DUANE NEWMAN: Brussels’s greening of its red tape raises yellow flags from trading partners

Even the most stubborn climate change denialists are likely to have taken notice of the latest scientific report from the Intergovernmental Panel on Climate Change (IPCC) that underpins calls for action to curb greenhouse gases.

In the countdown to the COP26 climate change summit in Glasgow in November, nations and regional blocs have been focused on outlining the measures they intend to take to contribute to the fight for a greener planet. However, we must remain on our guard, because splashing a pot of green paint on a protectionist plan does not erase its protectionist underbelly. 

This is why many of the EU’s trading partners are alarmed at elements of Brussels’s climate change strategy — they fear it masks a desire for carbon protectionism. In March the European parliament supported the implementation of a so-called carbon border adjustment mechanism (CBAM),  one of the pillars of the European Green Deal package, which aims to make the bloc carbon neutral by 2050.   

The European Commission recently announced that “the [CBAM] will be phased in gradually and will initially apply only to a selected number of goods at high risk of carbon leakage: iron and steel, cement, fertiliser, aluminium and electricity generation”.

Countries such as SA that export carbon-intensive products to Europe will find themselves in the firing line of this border adjustment mechanism as it will have a direct effect on the cost of exporting these goods to the EU. 

The cost will occur when extra duties are applied to our exports if it is decided that their true carbon footprint is not being reflected in the price. The EU insists that by using these duties the price of imports will reflect the cost of their carbon content more accurately. 

What is the embedded carbon in the product? This is not a number you can pluck out of the air. To calculate it may require a value chain analysis, and data on the source and amount of energy inputs at each stage of the value addition process will be essential. Working out all of this can be time-consuming and expensive. So forget the traditional piles of red tape; Brussels is now producing streams of green tape. 

Last year, an analysis by Trade & Policy Strategists (Tips) entitled “The Global Climate Change Regime and Its Impact on SA’s Trade and Competitiveness: A Data Note on SA’s Exports” warned that the SA economy is “particularly vulnerable to trade-related climate change risks” for the following reasons:

• SA has one of the world’s most carbon- and energy-intensive economies. The economy relies on coal as a feedstock for electricity (86% in 2016) and a quarter of liquid fuels production in the country;
• SA’s climate change framework remains unambitious by global standards, despite some progress in recent years with the implementation of a carbon tax and carbon budgets and recent updates to nationally determined contributions leading up to COP26;
• SA is relatively far from its main trading partners, which has implications for transport costs and associated greenhouse gas emissions; and
• SA has the status of an emerging economy and upper-middle-income country. Exemptions at the international level are likely to be granted solely to low-income countries and, to some extent, to lower-middle-income countries.

The Tips report looks at the composition of SA’s exports and notes that the exported greenhouse gas emissions are concentrated in mining value chain exports. Basic metals, mining and quarrying products accounted for more than half of exported emissions (53%) in 2015. Motor vehicles, utility services, chemicals and chemical products, and machinery and equipment followed.

Most of the country’s carbon-heavy exports go to China, which itself is not regarded particularly favourably in the climate change debate even though it has started to implement carbon trading schemes.

It would be foolhardy to assume the EU, which is also a vital SA trading partner, is the only player in global trade that will impose border carbon control mechanisms. When other key trading partners decide to do so it will place a further burden on SA exporters. 

There is a wider trend to reduce global trading emissions. This can be done through the EU’s approach of a border tax, or there could be an obligation to buy carbon offsets to the equivalent of the importing nation’s carbon tax.

Review list

Brussels’s carbon border adjustment mechanism is meant to be World Trade Organization-compatible, which could make it impervious to challenge on the grounds of protectionism. So how should SA exporters respond to all of this?

As SA manufactures and exports products in the sectors that will be hardest hit, its firms should carefully review the list of products and their tariff headings to establish where they are most exposed to the new green tax. 

On the initial list proposed by the EU are iron & steel, cement, fertiliser, aluminium and electricity generation. But as this list is expected to grow over time, SA manufacturers should be cautious in their long-term planning of exports to the EU. 

Meanwhile, SA producers should consider the source and amount of the energy used to make their products, and they must assess whether they should reduce their reliance on Eskom’s coal-derived electricity. 

If this makes them highly vulnerable to the new EU green tape, and whatever else is devised by other importing nations, they must assess the potential benefits of setting up their own renewable, or reduced carbon-intensity, power plants. The increase in the exemption threshold for a National Energy Regulator of SA generation licence to 100MW will help these industries set up their own green power plants.

Reduces rate

Under the current proposals even if the new border taxes are swiftly implemented the EU will grant a three-year exemption — in effect a nil rate — and a reduction in the CBAM is proposed if the products have already been subject to a carbon tax in their local market.

There could be an argument that though SA has a carbon tax the trade exposure allowance (which can be deducted from the carbon tax payable if a taxpayer is exposed to international trade) reduces the effective rate of this tax on our exports — so SA goods could still be subject to the CBAM on entry into the EU.

The three-year breathing space gives SA-based companies a longer planning window to calculate how badly they are to be affected, and what to do about it.

As the EU is a big part of SA’s export market this border tax will make our products less competitive — and therefore in addition to reducing the greenhouse gas intensity of our exports, perhaps we should also be looking at other export markets that are not subject to border carbon adjustments.

Action is needed now to ensure the EU’s radical moves to save the planet do not entangle our exporters in Brussels’ green tape and make SA products less competitive, negating many of the benefits our products receive under the EU’s Economic Partnership Agreement with SA and our neighbours in the region.  

• Newman is a co-founder of Cova Advisory.