Carbon Tax South Africa 2026: Phase 2 Under the Taxation Laws Amendment Act

The Taxation Laws Amendment Act (Act No. 5 of 2026) was published in the Government Gazette on 01 April 2026. Sections 53 to 61 of the Tax Laws Amendment Act, amend the Carbon Tax Act (CTA) to reshape how carbon tax will operate as South Africa transitions into Phase 2. Phase 2 will span five years from 01 January 2026 to 31 December 2030.

These amendments

• introduce financial consequences for exceeding mandatory carbon budgets,
• create a new refund mechanism for net compliance over the 5 years of phase 2,
• expand and refine existing allowances and emissions calculation methodologies,
• strengthen alignment between the Carbon Tax Act, the Climate Change Act and the Department of Forestry, Fisheries and the Environment (DFFE).

These amendments will require accurate emissions quantification, proactive engagement with the DFFE and careful management of production to curtail emissions.

Section 53: DFFE Carbon Budget Allocations and Direct Tax Risks

A mandatory carbon budget is now formally defined as an assigned amount of greenhouse gas emissions allocated to a person under Section 27 of the Climate Change Act, 2024, for direct emissions arising from that person’s operations over a defined period.

This amendment has practical implications. Carbon budgets are no longer merely targets. Once implemented, they will become legal emissions limits with tax implications. Emissions that exceed an approved carbon budget will incur a carbon tax rate of R 640 per tonne CO₂e, which is more than double the current 2026 rate of R 308 per tonne CO₂e. The tax rates for Phase 2 are available here. The commencement date for this provision is yet to be announced by the Minister of Finance.

For many facilities, carbon budgets will now become a financial risk rather than merely environmental compliance. Understanding budget allocations, emissions trajectories, and potential exceedance exposure will be critical in Phase 2.

Section 54: Emissions Calculations under Phase 2 of South Africa’s Carbon Tax

The fugitive emissions formula has been expanded to include syngas produced in coal-to-liquids (CTL) and gas-to-liquids (GTL) processes, and to include fuelwood used in charcoal production. A new methodology for fugitive emissions, that incorporates product mass where greenhouse gas emission factors apply, has been introduced. Furthermore, there are new emissions equations accounting for CO₂, CH₄, N₂O and net calorific values.

These amendments to the Carbon Tax Act are deemed to have come into operation on 01 January 2024, and provide clearer calculation methodologies for sectors that previously operated with limited regulatory guidance. Therefore, companies involved in CTL, GTL or charcoal production, should assess whether prior carbon tax submissions for the 2024 and 2025 tax years, remain accurate.

A particularly practical amendment allows the Minister of Finance to update Schedule 1 emission factors and calorific values of the Carbon Tax Act by Gazette notice. Historically, these values could only be amended through annual tax legislation, creating a lag between updated scientific data and the factors used to calculate carbon tax. The new approach allows more responsive updates and reduces potential misalignment between reported emissions and carbon tax calculations.

Yellow Tree will actively monitor Gazette publications on behalf of its carbon tax clients, as future changes will directly affect carbon tax liabilities and emissions calculations. If your organisation would benefit from this peace of mind, please contact us.

Section 55: The R 640 Carbon Tax Penalty Rate for Budget Exceedances

A new subsection to Section 5 of the Carbon Tax Act introduces a punitive carbon tax rate of R 640 per tonne of CO₂e on emissions exceeding an approved carbon budget for a tax period. For example, a company exceeding its budget by 10 000 tCO₂e could face an additional carbon tax liability of R 6.4 million (10 000 x R 640).

This represents one of the most significant changes introduced under Phase 2 of carbon tax, as it drastically increases the risk associated with emissions management. The provision will only become effective on a future date to be determined by the Minister of Finance.

Section 56: Carbon Sequestration Deduction and Electricity Generation Carbon Tax

In the forestry sector, the carbon sequestration deduction under section 6 of the Carbon Tax Act allows companies to reduce their emissions by the amount of CO₂e that the companies’ forests remove from the atmosphere. The Tax laws Amendment Act reinforces that the DFFE is required to confirm in writing the specific quantity of greenhouse gas emissions sequestered (in tonnes of CO₂e) for the relevant carbon tax period before the deduction can be claimed.

However, the definition of “sequestrate” has been updated to include third-party timber production in addition to forestry plantations and harvested wood products that are within the taxpayer’s own operational control. This is significant. Companies with fuel combustion emissions declared under IPCC codes 1A2d (pulp, paper and print) and 1A2j (wood and wood products) may now include carbon sequestration from third-party timber suppliers, provided no double-accounting takes place. This carbon tax amendment is effective from 1 January 2026.

Section 56 also makes a change for electricity generators such as Eskom. “C” has been removed from the carbon tax formula: “X = A – B – C”. “A” is the total carbon tax payable. “B” is a credit for purchasing renewable electricity under a power purchase agreement (PPA) – which the Tax Laws Amendment Act extends from 2025 to 2030. “C” was a deduction equal to the environmental levy under the Customs and Excise Act. Because the environmental levy no longer exists, it can no longer be deducted from carbon tax.

