At the time of proposing the carbon tax legislation in 2010, energy related emissions were considered the foremost culprit of carbon emissions in South Africa. Government introduced carbon taxes in conjunction with environmental-related tax incentives to encourage companies to adopt low-carbon technologies.

Section 12L of the Income Tax Act, No. 58 of 1962, read with the Regulations, provides a tax deduction from taxable income for taxpayers (“energy efficiency incentive”) based on their quantified energy efficiency savings reflected in their energy efficiency certificate. As is required of qualifying deductions, the energy efficiency savings should result from the carrying on of any trade and in the production of income.

In accordance with Section 12L, taxpayers are entitled to a tax deduction of 95c per kilowatt hour of energy efficiency savings they achieved during the year of assessment.

The energy efficiency incentive can be claimed for any form of energy savings (i.e. electricity, coal, natural gas, diesel, petrol, heavy fuel oil, etc.). It is claimable for both greenfields and brownfields projects. In addition to awareness and competency training, behaviour change (according to SANS 50010), cogeneration projects are included in the section 12L tax deduction.

The energy efficiency incentive cannot be claimed for verified energy efficiency savings from the following activities:

• Energy generated from renewable energy sources excluding energy generated from co-generation (combined heat and power);

• where energy is generated through a captive power plant with an energy conversion efficiency lower than 35%; or

• where a concurrent benefit is obtained.

To claim the energy efficiency incentive the company would need to procure from a South Africa National Accreditation System (“SANAS”) accredited measurement and verification inspection entity, firstly, a baseline report that indicates the energy use prior to implementing the energy efficiency project and proposed energy efficiency savings to be achieved implementing the energy efficiency project. The company would submit the baseline report to the South African National Energy Development Institute (“SANEDI”) who would issue an approval or propose adjustments.

Post implementation, the SANAS accredited measurement and verification inspection entity would prepare a performance report that quantifies the energy efficiency savings achieved from the project to SANEDI. SANEDI would propose adjustments, or approval with an energy efficiency performance certificate after verifying the information in the performance report complies with the standard, Regulations as well as accurately reflects the energy savings.

Currently, the energy efficiency incentive was to apply until 31 December 2022, the prior extension will be further extended from 1 January 2023 to 31 December 2025 for years of assessment ending before 1 January 2026.

For more information about how our Sustainability Services can assist with your tax related ESG planning and reporting, send an email to info@iotadvisory.co.za