JOHN DLUDLU: Act now on green trade with the EU before it is too late

On December 13, EU negotiators tentatively agreed on new rules to govern the carbon border adjustment mechanism (CBAM) — a complex plan to encourage heavy carbon emitters to move towards greener production. The implications of the rules go beyond EU borders, and if ignored, will lead to punitive action against its trading partners.

To be implemented in October, the agreement still needs to be confirmed by EU ambassadors and the European Parliament. In addition, given its trade implications, it will have to pass muster on its consistency with the provisions of the reinvigorated World Trade Organization. In a worst-case scenario, the WTO test may delay — but not stop — the implementation of the EU agreement.

In a 2005 arrangement, players in so-called dirty industries or carbon-intensive sectors  such as cement, fertilisers, iron and steel and aluminium were offered subsidies to compete, and now this support is to be gradually phased out. This is to ensure they keep production — and by implication jobs — in the EU rather than moving to countries outside the trading bloc.

Put differently, the main aim of the CBAM is to prevent the greenhouse gas emissions reduction efforts of the EU from being offset by increasing emissions outside its borders through relocation of production to non-EU countries where policies applied to fight climate change are less stringent than those of the EU.

In the December 13 announcement, the EU said: “It [CBAM] would be phased in gradually, in parallel to a phasing out of the free allowances, once it begins under the revised EU emissions trading system [ETS] for the sectors concerned. This will ensure compatibility of CBAM with international rules on trade.”

In brief, the mechanism seeks to achieve two goals: first, like the ETS, the CBAM will protect EU producers’ competitiveness; and second, it aims to encourage its trading partners to decarbonise (or level the playing field). EU importers of dirty products face tariffs if the rules are upheld.

Although initially covering a few products, it is envisaged that more sectors, including plastics and textiles, will be added at a later stage. The success of the scheme will be determined, in the main, by its application across value chains instead of just primary producers in select sectors.

Also, it requires the clear buy-in of business.

The EU is one of SA’s largest trading partners. Relations are governed by a free trade area agreement (technically a trade and development co-operation agreement). Based on SA’s membership of the Southern African Customs Union (Sacu) — which further comprises Botswana, Lesotho, Namibia and eSwatini — the free trade area agreement also covers those countries since they have a common external tariff regime. As a larger economy, SA compensates its partners for trade diversion.

Once implemented, the CBAM will force businesses in its trading partners to decarbonise or sell products that are cleanly produced. For SA, for example, it means hastening the pace of the transition towards green energy.

Already, SA has wasted more than a decade in licensing independent power producers — those using wind and solar. Once the government had woken up from its policy and regulatory inertia on renewables, lethargy struck again: contractual agreements were snarled up by bureaucracy and political squabbles between the ministers responsible for energy policy and oversight on power utility Eskom.

Gwede Mantashe (mineral resources & energy) and Pravin Gordhan (public enterprises, including Eskom) have spent the past two years shadowboxing around two issues: first, the characterisation of Eskom’s problem; and second, the pace of the transition towards green energy to power SA’s economy, which has been choked by power outages (frequent stage 6 load-shedding even during low demand periods such as weekends and the festive season holidays).

A week ago, a few days before the ANC’s national conference, this conflict came to a head when Mantashe accused Eskom’s management — which enjoyed Gordhan’s support — of treason. Days later, André de Ruyter, the CEO, announced he will leave the job in March.

Pointless to renegotiate

What should SA do?

Given the urgency of the climate change crisis and the protracted nature of talks around the topic (even in the EU), it will be pointless to renegotiate the EU-SA free trade agreement.

So, a far more pragmatic approach is required. SA really has little choice: it has to quickly move towards a green future. If it does not, it will face penalties from its trading partners through tariffs for markets such as the EU. For example, cement producers using Eskom’s coal-fired power might be levied import tariffs that make them less competitive in the EU.

Local banks are already shunning new coal mining projects.

A few months ago, Britain — with its unwise Brexit — and the EU pledged $8bn in aid of SA’s transition towards clean energy production. Separately, Spain made a $2bn pledge. Talks on how the money is to be spent have stalled.

Some, inside and outside Eskom, believe the money was all meant for Eskom, while others  correctly believe that a just energy transition requires the participation of all players in the energy ecosystem — producers of energy, policymakers, regulators and financiers — instead of just Eskom.

Worse, the $8bn pledge has been pounced on by president Cyril Ramaphosa’s political enemies — inside and outside the ANC — who criticise him for having accepted the money to destroy Eskom. Having survived a parliamentary vote over the $400,000 stolen from his Phala Phala farmhouse, Ramaphosa now faces calls by opposition MPs to answer questions about the $8bn.

This debate is likely to be driven by emotion and ideology instead of pragmatism. Plans for the just energy transition have been driven by bureaucrats and industry, and have hitherto excluded communities around Eskom’s plants facing decommissioning. This means the decommissioning will face stiff resistance.

The return of parts of Europe, such as Germany and the UK, to coal-fired energy as a result of the gas crisis caused by the sanctions on Russian gas over its “special military operation” in Ukraine has emboldened SA’s coal fundamentalists to continue the fight for continued production and usage of coal.

Until now, SA’s policymakers and economic regulators have said nothing about the implications of the CBAM. Sooner, rather than later, they will have to face the reality of the implications of the mechanism for SA exporters. Decisive political leadership — which has been missing so far — is required to drive this urgent agenda.