EU carbon tax move cranks up heat on SA exporters

The noose is tightening, faster and tighter. The implementation by the EU of a carbon tax at its border is one step closer after the EU parliament voted on a revised plan last week that extended the range of products being covered, as well as reducing the timeline to adapt.

SA, among a wide array of countries in the Global South, is set to be negatively affected. Exports to the EU will become increasingly costly, and therefore uncompetitive, if countries of origin have not decarbonised or implemented equivalent carbon taxes.

We cannot claim this comes as a surprise. Trade & Industrial Policy Strategies (Tips), the department of trade, industry & competition and the Industrial Development Corporation hosted a workshop on this very risk in 2013. Over the years, we as well as other structures have often raised the alarm.

In July 2021 the EU announced the Carbon Border Adjustment Mechanism (CBAM) as part of its “Fit for 55” policy package, which targets a reduction of European greenhouse gas (GHG) emissions of 55% by 2030, compared with 1990 levels. The CBAM will impose a tax on GHGs embedded in carbon-intensive products imported into the EU.

This is a protectionist measure by the EU, to protect its own industries from external competition and its economy from the risk of carbon leakage (businesses shifting production to countries with laxer emission constraints).

The EU parliament approved the enhanced CBAM proposal on June 22. The negotiations between the European parliament and the EU Council (comprising representatives of member states) are next in the legislative process before implementation begins.

Increasing scope

Unlike initially envisaged, the CBAM is now set to cover direct and indirect (from electricity consumption) GHG emissions. This is problematic for SA, which due to its coal-based power supply is one of the world’s most carbon-intensive exporters. SA manufacturing exports have a carbon content of about 2,250 tonnes of carbon dioxide equivalent (tCO₂e) per $1m, while most countries sit between 300 and 1,100 tCO₂e per $1m.

The scope of the CBAM also keeps increasing. Limited to 29 product categories from the electricity, cement, fertiliser, steel and aluminium sectors initially, the approved mechanism now also covers organic chemicals, plastics, hydrogen, ammonia and, as raised above, indirect emissions from electricity use.

What’s more, implementation is set to come earlier and faster. A short transition period from January 2023 to the end of 2026 remains, during which the burden will be administrative rather than financial — companies will have to report without being taxed. Then, the CBAM will be ramped up progressively from January 2027 to reach full force by 2032. That leaves us with less than five years to prepare and adapt to this new trade regime.

Least developed countries should be thrown a lifeline, with some of the revenues from the CBAM set to be directed towards supporting their decarbonisation efforts — a meagre consolation for (predominantly African) countries in dire need of support. Nothing is planned for other low- and middle-income economies such as SA.

Electricity grid

The CBAM will directly affect SA sectors that export to the EU, particularly the iron and steel, aluminium, organic chemical and plastics industries. A total of $1.5bn of SA exports (based on 2021 data) is at risk. This includes, in value of national export, 30% of organic chemicals, 26% of iron and steel, 25% of aluminium and 10% of plastics.

SA’s electricity grid will not be decarbonised by 2027, nor will a carbon tax equivalent to the European carbon pricing (€85 per tonne at the moment) be in place. Exporters in affected sectors need to proactively prepare for the CBAM — or face the consequences. Firms must align their business models to a low-carbon future by decarbonising their production.

The recent dispensation easing the rollout of renewable energy projects up to 100MW provides an avenue for many firms to maintain — if not increase — their competitiveness. But exporters will also carry the burden of proof and have to demonstrate their carbon performance to a single EU-based authority (set up to prevent forum shopping).

The EU’s CBAM is also expected to lead other countries — the US, the UK, Canada and Japan, among countries — to implement their own border carbon taxes. The writing is on the wall — going forward trade green or trade not.

While there is still time SA would be well advised to heed the message and do what we need to do, or be left behind to the detriment of our economy and people.

• Montmasson-Clair and Monaisa are economists at Trade & Industrial Policy Strategies in Pretoria.