The Minister of Finance, Mr. Enoch Godongwana, presented National Treasury’s annual 2025/26 budget earlier this afternoon. The budget has brought forth several crucial updates related to carbon tax, energy efficiency and incentives. We’ve compiled a summary of the key proposals.
Carbon Tax:
- Increased Carbon Tax Rate:
- The carbon tax rate increased from R190 to R236 per tonne of CO2e from 1 January 2025.
- The carbon fuel levy will also increase from 2 April 2025, with petrol rising by 3c/litre to 14c/litre and diesel by 3c/litre to 17c/litre.
- Phase 2 Carbon Tax Proposals:
- Extension of Section 12L: The energy-efficiency tax incentive (Section 12L) to be extended until 31 December 2030.
- Electricity Price Neutrality: The commitment to electricity price neutrality is extended to 31 December 2030, to shield consumers from higher costs. The proposal includes removing the electricity generation levy from 1 January 2026 and applying the carbon tax to electricity generation emissions. Electricity generators to continue deducting part of the renewable energy premium from their carbon tax liability, aiming for the carbon tax on electricity generation to be revenue neutral.
- Carbon Offset Allowance Increase: From 1 January 2026, the carbon offset allowance to be increased by 5 percentage points, to an offsets allowance of up to 10% for fugitive and process emissions and up to 15% for combustion emissions. Future carbon offset allowance increases may be considered.
- Trade-Intensity Threshold: The 30% trade-intensity threshold for the trade exposure allowance to be retained to allow a longer transitional period for hard-to-abate sectors.
- Basic Tax-Free Allowance: The basic tax-free allowance to be maintained until 31 December 2030, with future reductions to the allowance to be considered from 1 January 2031.
- Carbon Budget Allowance: The voluntary carbon budget allowance to be extended until 31 December 2025.
- Electricity Sector Benchmark: Under the carbon tax, companies may qualify for a performance allowance if they outperform an approved sector intensity benchmark, which does not yet exist in the electricity sector. A greenhouse gas emission intensity benchmark of 0.94 tCO2e/MWh for the electricity sector to be introduced from 1 January 2026.
- Carbon Offset Utilisation: The utilisation period for carbon offsets generated from approved projects before the introduction of the Carbon Tax to be extended to 31 December 2028.
- Other additional tax amendments proposed for the upcoming legislative cycle:
- Emission Factor Alignment: Schedule 1 of the Carbon Tax Act (2019) emission factors for natural gas and coal will be aligned with DFFE-approved Tier 2 emission factors from 1 January 2026.
- Fugitive Emissions Formula: The fugitive emissions formula in Section 4(2)(b) of the Carbon Tax Act will be clarified, with the oil and natural gas formula applied to solid fuel transformation activities.
- Sequestration Deduction: The sequestration deduction for the paper and pulp sector to be extended to third-party timber sequestration from 1 January 2026.
- Additional Carbon Offset Standards: Additional carbon offset standards to be evaluated for inclusion under the carbon tax.
Energy:
- Accelerated Renewable Energy Tax Incentive:
- The temporary section 12BA accelerated renewable energy tax incentive introduced in 2023 expired on 28 February 2025.
- After 28 February 2025, the section 12B renewable energy tax incentive will be in effect again with the leasing provisions remaining unchanged. The generation limits remain unchanged, with renewable projects over 1 MW allowed an accelerated depreciation allowance over three years whilst solar projects less than 1 MW qualifying for a 100% depreciation allowance in the first year of use.
- Diesel Refund Adjustment:
- From 1 April 2026, the diesel refund of the general fuel levy and RAF levy for farming, mining, and forestry operations to be applied to all eligible diesel purchases declared to SARS (rather than to 80% of eligible purchases).
Grants and Tax Incentives:
- S11D R&D Tax Incentive:
- The Innovation focussed incentive remains unchanged until at least 2033 offering an additional 50% tax deduction.
- Support Programme for Industrial Innovation (“SPII”), the Technology Innovation Agency (“TIA”) and other innovation grants:
- SPII, TIA and THRIP among others continue to receive funding and remain open for applications.
- DTIC Incentives & Industrial Growth:
- R18.4 billion has been allocated over the medium term for various business incentives under the Department of Trade, Industry and Competition (DTIC), supporting industries such as automotive, film, business process outsourcing, special economic zones (SEZs), clothing and textiles, and electric vehicle production.
- Small Business Development:
- The Department of Small Business Development has been allocated R2.1 billion over the medium term to support an estimated 120,000 small businesses, focusing on women, youth, and disabled entrepreneurs in townships and rural areas. Additionally, R313.7 million has been set aside to establish SME hubs to facilitate business expansion.
- Corporate Tax Incentives & Employment Support:
- The maximum Employment Tax Incentive (“ETI”) benefit remains R1,500 per month for the first 12 months and R750 per month for the second 12 months. Effective from 1 April 2025 the eligible income bands have however been adjusted for inflation, allowing more businesses to benefit.
- Urban Development Zone (UDZ) Tax Incentive Extension:
- The sunset date for this tax break has been extended until 31 March 2030 to encourage investment in urban renewal.
Concluding Comments:
We’re pleased to see that the recent carbon tax phase 2 proposals announced in the budget are less severe than those published in the 2024 discussion paper by National Treasury. Initially, phase 2 included a proposed 10% reduction in the basic allowance starting in 2026 with an annual reduction of 2.5% thereafter which would have heavily impacted carbon taxpayers. Thankfully, the current proposal suggests maintaining the basic allowance until 2030.
We’re also encouraged that National Treasury plans to extend the section 12L Energy Efficiency Tax incentive until 31 December 2030. This extension will lead to continued investment in energy efficiency measures. Additionally, proposed changes to the carbon offset allowance and standards will create more opportunities for project development aligned with the Government’s goals for reducing greenhouse gas emissions and increasing the domestic supply of carbon offsets in the market.
Despite the latest announced proposals, the carbon tax will still significantly impact taxpayers in the coming years. We recommend our clients assess their emissions, explore reduction opportunities, develop carbon mitigation plans, and consider carbon offset opportunities and other energy efficiency measures.
Catalyst Solutions will continue to assist our clients in navigating the latest changes announced and in developing effective sustainability strategies, whilst taking advantage of the available incentives and other savings opportunities.
For additional information or to discuss how these updates may impact your business please contact us.
Christo Engelbrecht: christo@catalystsolutions.global, +27 84 513 8177.
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