In 2018, South Africa was the eighth-largest coal producer in the world and one third of the country’s coal was exported. In 2020, some 60% of South Africa’s coal total energy supply is used for electricity generation, meeting 90% of the sector’s fuel needs. Most of the remainder of the coal feeds Sasol’s synthetic liquid fuels plant, producing 36% of the country’s gasoline and diesel-fuel in 2020. Renewable energy generates approximately 6% of South Africa’s electricity, mostly from both wind and solar.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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South Africa
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
South Africa imports most of its crude oil, mainly from producers in the Middle East and West Africa. South Africa’s indigenous crude oil resources are small, producing only 56 ktoe in 2020. PetroSA, a state-owned enterprise (SOE), was responsible for almost all oil production and all natural gas production in South Africa, but only 6% of the refining, distribution and retail sales of petroleum products in 2012. PetroSA also operates one of the world’s largest gas-to-liquid plants. Together, South Africa’s refineries cover about 72% of domestic supply of motor gasoline and diesel fuels with the remainder imported as finished petroleum products, while it produces more aviation fuels and fuel oils than necessary for domestic supply. State-owned Transnet SOC Ltd. is the main operator of South Africa’s petroleum pipelines. Several international and domestic companies are involved in downstream activities.
The country produced 22% of its domestic consumption of natural gas in 2020, with 78% imported from Mozambique through the Sasol Gas pipeline. The country’s natural gas sales are to industry, chiefly for energy transformation.
The National Energy Regulator of South Africa (NERSA) regulates the electricity sector, as well as the oil and natural gas pipeline industries. It is also responsible for electricity pricing. The state-owned company Eskom is responsible for generating 90% of the country’s electric power, and for all electricity distribution and transmission. The Petroleum Agency of South Africa (PASA) regulates the petroleum sector and the exploration and production of natural gas.
Energy prices and taxes
The prices of gasoline, diesel and kerosene are set by reference to the Basic Fuel Price, which is determined on the first Wednesday of each month by the Department of Energy, using international market prices as the benchmark. The government also sets maximum retail prices for LPG, kerosene (illuminating paraffin), and piped natural gas. Domestic wholesale and transport costs are added to the Basic Fuel Price, together with a number of other taxes and levies.
Other petroleum products, coal, and natural gas are untaxed when used for transport or heating and process purposes. An environmental levy of ZAR 0.035/kWh is applied to the consumption of electricity generated from non-renewable energy sources and nuclear power plants with a generation capacity of 5 MW or greater. Regulation of the price of coal ended in 1987 but, due to long-term contracts between Eskom and coal manufacturers, the price of coal used for electricity generation is still well below market and export coal prices. The standard VAT rate of 15% (14% up until 1 April 2018) applies to most energy products and to the consumption of electricity, although gasoline, diesel, and illuminating paraffin (kerosene) are zero-rated for VAT purposes.
The price of electricity has seen significant increases in recent years, with the percentage price increase being 15.06% in 2021-2022 and expected to increase by 9.61% in 2022-2023. Fuel prices have also seen marked increases, with the average price of petrol, diesel and illuminating paraffin increasing by around 40%, 44% and 70% respectively between 2021-2020. In 2022, petrol prices have increased by 20% since January 2022. In an attempt to ease the burden on consumers, the Minister of Mineral Resources and Energy and the Minister of Finance announced a temporary reduction in the general fuel levy (which makes up the total cost of petrol and diesel to consumers) of ZAR 1.50/litre from 6 April 2022 to 6 July 2022. Between 7 July – 2 August, this relief will be adjusted to ZAR 0.75/litre. The increase in petrol prices can be attributed to a variety of international and local factors. Locally, in 2022, the fuel price increase has largely been attributed to a tumultuous Rand exchange rate.
