South Africa could use existing structures, including the JSE, to quickly launch a carbon trading system that will help companies offset carbon reduction projects against the upcoming carbon tax.

In South Africa both carbon tax and carbon offsets are fast becoming a reality. For carbon offsets to be functional, a carbon offset trading system is required. Promethium Carbon has released a report addressing the potential structuring of the market for a carbon offset trading system in South Africa. The purpose of the report is to identify the requirements for such a trading system. The work was funded by the British High Commission’s Prosperity Fund.

The South African government’s climate change strategy allows for the potential use of carbon offsets in two applications. The first is to allow companies to mitigate their financial liability in terms of the proposed carbon tax. The second is to allow companies to use offsets against a potential carbon budgeting system. This report focuses mainly on the first application.

The report investigates whether it will be possible to implement a carbon offset trading scheme within the same time frame as the announced schedule for the implementation of the South African carbon tax. It concludes that this will be possible provided maximum use is made of existing infrastructure. This infrastructure is required to warrant both the environmental and economic integrity of the system.

The first level of infrastructure is required to ensure the environmental integrity of the system. Environmental integrity refers to the requirement that each tonne of CO2 traded as an offset must represent an actual emission reduction of one ton.

This can be achieved through the utilisation of existing offset standards like the Clean Development Mechanism (CDM), the Verified Carbon Standard (VCS) or the Gold Standard.

The second level of infrastructure is required to ensure the economic integrity of the system. This means that the credits and money handled in the system must be secure from theft, fraud and other undesirable events. Economic integrity can be ensured by using the JSE as a trading platform and combining it with either a local registry, such as Strate or ESC, or an international registry such as Markit or APX.

Promethium’s report proposes to limit the trade of offset credits in South Africa to credits generated in projects to avoid abuse of the system. Eligibility criteria must be designed to ensure that projects contribute to the development objectives of the country.

It is proposed to achieve this through a set of National Appropriateness Tagging Rules. The tagging rules should be placed under the custodianship of a committee, consisting of both government and the private sector.

The infrastructure required for the implementation of the National Appropriateness Tagging Rules already exist in the current environmental auditing industry in the country. No additional infrastructure development is required for this aspect of the trading system.

The research done for the report covered a high level analysis of the potential market supply and demand. The study found that there is sufficient potential volume to meet the demand generated by the proposed carbon tax at a marginal cost of R120 per tonne CO2e. The estimated volume of trade in the market is sufficient to create a viable market.

The report’s overall conclusion is that the necessary infrastructure, as well as potential supply and demand, exists to create a domestic carbon offset trading scheme in South Africa. The utilisation of existing infrastructure can make this possible within the same timeframes as the proposed South African carbon tax.

In addition a potential trading system could also be used under a carbon budget regime.

Building on existing national and international infrastructure will ensure the integrity, credibility and consistency of the proposed system. This will reduce costs and enhance the prospects of future linking with international carbon markets, says the report.