Big threat to South Africa

The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) poses a significant threat to South Africa’s economy. If other nations follow suit, the country could lose 350,000 jobs and 10% of its GDP. 

South Africa’s second-largest trading partner enacted the CBAM in April 2023 to protect the EU’s global competitiveness and encourage companies to adopt low-carbon production methods. 

The policy has been highly controversial, with South Africa even threatening to take the bloc to the World Trade Organisation (WTO). 

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

The policy is part of the wider European Green Deal to reduce emissions by 55% before 2030 and utilises the Polluter Pays Principle. 

Mark Boshoff, head of climate resilience and sustainability strategy at Nedbank Commercial Banking, said the EU is effectively using the carrot-or-stick approach. 

It is offering conditional access to its massive trading bloc while threatening to make South Africa’s exports uncompetitive with increased tariffs if they remain carbon-intensive. 

The CBAM is currently in its transition period, during which the system is gradually implemented, and imports are rated according to their carbon intensity. 

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.

Boshoff said it is extremely difficult for South African exporters to avoid their products being heavily taxed upon entering the EU under this new system.

The main issue is Eskom, which generates over 80% of its electricity from burning coal which effectively renders all major industries in South Africa carbon-intensive. 

While companies can try to avoid this by investing in rooftop solar or other sources of electricity, when heating, cooling, and transport are considered, they will still be carbon-intensive. 

Thus, over the medium to long term, South African products will carry higher carbon costs to import into the EU relative to those from countries with lower carbon intensity, Boshoff said. 

As a result, once CBAM is fully implemented, South African exports to the EU may become less competitive than other countries competing for the same market. 

High-carbon-intensity countries may become stuck behind a “Carbon Wall” and struggle to find markets willing to import or purchase their products. 

This may often be due to the supply chain demanding less carbon-intense inputs to satisfy the demands of end users.

This poses a significant threat to the South African economy, as it may not only lose access to its second-largest export destination, but other developed nations may also consider implementing similar measures. 

Research from the Reserve Bank shows that if carbon taxes are widely imposed on South Africa’s exports, the country could lose 10% of its GDP by 2050. 

This is under its worst-case scenario, but the bank said the potential risk should be enough to spur action to transition South Africa towards a low-carbon economy more quickly. 

While South Africa contributes only 1% to global greenhouse gas emissions, the carbon intensity of its economy is the highest among the G20.

“The impacts can be offset if South Africa reduces the carbon intensity of production more rapidly and increases its own local carbon taxes,” it said.

“Effective use of this additional tax revenue can accelerate the green transition and position South Africa as a green producer.” 

At the moment, the mechanism will mainly affect South Africa’s mining sector and, if it stays that way, exports to the EU will only fall 4% in 2030, lowering gross domestic product by just 0.02%.

However, the Reserve Bank also looked at what would happen if the EU’s mechanism were extended to all South African exports and if it were adopted by other countries, noting that the US, Canada, and Japan were also considering such proposals.

“Total exports fall by 10.1% in 2050, and GDP declines by 9.3% relative to the baseline,” it said.

“The employment effects, too, are large. 350,000 jobs will be lost by 2050 if more countries adopt a CBAM. This number rises to 2.6 million if all exports are subject to a CBAM.”

Even if South Africa negotiates exemptions, risks could still emerge from changing consumer sentiments or if other trade rivals adapt faster to border levies on carbon.