The EU’s plan to impose an import tariff based on the carbon emissions linked to certain imports will “transfer the burden of climate action onto developing economies” and place “undue and unjust burdens” on SA and certain industries in particular.
This is according to comments the department of trade, industry & competition submitted last week to the European Commission on the EU’s draft implementation regulations of the carbon border adjustment mechanism (CBAM).
The European parliament reached a provisional agreement in December that the “transitional period” for the mechanism will begin on October 1. In this period importers will incur no financial liability. It will go live in 2026, when tariffs will apply, and it will then be phased in over eight years.
SA’s exports to Europe will already be disadvantaged by a tax on direct emissions but given that about 90% of the electricity generated by Eskom comes from fossil fuels, the EU decision to include indirect emissions would be particularly harmful.
In its submission, the department said about $1.5bn in exports of SA to the EU are at risk because of the CBAM. It also referred to a paper published earlier in 2023 by the presidential climate commission, which showed that SA’s overall exports to the EU could decline by 4%, with the steel and aluminium sectors being most at risk.
A conservative estimate in the commission’s paper, which takes into account the application of direct emissions, found SA exports to the EU could fall by 8.7% for chemicals, 16% for aluminium, 30.5% for iron and steel, and 44.3% for cement by 2030. This would amount to a 4% reduction in total exports and a reduction in SA GDP of 0.02%
SA’s iron and steel sector said these tariffs would give its international competitors an unfair advantage — this would be in direct contrast to the stated intent of the CBAM, which was to ensure a fair playing field.
Indirect emissions
In its submission to the European Commission, the SA Ferro Alloy Producers’ Association said the inclusion of indirect emissions is particularly problematic. Due to SA’s reliance on coal-based power supply there is a “particularly large difference in the emissions intensity of EU electricity generation, and that of many other countries that export relevant products into the EU”. For example, the EU’s greenhouse gas emissions intensity of electricity generation in 2020 was about 200gCO2e/kWh compared with about 960gCO2e/kWh in SA.
This, said the association, would result in a large cost differential to the detriment of SA producers. It proposed that the inclusion of indirect emissions reporting be exempted for SA ferroalloy producers.
It also flagged the “vast difference between the SA and EU carbon price”, suggesting a review of the carbon border price to be paid taking into account each country’s economic position internationally.
One reason for the EU’s implementation of the mechanism is to protect the competitiveness of its own producers, which are taxed on their emissions, against importers from countries that levy no such tax.
For this reason, when carbon prices apply in the country of origin, as they do in SA, allowances may apply to reduce the carbon prices that importers will be liable to pay. SA’s carbon tax rate is expected to reach $20 a tonne by 2026 and $30 by 2030. The EU Emissions Trading System price rose to almost €100 per tonne in 2022.
The department said the implementation of the taxes would have the “unintended consequence of more than reversing and contradicting” the support the EU has pledged for SA’s transition to a predominantly renewables energy mix.
The draft implementation regulations of CBAM are “discriminatory” and “potentially violate the provisions of the World Trade Organisation (WTO) on nondiscrimination”, the department said.
Mahendra Shunmoogam, director for international trade policy at the department, told Business Day the cabinet would soon decide on SA’s strategy to respond to the implementation of CBAM and whether this should include approaching the WTO.
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