Woes for SA exporters as US considers carbon tax on imports

The noose is tightening on exporters around the world — including in SA — that have high levels of greenhouse gas emissions in their production processes.

According to a report in the Washington Post, proposed legislation in the US Congress would lay the groundwork for tariffs on imports from China specifically but also other countries with loose environmental rules.

The move is supported by both Democrats and Republicans.

“Senators Christopher A Coons and Kevin Cramer on Wednesday will introduce a bill that would lay the groundwork for America’s first carbon border tax. The senators’ goal is to impose fees on iron, steel and other imports from countries that are not significantly reducing greenhouse gas emissions,” the article said.

The bipartisan bill, called the Prove It Act, would require the energy department to study the emissions intensity of certain products including aluminium, cement, crude oil, fertiliser, iron, steel and plastic that are produced in the US and in certain countries.

“Using trade to advance American manufacturing — and to disadvantage dirty or high emissions products — is ultimately the only way we are going to put effective pressure on China, Russia and India to dramatically reduce their emissions,” Coons told the newspaper.

Cramer said Republicans were interested in a carbon border tax as a way to counter China and protect US businesses. “China’s sort of an easy target. They are the ones producing cheap stuff. But there are other players besides China that are dirty producers taking advantage of our system.”

The EU has already adopted a carbon border adjustment mechanism which will impose taxes on the carbon content of imported goods and now the US is considering a similar route.

The measures present a a threat for SA exporters who are dependent on Eskom for their energy needs. Eskom is responsible for more than 80% of electricity generated in the country, and is considered the worst polluter in Africa and the 14th worst emitter of greenhouse gases in the world.

SA exports to the US totalled $10.73bn in 2022, according to UN data, with the top five products being precious stones and metals, vehicles, iron and steel, machinery and aluminium.

Sasol, which exports a range of chemical products to the US, as well as vehicle manufacturers, would be affected by such a law.

SA is also facing a crippling energy crisis that has prompted the government to consider extending the life of Eskom’s polluting coal-fired power stations which were due to be shutdown as it seeks to bolster the country’s long-term energy security. Such a move would perpetuate the high level of emissions and increase the risk of SA bearing the brunt of regulations such as those proposed in the US.

However, forestry, fisheries & environment minister Barbara Creecy is confident that SA will still be able to achieve its emission goals by 2030, even if decommissioning of coal-fired power plants is delayed.

XA Global Trade Advisors Donald Mackay said the implementation details of the proposed US law would be important to consider. If it were to be implemented in one go, SA would be in deep trouble “as we almost can’t decarbonise” because of the reliance on Eskom. The situation would be different if the law were to be phased in over time and SA speeded up its generation of renewable energy.

Trade Law Chambers director Rian Geldenhuys pointed out that in addition to the trade impact, investments could also be affected as the legislation could also discourage US companies from investing in countries such as SA with less strict regulation. It could also encourage US companies already invested in SA to invest elsewhere.

“I think there is definitely the investment aspect which is quite a big concern,” Geldenhuys said. The trade impact would depend on the carbon tariffs imposed on particular types of product.

SA’s trade relations with the US will also be in jeopardy if the US  does not extend the African Growth and Opportunity Act (Agoa) which is due to expire in 2025. Agoa grants preferential access to the US markets for some SA products. SA’s stance on Russia’s war in Ukraine has raised fears about SA’s relations with the US. 

In April the EU approved the world’s first tax on carbon intensive imports. In terms of the carbon border adjustment mechanism, importers will have to start paying the tax in 2026 though they will have to start accounting for the carbon emissions associated with their products in October.

European importers will have to pay a levy on their imports corresponding to the charge imposed on comparable domestic industries under the EU’s emission trading system.

The EU argues that as less stringent climate policies prevail in non-EU countries there is a risk of “carbon leakage” which refers to the relocation of businesses from the EU to countries with laxer emission constraints. The mechanism aims to encourage cleaner industrial production in non-EU countries.

The proposed US bill also comes after Democrats last year enacted the most ambitious climate bill in US history. The Inflation Reduction Act devoted billions of dollars to curbing harmful emissions and promoting green technologies. The bill did not include a carbon border tax.

Coons told the Washington Post that his larger objective over the next few years was to create a “carbon club”, a group of allied countries that all adopted ambitious climate laws. Such a club could include the US, EU, UK, Canada, Mexico, Japan, South Korea and Australia.

ensorl@businesslive.co.za