SA’s exports are at risk of having hefty carbon border taxes imposed on them by the EU as a result of Eskom’s heavy reliance on coal, which accounts for about 90% of the electricity it produces.
The EU’s carbon border tax adjustment proposal could entail levies on goods imported from countries with a heavy carbon reliance from 2023, though the scope and quantum of the proposed taxes will become clearer only next month.
The penalty would imperil not only the mining industry — in which 453,000 jobs are at stake — but any manufacturer that produces a product with a high level of embedded carbon.
The European Commission is expected to unveil a series of penalties next month to be imposed on goods imported from countries with heavy carbon footprints, with Bloomberg reporting on June 2 that steel, cement and aluminium would be among the first to be affected.
The planned import taxes are part of a broader plan called the European Green Deal, which aims to make the region the first climate-neutral continent by 2050.
The issue is now on the government’s radar, with President Cyril Ramaphosa writing in Business Day that SA will engage countries at the COP26 climate conference scheduled for November and at the World Trade Organization on the issue of carbon tax import penalties and the phasing out of fossil fuels to get a fair deal for the developing world.
“We should be careful not to advocate one-size-fits-all approaches to disinvestment from fossil fuels or impose non-tariff barriers or discriminatory taxes that would unfairly harm developing economies,” he said.
In addition, SA firms and the government may soon find funding less available and more expensive as investors begin to price in environmental, social and governance (ESG) risk when allocating capital.
Investment firms are preparing by taking a stronger stance on ESG issues when making investments. Local asset managers are fast catching up, with Ninety One, Coronation and Alexander Forbes all highlighting their commitment to ESG investing in recent months.
John Green, chief commercial officer of Ninety One, warned during the 2021 Investment Forum on June 9 of the risk of carbon border tax adjustments due to Eskom’s heavy reliance on coal.
Carbon Brief ranks SA as having the most carbon-intensive power grid among 25 major economies it analysed based on grams of carbon emitted per kilowatt hour of power produced in 2017.
“If you believe that carbon border tax is something that the developed world applies because it’s one of the ways they can force emerging markets to address this problem then you’ve got to see that coming and you’ve got to adapt,” Green said in an interview. “If it comes in and you’re not adapting, then there’s going to be an enormous impact on the country.”
While the threat of carbon taxes imposed on SA’s exports is a risk for the government and firms, Green said it presents SA with an opportunity.
“If we commit to transitioning our electricity system from a coal-dependent system to a renewable one ... it will be an incredibly strong catalyst for growth,” said Green, adding that investors are “enormously receptive” to funding decarbonisation projects at competitive rates. In fact, so strong is the emphasis on achieving a more sustainable future that he said decarbonisation would replace digitisation as the world’s next big investment theme.
“Decarbonisation is going to be one of the most meaningful drivers of returns for the next 15 years,” he said.
“The companies that orientate towards delivering decarbonisation solutions are going to experience enormous growth.”
Ninety One’s global environment fund already has $835m invested in companies such as Waste Management Inc, Nextera Energy, Voltronic Power Technology and Infineon Technologies. Almost 70% of the companies in the fund are located in the US (35.2%), Europe (28.2%) and the UK (6.1%) with 19.4% in China and 1.3% in Japan.
“There are a whole lot of companies ... that are delivering fantastic solutions to decarbonisation, many of whom we don’t even know about,” said Green. “They are going to be the real stars over the next 15 years.”
Modelling work presented to the presidential climate commission has recommended a faster decarbonisation than contained in government targets, with activists also arguing that SA’s targets are too low and do not take a “fair share” of the world’s goal to reduce greenhouse gas emissions.
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