition to the challenges of aligning with the NCCRP, the exclusion of these projects works
against the objectives of the offset scheme as articulated in paragraphs 45 to 47 of the Paper.
25
4.4 Alignment with 2014 Budget
The 2014 budget requires the following work to be done in respect to the carbon tax:
Budget requirement
1. Reducing Eskom’s tax liability,
with a credit for the renewable
energy premium, limiting the
potential effect of the tax on
electricity prices.
2. Lowering the current electricity
levy.
3. Addressing concerns about
international competitiveness,
including a formula to adjust the
basic percentage tax-free threshold
to reward over performance.
Link to Carbon Offsets
a. Access of REIPP projects can reduce electricity tariffs as
discussed below
b. Eligibility of electricity based (Scope 2 emissions) energy
efficiency projects within the boundaries of tax paying
companies will reduce impact of carbon tax on these
companies
No impact
a. Broader access to offset opportunities through more lenient
eligibility criteria will address concerns about international
competitiveness.
b. Increased limit of offsets from 5% and 10% will enhance
opportunities and create international competitiveness.
c. The creation of a viable offset market will define South
Africa as a green-growth investment destination. There are
many global investment funds targeting this sector.
4. Refining the research and
development tax incentive to
provide for related green
technology.
No impact
5. Using firms’ carbon offsets to
reduce their carbon tax liability by
between 5 and 10 per cent of
actual emissions, as outlined in the
soon-to-be-published carbon
offsets policy paper.
As discussed in offset paper and this comments paper. The
limiting of offsets to 5% and 10% is however problematic as it
goes directly against achieving the objectives of the carbon tax,
which is to reduce emissions.
6. Minimising the effect on
households by providing subsidies
to install solar water geysers and
improve public transport.
a. Strengthening access to carbon pricing in SWH market will
significantly help this initiative. Numerous PoA’s have been
registered, but little action is taking place as there is no
market for the carbon credits currently. A local market
would overcome this substantial barrier
b. Carbon offset generated in projects such as BRT can
contribute significantly to funding of such projects.
7. Using some of the revenue
generated from the carbon tax to
fund the energy-efficiency tax
incentive, which began operating
on 1 November 2013.
The impact of Section 12L incentive will be limited due to
structural problems in the incentive. These issues are described
in more detail in paragraph 4.7. If 12L does not generate
sufficient action then a larger portion of the tax revenue can be
foregone in increased access to the use of offsets. The allocation
of revenue to offsets rather than to 12L offers a more direct link
to the objectives of the NCCRP and the NDP2030.
8. Aligning reporting and
classification of greenhouse gas
The carbon offset system must be based on methodologies
grounded in a coherent set of greenhouse gas accounting
26
Budget requirement
emissions for tax purposes with
mandatory emissions reporting to
the Department of Environmental
Affairs
Link to Carbon Offsets
principles. These must be aligned with the offset reporting
being developed by the Department of Environmental Affairs.
This is described in paragraph 4.1
.
4.5 Alignment with Draft requirements of Section 29 of the Air
Quality Act and Mandatory Energy Management Plans
The Department of Environmental Affairs published its draft regulations in terms of Section 29
of the Air Quality Act on 14 March 2014. These draft regulations are supposed to be aligned
with regulations on the submission of mandatory energy management plans to be published by
the Department of Energy. Both these sets of regulations cover the same scope as the proposed
carbon offset system. Issues that need to be addressed in the alignment of these initiatives are:
1) Each system has its own set of boundaries and thresholds. These are shaped as sectoral
classifications and percentages of variables such as emissions. The alignment of these
diverse criteria will be next to impossible. We recommend that a simple set of rules
common to all the schemes be adopted. Examples of such boundaries and thresholds
and the conflict between them can be seen in:
a. A company may have activities in sectors that are covered by the carbon tax but
not the mandatory reporting.
b. A company may have an energy consumption forcing it to submit mandatory
energy management plans, but emissions that does not require that it submits
greenhouse gas inventory reports.
2) The different systems are being developed without a common set of accounting
principles. This is discussed in detail in paragraph 4.1 above.
We recommend that the focus on detailed definitions of sectors and thresholds be simplified
between the different systems with a set of common rules. This set of rules can be augmented
with positive and negative (exclusion) lists. As an example, all companies with more than a
certain carbon footprint based on Scope 1 6 and Scope 2 7 emissions must have certain
obligations, irrespective of what sector or subsector they are located in. This rule can be overlaid
by a set of exclusions (negative list) for example that activities in agriculture and forestry are
excluded from paying carbon tax.
