Carbon taxes to add further upward pressure on electricity costs, Discovery Green warns

South Africa’s disproportionate reliance on coal for electricity generation is poised to add further upward pressure on tariffs by exposing local businesses to carbon taxes that could make up over 35% of their electricity costs by 2034.

This finding is contained in research conducted by Discovery Green in partnership with EY’s Africa Sustainability Tax division, which Discovery Green head Andre Nepgen says points to there being significant cost implications for those South African businesses subject to carbon tax.

The study notes that South Africa has a relatively low carbon tax currently of R190/t that has been further softened by incentives and allowances, as well as the fact that the tax was not immediately passed on to electricity prices.

From January 2026, however, South Africa will enter a second phase, during which the carbon tax rate will rise to R462/t by 2030, allowances will fall, and a firm’s Scope 2 emissions arising from electricity consumption will also be considered.

Therefore, EY tax partner Duane Newman states that South African businesses, which are exposed to carbon-intensive electricity, can expect a significant increase in local carbon taxes from 2026. South Africa’s carbon intensity is twice the global median, with about a ton of carbon dioxide equivalents (CO2e) emitted for every megawatt-hour of electricity consumed.

“On the current carbon tax regime, this would increase existing electricity generation costs by 4% to 6% in 2026 and by 24% to 34% by 2045.”

From 2026, businesses exporting to the EU will also have to face the Carbon Border Adjustment Mechanism (CBAM), which is expected to reduce the competitiveness of South African exports as importers face the prospect of paying to close the gap between South Africa’s lower carbon taxes and Europe’s stricter regime.

“By 2026, the price of carbon in the EU is expected to reach €85/t CO2e (R1 630), compared to South Africa’s expected €5.5/t (R105), after tax allowances are considered.

“With the EU being South Africa’s largest trade partner, this significant difference in the price of carbon means that around R52.4-billion in South African exports are at risk in the short term,” Newman explains.

The report argued that, by 2034, the implementation of the CBAM could increase electricity generation costs for affected industries by 70% in today’s terms, with industries such as aluminium, iron and steel particularly at risk.

“Our research highlights the urgency with which businesses need to prepare for a future where carbon taxes contribute more than 35% of total electricity generation costs,” Nepgen says.

He argues that firms can mitigate this new financial risk by proactively transitioning to high coverage renewable energy.