The real cost of green for the mining sector

During his speech at the Climate Resilience Symposium 2024, President Cyril Ramaphosa emphasised that a collaborative and balanced approach to energy transition is crucial to the threats it poses to South Africa’s economy, society and environment. President Ramaphosa continued to state that South Africa’s ability to compete on a global level, is being undermined by the country’s reliance on emissions-intensive energy systems. Furthermore, the European Union’s Carbon Border Adjustment Mechanism has the potential to damage economic stability, by creating international trade barriers.¹

Pursuing investments in green infrastructure will not only mitigate the effects of climate change and international trade barriers but is also expected to contribute to job creation and economic growth. It is estimated that between 85 000 and 275 000 green jobs will be created by 2030. It is predicted, however, that 40% of these jobs will require highly skilled and specialist resources.²

A report published by the International Renewable Energy Agency (IRENA), World Energy Transitions Outlook in 2023, highlighted that a key challenge is the temporary nature of jobs created during the construction phase of renewable energy projects. Therefore, skills development programmes should be introduced to ensure that green job creation is sustainable.

The Minerals Council of South Africa estimates that the mining sector employs 479 228 people, and that 25% of management positions in mining companies are now held by women. The mining sector also made significant investments in training and development and social initiatives which are estimated to have created 19 431 jobs during 2023. Taxes paid by the mining sector in 2023 amounted to R85.5 billion, and the mining sector also contributed 6.3% to South Africa’s Gross Domestic Product (GDP) in 2023.³

Evidently, the mining sector continues to play a significant role in the South African economy, even despite a deterioration in the availability of energy supply. The industrial sector is responsible for 44% of the total domestic energy consumption. The industrial sector includes the mining sector, which is one of the major consumers of domestic energy. Sufficient and reliable energy supply plays an important role in the economic viability of the mining sector. This has motivated several mining companies to invest in renewable energy. The Minerals Council of South Africa also confirmed that the mining sector supports renewable energy investments.

Economic efficiency of green initiatives

Current and proposed legislation aims to drive behavioural change. This is achieved by creating tax policy which is not economically efficient. An economically inefficient tax policy is one that provides incentives to encourage good behaviour and imposes higher taxes to discourage bad behaviour..

An example of a punitive approach is the imposition of carbon taxes. A person’s carbon tax liability is determined by multiplying the total greenhouse gas emissions (GHG) by the determined carbon tax rate. The carbon tax rate is determined in accordance with the formulas prescribed by section 4 of the Carbon Tax Act No. 15 (2019) (Carbon Tax Act).

One of the components included in the carbon tax rate formulas, is the fugitive emission factors as contemplated in Schedule 1 to the Carbon Tax Act. The Draft Taxation Laws Amendment Bill 2024 (2024 TLAB), has proposed that Schedule 1 should be expanded to include fugitive emission factors for coal mining, oil and gas operations. This means that mining companies conducting these operations would potentially become liable for carbon taxes, effective from 1 January 2024. The financial implications of the proposed retrospective application of the relevant provisions of the Carbon Tax Act could be catastrophic for these mining companies.

No doubt, the Legislator is trying to influence the behaviour of these companies in the hope that they will take action and increase investment in renewable energy infrastructure.

Another mechanism that is used to influence behaviour is to reward desired behaviour by granting incentives to taxpayers where certain requirements are met.

One of these incentives is included in section 36(11)(dA) of the Income Tax Act No. 58 (1962) (IT Act). The deduction is available for the acquisition of any new and unused machinery, plant, implement, utensil or article owned and brought into use for the first time by the taxpayer in their trade on / after 1 March 2023 and before 1 March 2025. The qualifying assets should be used to generate electricity from wind, solar energy, hydropower or biomass comprising organic wastes, landfill gas or plant material.

It should be noted that batteries used for storage and inverters may also qualify for the income tax allowance, if they are part of a system of assets generating electricity and are not used separately. The allowance can also be applied to improvements, as well as any foundation or supporting structure deemed to be part of the qualifying assets.

For qualifying renewable energy infrastructure investments, the taxpayer is entitled to claim a deduction of 125% of the cost. The capital expenditure deductible is limited to the mining income for that year and any balance of unredeemed capital expenditure is carried forward to the next year of assessment.

Section 15(a) of the IT Act specifically excludes the deduction of the certain accelerated allowances such as section 12B(1)(h) and the newly inserted section 12BA from income derived from mining operations, however, these allowances may be claimed against non-mining income earned.

Section 12BA mirrors the basic principles included in section 36(11)(dA) and allows the taxpayer a deduction of 125% of the cost of the qualifying assets, however, the allowance may not be deducted from mining income.

Unlike section 12BA of the IT Act, section 12B(1)(h) includes second-hand assets. The nature of the qualifying assets per section 12B(1)(h) are similar to the assets included within the ambit of section 12BA of the IT Act, except for the fact that there is a megawatt threshold included in relation to electricity generated from photovoltaic solar energy or hydropower. For qualifying renewable energy infrastructure investments, the taxpayer is entitled to claim a deduction of an accelerated income tax allowance of 50% of the cost in the first year, 30% in the second year, and 20% in the third year. However, for assets that generate photovoltaic solar energy not exceeding 1 megawatt, taxpayers are entitled to deduct an income tax allowance of 100% in the year in which the expenditure is incurred.

The 2024 TLAB did not propose any amendments or enhancements to the provisions of section 36(11)(dA), section 12B and section 12BA of the IT Act. Incentives proposed by the 2024 TLAB focus more on the automotive industry. The 2024 TLAB has proposed introducing an accelerated income tax allowance in respect of new and unused buildings, machinery, plant, implements, utensils and articles that are used in the production of electric or hydrogen-powered vehicles.

The takeaway

Investment in renewable energy is becoming a cornerstone of international trade facilitation. Therefore, renewable energy initiatives cannot be ignored, and the South African government has to take action in the interest of the South African economy.

Mining companies require reliable energy supply. Investment in renewable energy infrastructure not only provides more reliable energy supply, but also enables mining companies to manage their carbon tax liability and contribute to South Africa’s GHG reduction goals. The tax incentives for capital expenditure are certainly attractive if there is sufficient mining income available for set-off. The sunset date is however approaching with no indication of an extension on the horizon. Mining companies ready to take the leap would have to take quick, decisive action to benefit from these incentives.

From a carbon tax perspective mining companies will need to keep abreast of the changes in legislation to minimise any potential tax exposure.

While the initial investment in renewable energy infrastructure is significant, the time for going green is now.  

Authors: 
Evádne Bronkhorst & Marilize de Kock
 

^{1. Published by Government Communications on behalf of the South African Government (2024).}

^{2. Sourced from ESI Africa (2024).}

^{3. Sourced from the 2023 Comprehensive Facts and Figures report published by Minerals Council South Africa (2023).}