6
7
Direct emissions in terms of ISO 14046 Part 1
Energy indirect emissions in terms of ISO 14046 Part 1
27
4.6 Alignment with Renewable Energy Independent Power
Producer Procurement (REIPPP)
Burden placed on electrcity consumers
(cents/kWhr)
Money provide in tariff for RE PPA's
(R million)
Paragraph 67 of the Paper states that projects
20,000
6.00
included in the REIPPP will be ineligible to
18,000
5.50
16,000
5.00
generate offsets. This is presented within the
14,000
4.50
context of excluding projects that benefit from
12,000
4.00
other government incentives. Within this context
10,000
3.50
8,000
3.00
it is important to remember, that even if
6,000
2.50
National Treasury guarantees the REIPPP power
4,000
2.00
purchase agreements (PPA’s), the actual funding
2,000
1.50
for the REIPPP comes from the users of Eskom
1.00
2014
2015
2016
2017
2018
electricity through an increase in the tariff
Cents per kWhr (left axis)
allowed by NERSA. It must also be kept in
Money provided in tariff for RE PPA's (Right Axis)
mind that the REIPPP is a competitive bidding
Figure 11: Impact of REIPP purchase program
programme and that any economic benefit that on Eskom tariffs
constructed from data presented in NERSA reason for
can be attracted by the REIPPP projects will be (graph
Decision and IRP2010)
passed through in the bid prices and eventually
to the consumer of electricity in the reduced PPA prices.
The inclusion of the REIPPP projects in the Carbon Offset mechanism will therefore have the
effect that it will allow bidders to lower their prices. This will be made possible by the positive
economic impact the carbon offset revenue will have on the finance of the projects. This in turn
will allow Eskom (through NERSA approvals) to lower the allocation made in the tariffs for the
purchase of renewable energy.
Inclusion of the REIPPP projects in the carbon offset scheme will be aligned with the following:
a. The Minister of Finance instructed National Treasury in the 2014 budget to investigate
way to lower the impact of the carbon tax on electricity price. Taking into
consideration that the REIPPP burden on the tariff is in the order of 5 cents per kWhr,
and that this is similar in magnitude to the burden the carbon tax places on the
electricity tariff, access for REIPPP projects to the carbon offset mechanism can go a
long way towards achieving the outcome mandated by the Minister.
b. NCCRP objectives of developing a renewable energy economy, transforming the
economy to a low carbon trajectory, introducing cost efficiency and alignment of the
different policy initiatives.
4.7 Section 12 L
We have modelled the potential impact of Section 12 L of the Income Tax Act. We consider the
impact to be limited as the mechanism does not provide sufficient incentive to implement
28
projects. The table below provides a comparison between the different incentives. This table
includes a comparison with the, now abandoned, Eskom Demand Side Management (DSM)
subsidy scheme as industry perceives the 12 L incentive to be a substitute for the DSM funding.
It is however important to note that the 12L incentive can make an important contribution to
the layering of incentives that will enable the implementation of energy efficiency projects.
Criteria
DSM funding
Section 12L
Carbon offsets
Regulatory
framework
Well established and
working smoothly –
administered and
implemented by Eskom
New structure needs to be
developed by SANEDI.
Delay in implementation
of 12L between beginning
of 2009 and end of 2012
(4 years) due to
requirement to develop
new standalone
infrastructure and
capabilities.
Infrastructure well
developed, stable and
available globally.
Eligibility
Capital cost scrutinised by
Eskom. Funding
approved if total cost of
saving is below a specified
hurdle rate
No eligibility criteria are
applied. All energy
reduction projects are
eligible. Renewable
energy and cogeneration
are excluded.
Project must adhere to
very strict additionality
criteria that are audited in
a very strict manner.
No capital cost or
additionality criteria are
applicable.
No upfront approval or
validation is required.
Monitoring and
verification
Projects subject to
Monitoring and
Verification (M&V) by an
Eskom appointed M&V
expert once only after
implantation.
Baseline and M&V reports
must be prepared by a
Certified Measurement
and Verification
Professional (CMVP).
Annual verification
required by an accredited
auditor.
Energy efficiency tax
certificates must be issued
by SANEDI.
29
Criteria
DSM funding
Section 12L
Carbon offsets
Institutional
capacity
Significant M&V
infrastructure and
capability built over time.
This capability now
redundant. The
abandonment of this
infrastructure introduces
inefficiencies in the
economy.