A carbon tax took effect in June 2019. The tax applies to fuels based on their carbon content initially at a rate of ZAR 120 (USD 7.80) per tonne of CO2-equivalent. It increased to ZAR 127 per tonne of CO2-equivalent in 2020 (USD 7.71) and ZAR 134 per tonne of CO2-equivalent in 2021. The carbon tax covers fuel combustion, fugitive emissions, and the non-energy industrial use of fuels. For the initial phase up to December 2022, the zero impact on the price of electricity will cushion energy-intensive sectors, and tax-free emissions allowances ranging from 60% to 95%. However, the state-owned main electricity provider Eskom is fully exempt up to December 2022. In February 2022, the Minister of Finance announced an increase to the carbon tax rate to ZAR 144 (USD 9), effective from 1 January 2022. Additionally, to deliver on South Africa’s commitments to COP26, the carbon tax rate will increase by USD 1 each year until reaching USD 20. After 2026, the carbon tax rate will be increased more rapidly, to reach at least USD 30 by 2030, and USD 120 beyond 2050.
Figure 2. Total tax rebates and support for fossil fuels in South Africa
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
The above graph shows that the bulk of government support goes to petroleum products, mainly due to the exemption from the Value-Added Tax on sales of gasoline, diesel and illuminating paraffin. This is reported as a tax expenditure in the annual budget review.
Since 2003, the South African Government has provided a free basic electricity allowance of at least 50 kWh per month to low-income households (below the affordability threshold) which benefits approximately 19% of all households connected to the grid. In 2018/19 free basic electricity was provided to 2.3 million households at a cost of ZAR 81.62 per household. By 2020, the costs increased to ZAR 93.66 per household. In 2019, 88% of South Africa’s electricity mix is of coal origin.
The fiscal cost of support measures for fossil fuels in South Africa was estimated at ZAR 69.59 billion in 2022 (Table 1). Ninety-seven per cent (97%) was directed at end user beneficiaries, as opposed to 2% directed to firms. Support was mainly given out in the form of tax expenditures (ZAR 45.62 billion) accounting for 66% of the total fiscal cost of support measures. Direct transfers amounted to ZAR 23.97 billion.
The fiscal cost of support measures for fossil fuels has increased by 88% since 2017. Since last year, tax expenditures have increased by 30%, from ZAR 35.90 billion to ZAR 45.62 billion and direct transfers increased by 24%, from ZAR 15.59 billion to ZAR 23.97 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
|---|---|---|---|---|---|---|
|
Tax expenditures |
22.819 |
35.125 |
37.953 |
32.708 |
35.902 |
45.622 |
|
Direct transfers |
14.132 |
14.137 |
19.659 |
34.763 |
15.589 |
23.968 |
|
Total |
36.951 |
49.262 |
57.612 |
67.471 |
51.492 |
69.590 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
||||
|
VAT Exemption for Sales of Gasoline, Diesel and Illuminating Paraffin |
29.835 |
19.794 |
10.041 |
|
|
Refund of Fuel Levy and Road Accident Fund Levy for Diesel Consumed in Specific Sectors |
9.786 |
3.025 |
6.761 |
|
|
Tax Measure |
6.000 |
(Started 2022) |
6.000 |
|
|
Direct transfers |
||||
|
Free Basic Electricity Access |
10.603 |
7.883 |
2.720 |
|
|
Reduced fuel levy |
6.592 |
(Started 2022) |
6.592 |
|
|
Integrated National Electrification Programme |
5.302 |
5.521 |
-0.219 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
VAT Exemption for Sales of Gasoline, Diesel and Illuminating Paraffin |
In line with the VAT Act of 1991, gasoline, diesel fuel, and illuminating paraffin (kerosene) are exempt from the value-added tax (VAT) normally levied on sales of most products in South Africa (15% from 1 April 2018 in the case of energy products). This measure has been considered a tax expenditure in South Africa’s budget since FY2005/6 and “is calculated by estimating the value for sales and making assumption about the estimated volumes used by final consumers”, as stated in the 2018 Budget Review. Since FY2006/7 it has been assumed that 20% of gasoline sales and 90% of diesel sales in South Africa are used for business purposes and would have thus claimed a VAT credit. VAT exemptions were reported to be ZAR 16.15 billion, ZAR 1.84 billion and ZAR 569 million in 2016/17 for petrol, diesel and paraffin respectively for petrol, diesel and paraffin respectively; ZAR 17.08, ZAR 2 165 billion and ZAR 665 million in 2017/18 for petrol, diesel and paraffin respectively. For 2018/19, VAT exemptions for petrol, diesel and paraffin increased significantly, up to ZAR 20 259 billion, ZAR 8 089 billion and ZAR 931 million respectively. A total of 86 228 households received FBAE assistance for fossil fuels in 2018, and 54 926 in 2019. |
