Dark clouds gather for 350,000 jobs in South Africa

The implementation of carbon taxes on imports by the European Union (EU) has put 350,000 jobs on the line in South Africa and could impact as much as 10% of the local economy. 

South Africa’s second-largest trading partner enacted its Carbon Border Adjustment Mechanism (CBAM) in April 2023 to encourage companies to adopt low-carbon production methods and is part of the EU’s aim to reduce emissions by 55% by 2030. 

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 for climate action to poorer countries that have not contributed as much as developed nations to global warming. 

Reserve Bank researchers Boingotlo Gasealahwe, Konstantin Makrelov and Shanthessa Ragavaloo released a research paper detailing the potential impact of the CBAM on South Africa. 

They explained that 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 possibly shift exports to regions with less stringent climate-related restrictions. 

Under the current version of CBAM, South African exports to the EU would decline by around 4% by 2030 and reduce GDP by 0.02%. 

However, the researchers said this is a highly conservative estimate, and the impact is likely to be much more significant as CBAM’s scope increases and other countries potentially follow suit. 

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.

Other research from the Reserve Bank shows that if carbon taxes are widely imposed on South Africa’s exports, with other trading partners following the EU’s example, 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. 

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.”

Mark Boshoff, head of climate resilience and sustainability strategy at Nedbank Commercial Banking, explained that Eskom is the main problem. 

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 because the supply chain demands less carbon-intense inputs to satisfy the demands of end users.

To comply with the new tax, some European customers are giving South African companies targets to reduce the carbon content in products they ship to the EU, Business Leadership South Africa CEO Busisiwe Mavuso told Bloomberg. 

These are proving to be difficult to meet given that the nation derives the bulk of its electricity from coal, she said. 

The impacts may be offset if South Africa reduces the carbon intensity of production more rapidly and increases its own local carbon taxes.

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