SANEDI mandate is to
do R&D in energy
efficiency – now given
role as regulator.
At introduction of scheme
there was no CMVP’s in
SA.
Significant institutional
capacity exists that can be
utilised for
implementation of the
carbon offset system.
Economic
benefit to project
implementer
Project implementers
received 50% of capital
costs for energy efficiency
projects (up to a specified
cost per MWhr) and 100%
of capital for load shift
projects.
R0.45 per kWhr saved as
deduction from income
tax. This equates to only
R0.126 per kWhr of
economic benefit. This
incentive is available only
for a period on 1 year as
the baseline is restated at
the beginning of each
year.
On the basis that SA’s
national grid has an
emission factor of around
1 ton of CO2 per MWhr
and The carbon tax is set
at R120 per ton, the value
of an offset will have a
ceiling of R0.12 per kWhr
for projects that save
electricity. This benefit is
available for either a 7
years crediting period
(which is renewable twice),
or a single 10 year
crediting period.
Liability of
participants
ESCO liable for penalties
No indication
Auditors liable for
erroneously issued credits
under the CDM
Under the proposed
trading framework of
commodities the project
owner/developer should
be liable for erroneously
issued credits.
This analysis shows that the proposed carbon offset scheme offers two major differences with
Section 12L. The first is in the fact that the eligibility conditions of carbon offsets are much
more stringent. The mechanism is therefore a more targeted intervention that can be better
aligned with policy objectives. The second is that 12L will probably not serve as a major
motivator to project implementation as the economic benefit is severely limited.
We recommend that 12L be used as an additional incentive to the carbon offset scheme to act as
an additional, or layered incentive to achieve the policy goals of energy efficiency and greenhouse
gas reduction.
30
5 ISSUES NOT EXPLICITLY ADDRESSED
5.1 Regulatory Framework
We recommend that maximum use be made of existing infrastructure to get the offset system up
and running. This issue is not addressed in the Paper. We have proposed a system in our March
2014 report Carbon Trading in South Africa, Trading Offsets against The Proposed
Carbon Tax . The essence of the proposal is summarised below for ease of reference:
A possible market structure is shown in Figure 12 below with a nine step process from project
implementation to the utilisation of the tax offset.
Cost of project implementation
Offset Provider
(seller of offset credits)
Emission Reduction
Project
1
6
Credits brought to market
Standards
CDM/VCS/GS
Payment
for credits
Market
Payment
for credits
Registry
Trading
Platform
Clearing &
settlement
Buyer
7
Credits delivered
Taxpayer
(buyer of offset credits)
Seller
5
4
Tagging
Rules
SARS
8
RSA tagging
2
Validation
&
verification
3
International
Registry
(CDM, Markit,
APX)
Credits
surrendered to SARS
SARS
9
Reduction in tax
payment
Figure 12: Envisaged Market Structure
The process steps are indicated by numbers in the diagram. The nine steps are explained below:
1) The offset provider invests in an offset project. This project can be either inside the
business of the offset provider or outside. Note that the forward buying of credits, as is
typically done in the CDM to finance projects, is not covered by the scope of the scheme
proposed in this report. However trading can be done on an over the counter (OTC)
basis.
31
2) The project is validated and verified by an accredited auditor of the standard used (CDM,
VCS, GS, CCBA). This process guarantees the environmental integrity of the system.
3) The credits generated by the project
are issued into the international
registry in terms of the scheme under
which the project was developed. In
the case of the CDM this will be the
CDM registry and in the case of the
VCS or GS, this could be either
Markit or APX. Even though APX
and Markit run the registries, these
really are part of either the VCS or
GS registry systems. In both cases
APX/Markit are accountable to
VCS/GS through a contractual
agreement. APX and Markit are
effectively registry service providers
or administrators.
4) The owner of the credits can now
apply for the credits to be transferred
to the South African Scheme. This is
done by auditing the credits for
National Appropriateness according
to the rules of the South African
offset system.
5) The credits are issued into the
account of the offset provider in the
RSA registry against delivery of the
Audit report and cancelation
certificate from the registry of origin.
See Figure 13 for an example of a
cancelation certificate.
Figure 13: Example of CDM registry cancelation letter
6) Once the credits arrive in the account of the offset provider, he can bring the credits to
the market to be traded.
7) The tax payer buys the credits on the market. The credits are transferred to the registry
account of the buyer.
8) The tax payer surrenders the credits into the cancelation account of the South African
revenue Service (SARS).