|
Refund of Fuel Levy and Road Accident Fund Levy for Diesel Consumed in Specific Sectors |
The General Fuel Levy is applied to octane petrol, diesel and certain types of biodiesel. A baseline that considers the Fuel Levy and RAF levy to be substitutes for a road-user fee, exempting from tax the motor fuel used on farms and off-highway does not constitute a tax expenditure. It does, however, under an alternative baseline where all uses of motor fuels are taxed in the same way. This alternative baseline implicitly assumes that the motor-fuel excise tax is specifically intended to raise general revenue by raising the price of the taxed item, or to reduce externalities associated with the consumption of the fuel, but not the externalities associated with the use of vehicles on highways, or the direct cost of funding the highway system. The 2019 budget noted that the government will review fuel levy arrangements in order to limit RAF levy exemptions where off-road users still claim from the RAF for accidents and to ensure all transport fuels (such LPG which is currently exempt) are contributing taxation. |
|
Tax Measure |
The gov is considering knocking 1.50 cents a litre off its general fuel levy until the end of May. The duty imposed on each liter of fuel will be reduced by almost 40% from 6 April until 31 May. The measure will result in foregone tax revenue of ZAR 6 billion, all of which will be recouped through a sale of strategic oil reserves due to take place in the fiscal year starting Friday. Additional measures to contain costs include the scrapping of a levy on 95-octane unleaded fuels No inland, according to Godongwana. |
|
Free Basic Electricity Access |
Since 2003, the government provides a free basic electricity allowance of 50 kWh (an amount deemed sufficient to provide basic services) to indigent households with a connection to the national electricity grid. This measure is funded through the so-called “local government equitable share” (LGES) that is transferred to municipalities by the government to support, amongst other things, their provision of “free basic services” such as water, sanitation, electrification, and waste removal. From 2012, the amount allocated to free basic electricity has been provided in the national budget. A total of ZAR 11 645 billion was allocated in 2020-21. From 2004 to 2011, when the allocating for free basic electricity was not stated in the budget, the amount was estimated in the OECD inventory using the following method. In 2013, about 26% of the LGES spent on free basic services was dedicated to electricity, making up ZAR 675 per low-income household per year (Parliament of the Republic of South Africa, 2013). The annual estimates from 2004 to 2011 assume an expenditure of ZAR 675 per low-income household. This amount is then multiplied by the number of households receiving free basic electricity across South Africa (from StatsSA 2005-12) and the share of electricity produced from coal (about 93%, in the form of hard coal). |
|
Reduced fuel levy |
To cushion the impact of higher fuel prices, the government reduced the fuel levy from April to July 2022, at a fiscal cost of around 0.1% of GDP. The government reduced the general fuel levy by R1.50 per litre for April, May, and June and by R0.75 per litre for July. |
|
Integrated National Electrification Programme |
Since 1994, the Government of South Africa has had in place programmes to support extension of electricity infrastructure. From 1994 to 1998, this was through the Reconstruction and Development Programme (RDP), implemented by Eskom and municipalities. A new Integrated National Electrification Programme (INEP) was put in place from 1999. The national budget separates INEP payments into grants to municipalities and transfers to Eskom. Eskom transfers were roughly twice those to municipalities. The 2019 Budget reduced the INEP by ZAR 5886.4 million in 2019/20 and ZAR 558118.18 million in 2020/21. The funds were reallocated to the urban settlements development grant in the Department of Human Settlements. For 2021/22 and 2022/23, however, an increase back to the level of 2017/18 is expected: first up to ZAR 5.3 billion, then to ZAR 6.1 billion. |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.