What SA needs to do about threat to exports from EU border taxes
• It is a moderate overall risk but the country will face pressure
SA exporters of iron, steel and aluminium products are likely to find themselves negatively affected by the EU’s carbon border adjustment mechanism (CBAM).
With the CBAM, the EU aims to prevent “carbon leakage” as a result of manufacturers relocating from the EU to countries with weaker carbon pricing systems for reducing emissions, or carbon-intensive imports from such countries outcompeting and displacing the EU’s domestic production.
The basic idea is that a border tax, payable by EU importers of certain carbonintensive goods, would equalise the effective price for carbon in imported goods with that paid by EU producers under their Emissions Trading System.
For now, the sectors covered are iron and steel, aluminium, cement, fertiliser, hydrogen and electricity, but the EU aims to expand coverage to include other carbon-intensive products such as plastics and organic chemicals at some point in future.
In October, the CBAM commenced a three-year “transitional phase”, with mandatory quarterly reporting by EU importers of the embedded carbon “content” of most goods in the covered sectors. Both direct emissions from production processes and indirect emissions from consumption of electricity will be reported.
After the transitional reporting-only phase, the “definitive phase” with an equilibrating border tax is set to come into effect in 2026.
SA is one of the biggest carbon-emitting countries in the world, mainly as a result of its heavy reliance on coal for electricity generation, which accounts for more than half of SA’s carbon dioxide emissions. In 2022, it was the 17th-largest emitter of CO2 from fossil fuels in the world, behind international aviation and several far larger economies, accounting for a little more than 1% of global fossil fuel CO2 emissions, according to the Emissions Database for Global Atmospheric Research.
As a highly carbon-intensive economy but a modest exporter of CBAM-covered goods to the EU, SA faces a moderate overall macroeconomic risk. The EU is SA’s single most important export market, accounting for 21% of total exports in the period from the first quarter of 2022 to the third quarter of last year.
SA is also a big exporter to the UK and Switzerland, which are aligning their carbon pricing schemes with the EU’s.
SA’s exports of CBAMcovered goods are only about 2.5% of its total exports.
That said, SA’s electricityintensive aluminium and iron and steel industries are heavily exposed. For example, exports of aluminium products to the EU, UK and Switzerland have averaged $880m annually since 2022, about 42% of the total. SA’s important iron and steel industry is also significantly exposed to the CBAM all along the value-added chain, from upstream sintered iron ore inputs to downstream products such as steel bolts and screws.
For example, SA shipped an annual average of $1.1bn worth of sintered iron ore to EU-plus countries in the quarter one 2022 to quarter three 2023 period, or 30% of the total.
Exports of CBAM-covered ferroalloys to EU countries averaged $536m a year in the same period, or 13.2% of the total. Exports of other iron and steel products — predominantly pig iron and midstream flat-rolled iron and steel — averaged $494m annually, or 17% of the total.
Based on current prices for CBAM-covered goods and for carbon in the EU and SA, and estimated product-specific emission levels in each economy, the CBAM border charge is likely to be material, ranging from about 15% to about a third for SA’s most important CBAM-covered exports to the EU. And critically, as the EU gradually withdraws the free allowances under its Emissions Trading System, its price for carbon emissions is likely to rise, thereby raising CBAM border charges to the extent that this is not offset by producers’ own decarbonisation efforts or higher carbon prices in producing countries.
SA producers of carbonintensive goods are likely to face intensified competition from other emission-heavy producers such as China and Russia in African and other markets such as the US, after being priced out of the EU and other economies with strong carbon mitigation policies.
TRADE PATTERNS
There are many questions and concerns about how the CBAM will affect global trade patterns and penalise emerging markets. Many emerging markets, SA included, view the CBAM as “green protectionism”. However, the EU is unlikely to change course.
Moreover, the growing number of other countries with strong decarbonisation policies entailing high domestic prices for carbon emissions will also likely impose similar carbon border taxes. For example, Canada and Australia are actively considering their own version of a CBAM.
SA has little option but to adjust quickly to this growing reality, in part by raising its own carbon price and actively recycling those revenues to help producers decarbonise. To the extent that it is possible, SA aluminium and iron and steel producers should try to develop their own sources of carbonfree electricity rather than draw power from the Eskom grid.
SA’s abundant renewable energy resources, which remain significantly underexploited, suggest that it should be possible to position ourselves as a low-emissions producer with a significant competitive advantage. But we have to move faster to do so, because the world is not standing still on this.
SA ALUMINIUM AND IRON AND STEEL PRODUCERS SHOULD TRY TO DEVELOP THEIR OWN SOURCES OF CARBON-FREE ELECTRICITY