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Climate change measures and disputes

Africa Connected: Issue 4

By Kirsty Simpson

Africa is rich in natural resources, and several African economies are dependent on supplying or using fossil fuels, including South Africa, the Democratic Republic of Congo, Ghana, Tanzania and Mozambique, to name a few.

The mining of natural resources has traditionally resulted in job creation and has gone some way to alleviating poverty in low- and middle-income countries on the continent. Most African governments have also invested in infrastructure geared towards the use of fossil fuels.

Both mining activity and the use of fossil fuels produced by mining are major contributors to the emission of greenhouse gases (GHGs) and a particular country’s carbon footprint.

The top five global GHG emitters are China, the US, the collective members of the EU, India and Russia. Africa’s carbon footprint is comparatively small. However, South Africa in particular is a significant global emitter of GHGs, with a heavy reliance on mining and fossil fuel-based energy.

In these circumstances, climate change has far-reaching consequences for many African countries.

What is to the world to do?

By adopting the Kyoto Protocol in 1997, certain developed countries agreed to comply with country-specific GHG emission reduction targets, and risked being penalized for failing to do so. However, this has had limited success, partly because some of the largest developing countries such as India and China are not party to the Kyoto Protocol, and the fact that the US has refused to ratify the treaty.

In 2016, in global acknowledgment of the need to address climate change, 195 countries (including the US, China, India and 47 African countries) signed the Paris Agreement, pursuant to the United Nations Framework Convention on Climate Change. However, the US has since given notice of its withdrawal from the Paris Agreement with effect from November 4, 2020.

The Paris Agreement deals with the mitigation of GHG emissions, adaptation and the reporting and financing thereof in order to reduce GHGs and thereby better manage the increase in the average global temperature. As part of the agreement, both developed and developing nations will make green financing available to fund projects that result in mitigation and adaption measures. This has the potential to help African countries to develop capacity and access the technology needed to implement reduction measures.

The signing of the Paris Agreement was indicative of governmental support for the mitigation of climate change. It was expected that climate change would play a critical role in governmental policies and decision-making, including in regard to licensing of operations and the introduction of new legislative measures, which has already been seen on the African continent.

Incentivizing appropriate behavior

According to the World Bank, 15 countries have introduced a carbon tax in order to incentivize companies to invest in and manage sustainable businesses and technologies that have lower GHG emissions or are carbon-resilient. More countries have introduced other carbon pricing initiatives.

In an unusual step for an emerging market economy, in 2019, South Africa introduced an environmental levy when promulgating the Carbon Tax Act. It is the only African country to have introduced a carbon tax to date.

The Carbon Tax Act, which is based on the polluter pays principle, imposes a tax on businesses conducting activities in South Africa that emit GHGs above the threshold for the activity or sector. Each GHG-generating facility must be licensed and registered for purposes of the environmental levy.

The carbon tax is calculated with reference to the total GHG emissions of a taxpayer in a particular tax period, expressed as the carbon dioxide equivalent of those GHG emissions, resulting from fuel combustion, industrial processes and fugitive emissions. This will be determined in accordance with the reporting methodology approved by the Department of Environmental Affairs (DEA), or in the absence thereof, in accordance with the calculation set out in the Act.

For the tax period June 1, 2019, to December 31, 2019, carbon tax was levied at a rate of ZAR120 per ton of carbon dioxide equivalent of GHG emissions. This rate increases annually according to consumer price inflation (CPI) plus 2% for each tax period, from January 1, 2020, to December 31, 2022. After December 31, 2022, the rate of tax will be increased according to CPI.

While a threshold has been prescribed in the Act for industries participating in fuel combustion activities, no threshold has yet been prescribed for the actual mining of coal and other resources. The introduction of the carbon tax will nevertheless have a knock-on effect in the mining industry, as industries reliant on fossil fuels will look to avoid paying the carbon tax by developing new technologies or using renewable energy instead.

