South African carbon tax update: 2025 budget highlights

Contents

• Carbon tax changes
• Carbon fuel levy changes
• Aligning carbon tax and carbon budgets
• Carbon offsets under the carbon tax
• Market developments to watch

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In the 2025 Budget cycle, National Treasury confirmed a higher carbon tax rate, moved forward key changes to the carbon offset regime, and continued laying the groundwork for Phase 2 of South Africa’s carbon tax, expected to take effect from 1 January 2026.

Below we summarise the key changes and what they mean for carbon tax–liable companies.

Carbon tax rate and price path

• National Treasury confirmed the headline carbon tax rate increased from R190 to R236 per tonne of CO₂e from 1 January 2025 (a 24% increase).
• The legislated carbon tax price path also signals a further step-up to R308/tCO₂e in 2026, with annual increases thereafter, as set out in Treasury’s Phase 2 discussion paper.
• While Phase 1 remains in place through 31 December 2025, businesses should use the 2025 tax period to prepare for tighter rules and higher effective carbon costs expected from 2026.

Carbon fuel levy increase

• Treasury confirmed an increase in the carbon fuel levy effective 2 April 2025:
  • Petrol increased to 14c/litre
  • Diesel increase to 17c/litre

Aligning carbon tax and carbon budgets

• Treasury continues to position the carbon tax alongside the national carbon budgeting system under the Climate Change Act (signed on 23 July 2024), with Phase 2 design intended to deliver sharper emissions reductions.
• In the 2025 draft tax bill cycle, Treasury indicated that the carbon budget allowance (5%) is proposed to be extended to 31 December 2025, but not beyond.
• From 2026, Treasury proposes replacing this allowance with an equivalent increase in the carbon offset allowance, shifting more value towards the purchase and retirement of eligible carbon credits.

Carbon offsets: rule changes and Phase 2 proposals

• Treasury updated carbon offset rules to support investment in domestic projects. A key change is the increase in the threshold for eligible renewable energy projects from 15 MW to 30 MW for carbon tax offset eligibility.
• Looking ahead to Phase 2, Treasury proposed increasing the maximum carbon offset allowance by 5 percentage points from 1 January 2026:
  • from 10% to 15% for fuel combustion emissions
  • from 5% to 10% for process and fugitive emissions
• Treasury has also continued work on strengthening the domestic carbon market ecosystem, including how credits are sourced, verified, and recognised. Treasury noted that international standards can restrict certain project types (including some grid-connected renewables) on additionality grounds.

Market developments to watch

• With higher tax rates and a bigger role for offsets from 2026, companies are increasingly treating offsets as a cost-management tool, but one that requires careful attention to:
  • Offset eligibility rules
  • Retirement documentation requirements
  • Timing of credit retirement against carbon tax periods