Big threat that can damage South Africa’s economy

As more countries implement a carbon tax on imports, South Africa’s economy is at risk of losing billions worth of foreign exchange earnings and hundreds of thousands of jobs. 

South Africa’s economy is one of the most carbon-intensive in the world, with its export industries particularly intense. 

In a world with increased carbon taxes on goods and services, these exports will become uncompetitive and lose market share to cleaner alternatives. 

This is feedback from the Organisation for Economic Co-operation and Development (OECD) in its latest economic survey of South Africa. 

The report identified South Africa’s carbon-intensive economy as a significant threat to prosperity in the years to come. 

South Africa’s carbon-intensive economy is primarily driven by coal-generated electricity from Eskom, which supplies over 80% of the country’s electricity. 

Despite this, the greenhouse gas (GHG) intensity of GDP has declined since 1990, primarily due to the rise of the services sector in the economy and a decline in mining output. 

However, the OECD expects this intensity to increase in the coming years as the country’s population continues to grow and its economy is expected to rebound. 

South Africa’s population increased by 64% from 1990 to 2022 and is projected to rise a further 10% by the end of the decade. 

While low economic growth has limited the growth of emissions in South Africa, if activity picks up, then the emissions of the country could rise quickly if the structure of the local economy does not change, the OECD warned. 

Despite the growth of the services sector, South Africa’s economy remains highly dependent on energy-intensive sectors such as mining and manufacturing for its employment. 

The country’s largest employer, the agricultural sector, represents around 11% of emissions. This sector is likely to be the hardest hit by carbon taxes on imports due to its reliance on energy-intensive modes of transport. 

The graph below shows the GHG intensity of South Africa’s economy in comparison to other OECD countries. 

Impact of carbon taxes

The imposition of carbon taxes on imports by South Africa’s largest trading partners, particularly the European Union (EU), poses a significant threat to the country’s exports. 

South Africa’s second-largest trading partner is in the process of enacting its Carbon Border Adjustment Mechanism (CBAM) to encourage companies to adopt low-carbon production methods. 

The CBAM is based on the Polluter Pays Principle and has been highly controversial, with South Africa threatening to take the EU to the World Trade Organisation (WTO). 

South Africa argues that it shifts the burden of climate action to poorer countries that have not contributed as much to global warming as developed nations.

South Africa is among the top 20 countries most exposed to the EU’s CBAM and may be significantly impacted by the policy. 

The policy’s net impact will depend on how effectively South African companies can reduce their carbon intensity and whether they can shift exports to regions with less stringent climate-related restrictions. 

Under the current version of CBAM, South African exports to the EU are expected to decline by around 4% by 2030, resulting in a 0.02% reduction in GDP.

This is a relatively conservative estimate provided by the Reserve Bank, given that the system is still in its transition phase. In the coming years, the EU’s CBAM scope will increase, and other countries are likely to follow suit. 

From 1 January 2026, the transition period ends, and all exemptions to the EU’s carbon tax are phased out. The first industries to be added are iron and steel manufacturing, cement, fertiliser, and chemicals – key inputs in any economy.

Research by Net Zero Tracker indicates that approximately 422,000 jobs are supported by exports to countries with active or incoming Carbon Border Adjustment Mechanism (CBAM) policies. 

Apart from the EU, this list of countries includes the United Kingdom, Australia, and Japan – all key trading partners for South Africa. 

If CBAMs expand beyond raw materials, as the researchers expect, other South African industries will be at risk.

Its automotive sector has the second-highest emissions in the world, and its agricultural producers create three times the emissions of some peer countries, the researchers found. 

In total, 78% of South Africa’s exports go to countries that have net-zero targets, according to the study. Those exports support 1.2 million jobs in total.