The tax burden of carbon tax will be reduced by a taxpayer by using carbon offsets prescribed by the Minister of Finance. There are also standard allowances for fossil fuel combustion, industrial process emissions and fugitive emissions, based on the activity/sector. The allowances are subject to a maximum limitation of 95% or 100% of the total GHG emissions of the taxpayer for that period. The national treasury has indicated that the result of these allowances is that the effective tax rate is reduced to less than half the prescribed rate of tax.

If a taxpayer implements measures to reduce GHG emissions, it may receive a performance allowance, not exceeding 5% of the total GHG emissions of that taxpayer. This is determined with reference to the sector GHG emissions intensity benchmark prescribed by the Minister of Finance, or in the absence thereof, zero, and the measured and verified GHG emissions intensity of the taxpayer.

The Carbon Tax Act also provides for tax incentives to reward the efficient use of energy. Taxpayers involved in the listed activities are incentivized to participate in the carbon budgeting system (duly confirmed by the DEA), through an additional allowance of 5% of the total GHG emissions per tax period.

Global commentators have stated that the carbon tax being implemented in South Africa is too low to have any real impact. Indeed, the tax is comparatively low when compared with other countries in which carbon tax is levied. However, the carbon tax has been criticized by businesses operating in South Africa as being too high. They have warned that this may ultimately lead to job losses.

The balancing of the various interests will require careful management by the South African government. There will need to be a concomitant increase in the development of carbon-neutral economic activities, in order to avoid an increase in the country’s 28% unemployment rate.

The Integrated Resource Plan published by the South African government in October 2019 revealed that given the abundance of natural resources in South Africa and the existing infrastructure, the South African economy will continue – for at least the next decade – to be based on mining, and electricity generation via coal. Where new investments are made, they must be in more efficient coal technologies that comply with climate and environmental requirements.

Over the next ten years, the South African government also expects electricity generation from gas / diesel, wind and solar sources to increase, with a view to generation of energy from these three sources being almost equivalent to coal power generation by 2030.

When parties do not comply – climate change disputes

The ICC Commission on Arbitration and Alternate Dispute Resolution recently released a report on Arbitration of Climate Change-related Disputes. They predict exponential growth in climate change-related disputes, particularly given the increase in awareness and changes in investment decision-making.

Types of disputes that may arise and can be arbitrated in relation to climate change include:

  • disputes pertaining to contracts concluded to address climate change such as contractual disputes in renewable energy projects or divestment disputes and associated environmental warranty claims, green funding, carbon trading and pricing;
  • disputes not pertaining to contracts concluded to address climate change, but which have an environmental angle;
  • disputes between states or companies, on the one hand, and large groups or classes of people on the other hand, where the parties have agreed to submit the dispute to arbitration; and
  • investor-state disputes in terms of more recently concluded bilateral investment treaties.

The advantages of arbitration proceedings to resolve disputes of this nature include:

  • the choice of arbitrator(s),which allows parties to ensure that the tribunal has the necessary technical expertise to decide environmental disputes (this can be regulated expressly in the arbitration clause in the contract or at the time of the arbitration itself);
  • the determination of the dispute in a neutral forum, where the resolution of the dispute could otherwise be swayed by public debate or the views of the state in question;
  • the ability to adopt a flexible and expedited approach, including to accommodate expert witness evidence, bespoke confidentiality undertakings and the granting of interim measures;
  • the understanding of the international nature of such disputes, which requires an understanding of international law, domestic law, investment treaties and industry best practice;
  • the cross-border recognition of arbitration awards; and
  • the convenience of resolving state-state disputes, where there are often gaps in the dispute resolution mechanisms.

The use of arbitration in class actions or community disputes on the continent has been limited. However, arbitration may be a good way of resolving such disputes, because the company or state involved can avoid a multiplicity of actions. The party accused of an environmental infraction can also manage the reputational risk by submitting to arbitration and managing the confidentiality regime. Third-party funding also assists community parties in managing the cost implications of referring disputes to arbitration.