Carbon tax is a carbon pricing instrument that is implemented in an advance to stimulate action to economic restructure by holding entities liable for environmental damage caused by the human caused emission of greenhouse gases (“GHG”) into the atmosphere. Proactive reform to reduce emissions through transition to cleaner technologies and optimised efficiencies is thus rewarded by financial incentive through reduced liabilities.
Effectively an environmental levy, carbon tax has been implemented in numerous countries in response to growing awareness of the risks of climate change and global warming, as further highlighted by the landmark Paris Agreement signed by 195 state parties in 2016, including South Africa. The Agreement aims to reduce global GHG emissions to limit average global temperature increase to below 2°C above preindustrial levels through collective international action. GHG emissions are reduced on the principle that demand shifts away from goods that include CO2 in their pricing structure.