South Africa’s carbon tax is set to increase by 143% by 2030, potentially pushing its contribution to electricity generation costs above 35% by 2034, leaving businesses heavily exposed as allowances are phased out and international trade penalties increase.

This is according to new research from Discovery Green and EY’s Africa Sustainability Tax division.

South Africa’s heavy reliance on coal for electricity generation, which emits roughly one tonne of CO₂ per megawatt-hour, positions it as one of the most carbon-intensive economies globally. The Carbon Tax Act, introduced in 2019, initially set a tax rate of R190 per tonne, sparing electricity consumers from bearing its full cost. However, with the second phase of the carbon tax set to begin in 2026, this rate will rise to R308 per tonne and, by 2030, could reach R462 per tonne, Deloitte estimates.

At this stage, Scope 2 emissions tied to electricity consumption will also be taxed, significantly impacting operating costs for energy-dependent sectors. “Individual businesses will soon face direct taxation on the carbon footprint of the energy they consume,” said Duane Newman, EY Tax Partner and carbon tax expert. “With tax allowances being phased out, the financial impact will be substantial, especially for energy-intensive industries.”

In practical terms, this means, by 2034, carbon taxes alone could drive up electricity generation costs by 60% for some businesses, according to Discovery Green. Currently, these allowances offer up to 85% relief for qualifying industries but they are expected to disappear within the decade, leading to a projected 143% rise in local carbon taxes by 2030.

The EU’s carbon border adjustment mechanism

South African businesses exporting to the European Union (EU) will face additional financial strain under the EU’s forthcoming Carbon Border Adjustment Mechanism (CBAM), which will tax imports based on carbon intensity. This measure, set to roll out in 2026, could see South African exporters paying up to three times the local tax rate to bridge the gap with Europe’s stricter carbon pricing. By 2034, the CBAM could increase electricity generation costs for affected industries by 70% in today’s terms with aluminium, iron and steel producers particularly vulnerable.

The compounding impact of South Africa’s escalating carbon taxes and Europe’s CBAM paints a challenging picture for local industries reliant on fossil fuels. By 2045, EY researchers estimate that South Africa’s carbon tax rate could be as high as US$120 (R2 160) per tonne, further driving up operational costs across industries. With domestic and international carbon costs on the rise, the urgency for businesses to adapt has never been clearer.

“The introduction of CBAM raises immediate concerns for South African exporters,” said Newman. “With the EU as South Africa’s largest trade partner, the R52,4 billion in exports at risk highlights the necessity of adopting strategies to curb emissions and remain competitive.”

Researchers warn that the only viable solution for South African businesses to offset these rising costs is to shift towards high-coverage renewable energy. “Businesses need to prioritise renewable energy investments to mitigate the financial risk posed by escalating carbon taxes. In a decade, we could see a 340% increase in domestic carbon tax payments tied to electricity consumption if no strategic changes are made,” said Andre Nepgen, Head of Discovery Green.