AYABONGA CAWE: Border tax on carbon-intensive products puts exporters at risk

Lionel Adams and Mandla Madwara established a company more than five years ago. Their company, Africa Auto Group, supplies e-coating services to component manufacturers and assemblers in the automotive, consumer electronics and renewable energy sectors.

Employing 18 workers, Africa Auto Group was one of the many firms that got a “shout out” from the trade, industry & competition minister in his quarterly update to legislators last week. If the cross-border adjustment mechanism (CBAM) widens its scope beyond upstream steel, chemicals and other products, Adams and Madwara may be out of pocket. Or so it seems.  

The CBAM, a border tax on carbon-intensive products being imported into Europe, may have effects that can be anticipated but are unevenly understood. It looks to equalise the tax treatment and pricing of the carbon embedded in imported goods and goods produced by manufacturers in the eurozone.

The system is set to apply from October 1, though a 36-month transitional period will only involve reporting on the carbon content of the goods exported into the EU.

It will initially cover iron and steel, cement, aluminium, fertilisers and electricity, and will later be extended to hydrogen imports to the EU. A policy brief authored by Lerato Monaisa and Seutame Maimele of think-tank Trade & Industrial Policy Strategies suggests other industries may be at risk too.  

Brics

The EU says the CBAM is a “landmark tool” to effectively incorporate the externalities associated with carbon emitted during production into the price structure of goods exported into Europe. Brics countries (Brazil, Russia, India and SA),  oppose the mechanism as they say it restricts trade and investment and  establishes “green trade barriers” that are incompatible with multilateral rules.

Viewed this way, carbon border taxation and measures like the CBAM may emerge as an area of divergence between nations and regions in the Global North and Global South.  

Moreover, the mechanics of and timeline to implement the CBAM matter for us here in SA for a number of reasons. For a combination of historic and contemporary industrial reasons the EU is one of SA’s major export destinations, accounting for about a fifth of total exports. In that EU-destined local export basket the effect of the CBAM will not be evenly felt across different sectors and subsectors of the economy. Industrial sectors exporting goods such as chemicals and iron & steel will be harder hit than, say, cement, because of the larger proportion of total exports of those products that land up in the EU.  

Third, the over-determining role of Eskom’s coal-powered electricity in the embedded carbon content of manufactured export products is expected to attract punitive sanctions from 2026 onwards, and to varying degrees influence the path to net zero for many domestic exporters, who are already being incentivised to invest in and take up embedded renewable energy.  

To some degree more favourably, SA’s green hydrogen commercialisation strategy, published in December, seeks to “position SA as a preferred and reliable provider” of green hydrogen to especially the EU and the UK markets, potentially capturing 7%-30% of global tradable market share. The CBAMs in this instance, say in the case of iron, steel and cement for export, could catalyse earlier domestic application and adoption of green hydrogen in these “hard-to-abate” sectors as firms move to secure key export contracts.

To what degree these risks will be managed, or the opportunities therein leveraged, will depend on how firm level and societal mechanisms to shoulder the transitional costs (from one energy or fuel source to the next) work, and how the shocks affecting different economic actors (workers, firms and other value chain players) are smoothed.  

Absent all of this, Adams and Madwara’s coating operation may have to brace itself for some disruption, even surges in demand in some cases, with the impact on the workers in their factory unpredictable and uneven. It is a risk that will have intended, and may have unintended, outcomes.  

• Cawe is chief commissioner at the International Trade Administration Commission. He writes in his personal capacity.