9) The tax payer receives a reduction in his tax liability that is equal to the CO2 value of the
surrendered credits.
32
5.2 International Alignment
As climate change is a global issue, it is necessary to align South Africa’s efforts to mitigate
greenhouse gas emissions with international efforts. South Africa realises the importance of this
and is an active and prominent participant in the UNFCCC process.
Despite this importance, here is only one mention of international alignment in the Carbon
Offset paper. Paragraph 50 states “depending on the outcome of the UNFCCC climate change negotiations
and the nature of an international climate change agreement that might be reached in the near future, the required
geographical eligibility of carbon offset projects could be reviewed during subsequent phases of the carbon tax
regime.”
We recommend that more effort is taken to ensure that there is alignment with South Africa’s
efforts at the international negotiating table.
Some issues that need to be kept in mind in the international arena are:
1) Aligning policies with South Africa’s negotiating partners in the African bloc, SouthSouth relations, BRICS, etc.
2) Recognition of early action on national and international levels.
3) Political prestige for international negotiations and positioning in Lima 2014.
A well designed offset scheme can position South Africa as an attractive green-growth
investment destination.
5.3 Eligibility of other programs or schemes
The Paper refers to 4 standards that can be used in the offset scheme: CDM, VCS, GS and
CCBA. It does however not offer an analysis of chosen programmes against criteria is required
to ensure the integrity of the offset system.
We recommend that a process is required to include new standards into the offset system. This
process should include a set of criteria according to which an offset standard can be evaluated.
Take as an example the possibility of including emerging schemes such as the Chinese, South
Korean or Californian standards. This may be very beneficial to South Africa as it may make it
possible to link to these carbon market trading schemes in future. How will process work to
approve such standards for project development in South Africa?
The table below contains some suggestions about what can be included in this process.
33
Table 5: Criteria for selection of offset standards
Criteria
Questions to be
answered for each
standard
Environmental Are emission
integrity
reductions real?
Comments
The CDM, VCS and GS all comply with this criterion as
the principle of emission reduction calculation is very well
established. Projects can reduce emissions in any of the
Kyoto gasses.
Are emission
reductions permanent?
Proving permanence is a difficult point for some types of
projects, such as land-based and forestry projects.
Emission reductions achieved by standard CDM projects
are permanent, but not those achieved by
afforestation/reforestation CDM projects. The VCS
addresses the permanence issue in a realistic way through
risk assessments and provisions for the risks, like buffer
accounts.
Can the emission
reduction be verified?
This issue is addressed in the verification requirements of
each standard. Some of these requirements can, however,
present a disproportionate burden.
Are emission
reductions additional?
Most standards will comply with this criterion as
additionality arguments are well developed and matured.
As with the verification criterion above, some standards
tend to over-emphasise the additionality argument to the
detriment of the provision of offsets. Progress achieved by
the VCS in the development of positive lists goes a long
way towards overcoming the onerous additionality
requirements imposed by other standards.
Does the standard
provide for the
avoidance of double
counting?
The risk of double counting is reduced where only one
standard is used in a region. The risk can, however, be
increased if more than one standard is used. The CDM
does not require checks that a project has not been
registered under another scheme, whereas this provision is
made in the VCS.
What is the risk of
erroneous exclusion
and erroneous
inclusion of emission
reduction projects?
The CDM has a very low risk of erroneous inclusion but a
very high risk of erroneous exclusion. This situation is
detrimental to the aims of the offset scheme and
development in general. The VCS is more balanced in this
respect. Figure 5 above illustrates this issue.
34
Criteria
Questions to be
answered for each
standard
Comments
Economic
factors
What is the cost of
validation and
registration?
The costs of validation and verification in the CDM are
very high. This is in part caused by the high degree of
asymmetry between the offset scheme and the verification
of the emissions actually being offset. The high costs
combined with the high risk of erroneous exclusion makes
the CDM unattractive to many potential offset providers,
especially those developing projects with smaller emission
reduction potential. Standardized methodologies such as
positive lists or performance benchmark approaches can
reduce transaction costs considerably, especially in respect
of project validation.
What degree of
localisation is possible
by using local auditors
and registry structures?
One of the objectives of the domestic offset scheme is the
generation of green jobs. Localisation of the validation and
verification services can create a significant amount of high
quality green jobs. The accreditation of designated
operational entities under the UNFCCC is an onerous task,
and only one SA company has achieved this accreditation.
