Q&A: Norton Rose Fulbright South Africa

Candice Gibson, director at Norton Rose Fulbright South Africa, on the country’s mining legislation and the ramifications of carbon tax

Q&A: Norton Rose Fulbright South Africa

 Q: How does the introduction of carbon tax impact the mining industry?
A: The mining sector will have to account to SARS for carbon tax in the event that the activities undertaken are in excess of the thresholds provided for in the Carbon Tax Act. The thresholds provided are dependent on the type of mining activities undertaken. For example, should mining or quarrying activities be in excess of the threshold of 10 MW(th), the taxpayer will be required to account to SARS for carbon tax. Mines will therefore be required to submit environmental levy accounts in terms of the Customs and Excise Act.

Q: What are the offsets that government expects and the various phases that are being implemented?
A: Carbon tax will be implemented in two phases. The act provides taxpayers with allowances in order to assist with the transition to a lower-carbon economy during the first phase, which will last until 31 December 2022. During the second phase, it is anticipated that the rate of the carbon tax will be increased, and the allowances decreased.

Following the publication of the Carbon Offset Regulations on 2 December 2019, taxpayers liable to account for carbon tax are now able to make use of the carbon offset allowance up to a maximum of 10%. A carbon offset is an external investment that allows companies to access greenhouse gas (GHG) mitigation options in respect of an approved project. The carbon offset projects are likely to generate sustainable development benefits and employment opportunities in SA by encouraging investments in energy efficiency, renewable energy and rural development projects, among others.

Q: There are concerns around the cost of the tax and how it will affect the supply chain. Please elaborate?
A: During the first phase, taking into account the incentives provided for in the act, the rate of the tax is relatively low, with the rate of tax of R120 per ton of CO2 equivalent above the tax-free thresholds. With the use of the allowances, this could result in an effective rate of tax of R6 to R48 per ton of CO2 equivalent. From a practical perspective, we have seen the cost of the carbon tax being passed on through the supply chain, which was ultimately not the intention of the tax, which follows the ‘polluter-pays principle’. The passing on of the cost of the tax at this stage will ultimately be governed by the commercial agreements in place, and whether they allow for such a pass through.

Q: How disruptive is carbon tax? Is it something that can easily be incorporated/measured, controlled and accounted for by the mining sector?
A: The aim during the first phase is for carbon tax to be revenue neutral, and where revenue is generated during the first phase, such revenue is to be recycled to fund measures to assist with the transition to a lower-carbon economy.

During the second phase, it’s anticipated the rate of the tax will be increased, which would have the effect of being more disruptive on carbon-intensive sectors. As a result of the mining sector having to comply with environmental legislation, especially with regard to air pollution and monitoring, mining companies are required to report their emissions on a national reporting platform that will hold both air pollutants and GHG emissions inventories of SA. This reporting mechanism will assist mining companies with the data that is required to be submitted to SARS.

Q: What implications does carbon tax have on investment – both foreign and local?
A: The Carbon Tax Act forms one of the measures government is implementing to enable SA to meet its nationally determined contribution commitments in terms of the 2015 Paris Agreement, and to reduce GHG emissions in line with the National Climate Change Response Policy and NDP. In addition to the carbon tax, additional measures will be introduced with the promulgation of the Climate Change Bill this year. These include sector-specific desired emission-reduction outcomes and company-level carbon budgets.

Investors in certain industries, mining inclusive, will need to consider the impact of reducing carbon emissions, paying carbon tax and emissions reporting in terms of the current regulatory standards and controls for identified GHGs and their emitters. Investor decision-making will be guided by a project’s exposure to, and management of, climate-change risks. Increasingly, carbon reduction as well as physical and infrastructural resilience are determining factors in access to capital and the management of investment returns.

Q: What are the other noteworthy laws that significantly impact the industry?
A: The legal obligations in terms of the relevant environmental legislation with which a mining company would need to comply are determined by the nature and extent of their mining operations.

When making an application for a mining right under the Minerals and Petroleum Resources Development Act, 2002, the applicant must simultaneously apply for an environmental authorisation in terms of the National Environmental Management Act, 1998 (NEMA). The mining operations would need to be conducted in line with the conditions of an approved environmental authorisation and environmental management programme. Additional requirements often include the need to obtain a water-use licence in terms of the National Water Act, 1998 and a waste-management licence in terms of the National Environmental Management: Waste Act, 2008.

Furthermore, the holder of a mining right is required to annually assess its environmental liability and increase its financial provision in terms of Section 24P(3) of NEMA and the 2015 Financial Provision Regulations. In terms of these regulations, the holder of a mining right or permit must make financial provision for rehabilitation and remediation, decommissioning and closure activities at the end of operations; and for remediation and management of latent or residual environmental impacts that may become known in the future, including the pumping and treatment of polluted or extraneous water.

Q: In comparison with global standards, how progressive is mining law in SA?
A: The Fraser Institute’s annual survey of Investment Attractiveness, Policy Perception and Best Practices indexes ranks mining jurisdictions globally.

SA remains a significant global mining jurisdiction and it is a significant global producer of PGMs, manganese and coal. In the past year, the country’s investment attractiveness ranking improved from 48 to 43 out of 83 jurisdictions reviewed. This is a move in the right direction and an encouraging sign that its image is improving. SA is still, however, a long way off from being a progressive mining jurisdiction. Its direct neighbour Botswana by comparison holds the top African jurisdiction in a ranking at 32 out of 83.

Q: How certain is the market around all mining policy compliance? Is this cumbersome or easily navigated turf?
A: Policy uncertainty remains the largest impediment to SA’s mining industry. A more stable policy environment is required and would, by extension, result in a more progressive jurisdiction. SA lawmakers need to do more to ensure the country becomes a stable and predictable jurisdiction that is attractive to foreign direct investment.

Mining companies should instruct appropriate legal professionals to engage effectively with regulators and assess whether their operations are compliant with the applicable legal requirements.

Q: What types of mining are most impacted by environmental law/ policy, and why?
A: The current trend towards minimising climate impacts has brought coal mining and related operations into the spotlight. This has been exemplified by the case of EarthLife Africa Johannesburg v Minister of Environmental Affairs and Others, in which the court held that a decision to grant an environmental authorisation for a coal-fired power station was unlawful and irrational in the absence of a climate-change impact assessment.

In addition, the cases of Mining and Environmental Justice Community Network of South Africa and Others v Minister of Environmental Affairs and Others, and Global Environmental Trust and Others v Tendele Coal Mining (Pty) Ltd and Others concern recent high-profile community challenges to coal-mining operations in proximity to environmentally sensitive areas.

Gold mining operations are known to have historical impacts related to acid-mine drainage and groundwater resources, and therefore come under increased scrutiny in relation to mine closure and rehabilitation. Despite this, the environmental impact of a mine is more dependent on the manner in which the mining is conducted, rather than the type of mineral being mined.

Q: How does policy affect beneficiation and micro/macro-environments?
A: The current mining policy environment in SA is uncertain. Such uncertainty results in a lack of foreign direct investment. This stifles downstream industries that conduct beneficiation activity. Beneficiation or the value-addition process resulting in the enhancement of a mineral’s value is typically achieved through a manufacturing or engineering process. The value addition in the mining sector results inter alia in the creation of higher skilled jobs, increased tax revenues and the creation of a more sustainable industry.

Policy uncertainty has a significant impact on the beneficiation of minerals and metals. The value-add processes are capital intensive and such significant investment requires policy certainty.

By Kerry Dimmer