How the EU’s carbon tax could reshape South African exports

A new mechanism implemented by the European Union (EU) to curb carbon-intensive goods entering its market could place South African businesses and agricultural enterprises at a costly disadvantage, according to Mark Boshoff, head of Climate Resilience and Sustainability Strategy at Nedbank Commercial Banking. 

Because the EU is SA’s largest trading partner, accounting for over 20% of total trade, this policy shift is crucial for local exporters to understand and has implications on efforts by local companies to decarbonise their operations as part of their overall climate resilience strategies.

In April 2023 the EU enacted the Carbon Border Adjustment Mechanism (CBAM), a policy that aims to put a “fair price” on carbon emissions associated with the production of carbon-intensive goods imported into the EU. This move is designed to level the playing fields for EU companies that have been under pressure to reduce their carbon footprints at considerable expense against potentially cheaper, carbon-intensive imports from non-EU countries like SA.

Part of the broader European Green Deal, the CBAM seeks to reduce greenhouse gas emissions by 55% by 2030. It employs the “polluter pays” principle, encouraging businesses to adopt cleaner production methods. The EU justifies the CBAM by pointing to the risk of “carbon leakage”, where companies relocate high-carbon production to countries with weaker environmental regulations. The CBAM also aims to prevent EU-made products from being replaced with more carbon-intensive imports.

For SA, the CBAM poses a particular challenge. While the country is transitioning to a low-carbon economy at a snail’s pace, its current carbon taxes are low in comparison with EU carbon taxes. This differential in carbon taxes will lead to higher costs being imposed on South African goods entering the EU in the medium to long term to bring pricing in line with domestic production of the EU.

The higher cost to import one country’s goods could result in importers seeking out other countries that have advanced further in carbon emissions transitioning. This is especially concerning given SA’s high carbon intensity, at 1.5 times that of China and double the global average. Much of this stems from Eskom’s reliance on coal, which accounts for roughly 43% of the country’s greenhouse gas emissions. South African businesses then use this high carbon energy in the production of their goods and attempt to export goods with a high carbon production content, Boshoff says. 

South African exports to the EU may struggle to compete against goods from countries with lower carbon footprints. This comes at a time when local businesses are looking to diversify their export markets amid stagnant domestic demand and competition from low-cost imports like those from China.

However, there is some breathing room. The CBAM will be implemented in phases, offering companies time to adjust. The transition period, which began in October 2023, runs until December 2025. During this time, certain industries — such as iron and steel, cement, fertilisers and chemicals — will be gradually phased into the system, initially exempt from carbon taxes. By 2026, these exemptions will be phased out while more industries will be added.

In response, South African companies that depend on EU exports may need to make significant investments to meet these new requirements. Some may seek alternative markets with less stringent regulations, but this is not a long-term solution. 

The documentation required for CBAM compliance overlaps with other jurisdictions implementing their own carbon border mechanisms while reporting frameworks, such as environmental, social, and governance and International Financial Reporting Standards, begin to impact most markets, businesses and enterprises in some way and carbon costs will need to be accounted for, whether these companies are exporting to the EU or elsewhere. Also, listed companies and large companies are under increasing pressure to purchase low-carbon input goods, and domestic purchasers may begin to seek better options for procurement. 

High-carbon economies like SA may find themselves trapped behind a “carbon wall”, struggling to sell carbon-intensive goods as more countries and companies demand low-carbon products to satisfy their own supply chain needs. 

“To stay competitive, it is crucial for South African businesses to understand the costs and benefits of decarbonisation. By reducing operational waste and energy use, companies cannot only cut costs, but also boost their brand value and appeal to environmentally conscious consumers and procurement teams. Green products are increasingly preferred by buyers not just for environmental reasons, but because they are often easier to sell in compliance with regulations governing the green economy,” Boshoff says.

As the CBAM is rolled out, now is the time for South African businesses to review their operations and reduce emissions where possible. Steps like conducting energy audits, investing in renewable energy solutions to replace or lessen dependence on Eskom coal-generated electricity, and upgrading outdated, energy-intensive equipment can lead to long-term savings on carbon and expenses. These could offset the upfront costs of cleaner technology.

Beyond energy, businesses should look at reducing waste and exploring circular economy solutions. Finding buyers for offcuts or partnering with recyclers can reduce landfill waste and create additional income streams. Similarly, sourcing from sustainable suppliers can help reduce a company’s indirect carbon footprint, especially for small and medium enterprises.

Climate change is a global problem that requires innovative solutions. Businesses that take proactive steps to reduce their carbon reliance will be better positioned to compete both locally and internationally.

Nedbank Commercial Banking stands ready to play a crucial role in raising awareness and offering training to help companies adopt cleaner technologies and processes, ensuring they remain competitive in the EU and beyond.

This article was sponsored by Nedbank Commercial Banking.