Framing the Shift
South Africa’s carbon market has evolved from a compliance mechanism into a strategic policy tool linking climate action, finance and competitiveness. Since the introduction of the Carbon Tax in 2019, the country’s approach has expanded to include the Carbon Offset Administration System (COAS), the draft Carbon Budget Regulations (CBR) and growing alignment with global mechanisms such as the EU Carbon Border Adjustment Mechanism (CBAM). Collectively, these measures are building a structured, transparent and investable carbon ecosystem – one that is gradually shifting from penalty-based compliance to value-based opportunity.
Carbon Credits – The Foundation of Carbon Finance
A carbon credit represents one tonne of CO₂ avoided or removed from the atmosphere. Projects that generate credits must demonstrate measurable, verifiable reductions that go beyond business-as-usual – a principle known as “additionality”. This means the project must depend, at least in part, on carbon finance to proceed. Activities that are already profitable or legally required cannot claim credits because they would have occurred regardless of carbon revenue.
South Africa’s Carbon Market – Dual Systems
South Africa operates two complementary systems:
– The voluntary carbon market, where organisations purchase credits to meet net-zero or ESG targets.
– The compliance-linked market, where emitters subject to the Carbon Tax can offset up to 10–15% of taxable emissions with approved credits.
At the centre sits the COAS registry, which records the flow of credits from international standards into South Africa’s local system. Projects are validated, listed and finally “retired” through SARS to reduce Carbon Tax obligations.
The period between 2019 and 2025 was broadly considered “Phase 1” of the Carbon Tax. Listings of carbon credits were steady at around 4 million tonnes per year until 2022, when fewer new credits were brought to market before rebounding slightly in 2023. At the same time, many participants held onto existing credits, building stockpiles in anticipation of higher future Carbon Tax rates that would make those credits more valuable.
The Carbon Tax: Entering a New Phase
Carbon Tax is moving from its introductory phase into Phase 2 (2026–2030). Key features include:
– A tax rate increasing from R190/tCO₂e in 2025 to about R400/tCO₂e by 2030.
– An expansion of the offset allowance from 10% to 15% for most sectors.
– A gradual reduction in transitional allowances originally introduced to soften the impact of Phase 1.
These reforms will effectively double potential offset demand and establish a more predictable carbon price signal. For companies, this marks a shift from temporary compliance to permanent carbon cost management.
Carbon Budgets and CBAM – Policy and Trade Intersections
The CBRs create a quantitative emissions cap that complements the price signal of the Carbon Tax. Major emitters – those producing over 30,000 tonnes of CO₂e per year – will be allocated five-year carbon budgets that cover only Scope 1 emissions. Exceeding the assigned budget triggers a penalty of R640/tCO₂e, with no allowance for offsets. Staying within the budget allows continued use of offsets under the Carbon Tax system.
In parallel, Europe’s CBAM is reshaping international trade. From 2026, exporters of steel, aluminium, cement and fertilisers must disclose both Scope 1 (direct) and Scope 2 (electricity-related) emissions and purchase CBAM certificates priced at approximately €70–100 per tonne of CO₂e.
Understanding Scope 1, 2 and 3 Emissions
South Africa’s regulatory framework currently applies only to Scope 1 emissions – the direct greenhouse gases produced from owned or controlled sources, such as on-site fuel combustion, process heat, or industrial operations. These are the emissions targeted under both the Carbon Tax and the CBRs.
Scope 2 emissions – those from purchased electricity, steam, or heat – are not yet regulated domestically, but are increasingly critical due to South Africa’s coal-heavy electricity grid. They will become unavoidable under CBAM, which requires exporters to report embedded Scope 1 and 2 emissions in all traded goods.
Scope 3 emissions include all other indirect emissions across the value chain – from suppliers, transportation and product use to end-of-life treatment. While not yet included in national regulation, South Africa will eventually need to align with global frameworks such as the GHG Protocol and the Science Based Targets initiative (SBTi). Together, these three scopes represent an expanding carbon accountability framework – from direct operations to electricity consumption and ultimately to full value-chain transparency.
Sources of Carbon-Credit Supply in South Africa
There are three broad groupings of project types expected to generate future carbon-credit supply in South Africa:
– Renewable energy projects, subject to defined eligibility limits under the Carbon Tax system.
– Energy-efficiency and fuel-switching projects related to carbon-intensive energy infrastructure.
– Natural climate solutions projects, such as efficient cookstove programs and afforestation initiatives.
Together, these categories form the foundation of South Africa’s carbon offset supply, with demand expected to grow steadily through 2035 as carbon prices rise.
What Businesses Should Do Now
For corporates:
– Establish verified Scope 1 and Scope 2 baselines in line with GHG Protocol standards.
– Integrate carbon pricing and CBAM exposure into long-term investment decisions.
– Use offsets strategically to manage rising tax liabilities.
– Engage early with the Department of Forestry, Fisheries and the Environment (DFFE) to prepare for carbon budget allocations.
For project developers:
– Prioritise high-additionality projects such as off-grid renewables, efficiency retrofits and nature-based carbon sequestration.
– Register projects early under recognised international standards to secure eligibility.
– Explore aggregation models to scale smaller interventions efficiently.
The Emerging Picture – From Policy Tool to Investment Platform
South Africa’s carbon market is maturing into a multi-layered, credible system that integrates pricing, measurement and compliance across both domestic and global mechanisms. The Carbon Tax sets the price; carbon budgets impose quantitative limits; and CBAM extends accountability across borders.
As verification standards strengthen and carbon prices rise, the market is moving from basic compliance toward strategic value creation – enabling cleaner industry, climate-conscious investment and export competitiveness. The challenge for businesses is no longer whether carbon regulation applies, but how to turn it into long-term advantage.
For more on South Africa’s evolving carbon landscape, listen to Brundtland’s Carbon Compass podcast here: Spotify link