While Eskom was shielded from carbon tax under phase 1, it will not be shielded under phase 2. Carbon tax will be levied on electricity generators and passed through to consumers in the NERSA-approved tariffs. Eskom generates electricity with a carbon footprint of 0.94 kg CO₂e per kWh. Assuming a 60% net carbon tax allowance and using the 2026 carbon tax rate of R308/t CO₂e, electricity will likely include an 11.5 c/kWh pass-through of carbon tax to industry. Purchased electricity represents scope 2 emissions for industry and as such this tax is payable by the electricity generator and not the consumer which is industry. Nonetheless, industry inevitably carries the cost, to the extent to which it is still dependent on the grid.

Section 57: Voluntary Carbon Budget Allowance Extended to 2025

The voluntary carbon budget allowance has been extended to include the 2025 carbon tax year. Taxpayers for whom Yellow Tree obtained an approved DFFE carbon budget letter may continue claiming the 5 % allowance for the 2025 tax period.

Section 58: Impact of Budget Exceedances on South Africa’s Carbon Tax Allowances

The latest Tax Laws Amendment Act introduces Section 14A of the Carbon Tax Act, which strengthens the link between South Africa’s carbon budget system and the carbon tax regime. The provision is intended to discourage companies from exceeding their approved carbon budgets by imposing more stringent tax on emissions above the allocated budget.

While initial interpretations of the Budget Speech suggested that taxpayers that exceed their carbon budgets could lose access to all carbon tax allowances for the relevant tax period, subsequent clarification from National Treasury clarified that only the portion of emissions that exceeds the approved carbon budget will not be eligible for allowances. All allowances will still apply to emissions below the carbon budget allocation.

The amendment therefore increases the financial consequences of exceeding approved carbon budgets and reinforces the role of carbon budgets as a central mechanism for driving emissions reductions.

Section 59: The New SARS Carbon Tax Refund Mechanism for Compliance

To balance the stringent exceedance provisions, a new refund mechanism has been introduced. Where taxpayers exceed their carbon budget in a specific year and pay the higher penalty rate, they may later recover those amounts if cumulative emissions over the five-year carbon budget cycle remain within the approved allocation. However, penalties will have serious cash flow implications for businesses that find themselves in this trap and awaiting a later refund.

To qualify for a refund, taxpayers must:

• obtain written confirmation from the DFFE certifying both the cumulative actual emissions and the allocated carbon budget for the relevant periods,
• submit the refund claim within one year after the carbon budget period ends,
• submit the claim in the form and manner prescribed by the Commissioner of SARS.

The refund mechanism introduces some flexibility into the Phase 2 framework and recognises that emissions may fluctuate yearly within a five-year carbon budget cycle.

Section 60: Updated Emission Factors for South African Carbon Tax from 2026

Schedule 1 to the Carbon Tax Act contains the emission factors used in all carbon tax calculations as per Section 4(2). Emissions factors for various fuels have been corrected with effect from 1 January 2026 and will directly affect the carbon tax liability for those who use these fuels. The updated factors apply only from the 2026 tax year, and the 2025 carbon tax return must still use the previous Schedule 1 values.

Using incorrect emission factors will affect tax liabilities and could create compliance risks during verification or audit processes.

Section 61: Increased Carbon Offset Allowance and COAS Integration

Section 61 of the Tax Laws Amendment Act amends Schedule 2 of the Carbon Tax Act, which sets out the maximum percentage that can be offset using approved carbon credits. Sectors previously capped at 5 % increase to 10 % and sectors previously capped at 10 % increase to 15 %. Please see table 2 at the end of this article.

These higher offset allowances apply from 1 January 2026 and provide flexibility for taxpayers. Yellow Tree has access to offsets that are Verra accredited and already available in the Carbon Offset Administration System (COAS). Please engage with us regarding the purchase of these credits to reduce your tax liability.

What Should Taxpayers Be Doing Now?

Phase 2 increases the importance of proactive carbon tax management. Companies should begin preparing now by:

• confirming carbon budget allocations with the DFFE once regulations are finalised,
• modelling potential exceedance scenarios and associated liabilities,
• reviewing sequestration claims and DFFE confirmation requirements,
• assessing the financial impact of the revised electricity generator formula,
• re-evaluating carbon offset strategies under the expanded allowance limits,
• ensuring the correct emission factors are used for each carbon tax period,
• monitoring future Government Gazette notices for commencement dates and updated emissions factors.

The Phase 2 amendments make South Africa’s carbon tax regime far more financially material. For many sectors, carbon tax is no longer simply an environmental levy, it is a financial and operational risk that requires active management. Our team is here to support you with both compliance and tax efficiency. We fully manage the carbon tax function for many of South Africa’s blue-chip companies through our foundation in tax law and chemical engineering.

If you currently handle your carbon tax compliance in-house, or use advisors who lack an engineering background, we invite you to reach out. We welcome the opportunity to review your current carbon tax calculations, assess your compliance, reduce your liability, and provide you with peace of mind.