Entities that are accredited against ISO 14065 by an
accreditation body recognized by IAF can act as
validation/verification bodies under the VCS. As of 2013,
the local IAF recognised entity SANAS can accredit
organisations against ISO14065, and two entities have
indicated that they are applying for this international
accreditation through this local accreditation body.
What are the regulatory
delays associated with
validation and
registration?
Validation of CDM projects can take up to three years to
be completed, with the average time in the order of one
year. These long development timeframes put a large
burden on the developers of offset projects.
Regulatory
factors
Note that the CCBA, which is included in the Paper, will not qualify as an offset standard if the
criteria above are applied. This is because the CCBA is does not address issues such as
environmental integrity but simply requires that a project be registered under a Recognized GHG
Program.
5.4 Post 2020 Issues
The Carbon Tax Policy Paper of May 2013 states in paragraph 36 the proposed … offsets for the
different sectors will remain fixed during the first phase (2015–19). There needs to be certainty on what
the intention of National Treasury is with respect to the long term allowance for offsets. This is
35
important as companies take investment decisions based on financial analysis that span a period
of 10 to 20 years. Failure to provide certainty on the longevity of the offset scheme will severely
impact on the amount of credits that come to the market. Such a lack of credit supply could
cause the market to collapse.
Seeing that the post-2020 scheme will have to be informed by the international developments,
especially the Framework for Various Approaches (FVA) that is currently being developed, it is
important that the scheme be structured in a way that can be compatible with future
developments. In this respect we recommend that:
1) The scheme to be introduced by 1 January 2016 be based on existing regulatory and
commercial infrastructure to ensure timeous supply of a sufficient volume of credits to
enable the market to function efficiently.
2) That an explicit message is sent to the market that the scheme envisaged between 2016
and 2020 will remain in force up to 2020, in that any new arrangements after 2020 will
accommodate credits from projects implemented prior to 2020.
3) No significant investment is made in the development of a new scheme until such time
as clarity is reached on the direction of the Durban Platform negotiations.
4) That effort is taken to ensure that South Africa’s negotiating team at the UNFCCC
negotiations are well informed in the developments with respect to carbon tax and
offsets. This is especially important in the negotiations around the structuring of the
FVA.
Agriculture and land use projects should qualify for a longer period than 5 years. Both to
preserve food security and the timeframe to develop these projects more time is required.
36
ANNEXURE: SUPPLY AND DEMAND MODELLING
ASSUMPTIONS
Eligibility criteria in the offset paper
MAC Supply 100%
High
>R150
Assuming that all projects identified in the Mitigation Potential Analysis (MPA)
(Department of Environmental Affairs, 2013) are available as offsets as a starting
point to calculate the final supply.
Costs Projects with Marginal Abatement Costs (MAC) of more than R150/tCO2e are
excluded. The income from sales, as carbon tax offsets are not expected to make
these projects economically viable.
Negative MAC
Projects with a Negative Marginal Abatement Cost are excluded as they are not
expected to prove additionality, unless they are allowed by means of a positive list,
in which case they are counted back in.
Eligible projects Of the projects remaining after deducting the projects with negative marginal
facing barriers
abatement costs as well as high (>R150) marginal abatement costs, it is assumed
that 50% can be implemented. It is founded in the assumption that certain of the
projects identified will not be implemented in the timeframe covered by this
analysis. This assumption can be debated.
Offsets within Tax Offsets generated within the tax net are excluded as a starting point. Different
net
assumptions are made later to count some of these credits back in. This calculation
made sure to firstly deduct the projects excluded in the previous steps to ensure no
double counting occurred.
Additional within Carbon credits generated within the tax net are excluded under all
Tax net (50%)
circumstances.
Prior to 2015
5% of total credits are estimated to be available based on the understanding that
only credits issued prior to 2015 and outside of tax net are allowed.
12L excluded
Projects applying for support via Section 12L of the income act are excluded to
be sold as offsets under the carbon tax.
REIPP
REIPP projects are excluded, even though they are not funded by the national
fiscus. Funding for the REIPPP comes from all users of Eskom electricity
through a tariff increase. REIPPP is a competitive bidding program and any
economic benefit that will be passed through in the bid prices and eventually to
the consumer of electricity in the form of reduced PPA prices.
Industrial Gasses
All N2O abatement excluded, not just adipic acid plants (which would be in line
with the EU regulations).
Positive List
Assuming that 50% of the projects previously excluded due to negative Marginal
Abatement Costs become eligible as offsets due to mention on a positive list.
37