EU carbon taxes put SA and Global South at a disadvantage

Experts warn that the EU’s carbon tariffs will burden the Global South unfairly as the cost of decarbonisation could lead to economic devastation.

This comes as SA scrambles to comply with the EU’s carbon border adjustment mechanism (CBAM).

CBAM, designed to curb carbon leakage and encourage global decarbonisation, will impose carbon tariffs on imports from countries with less stringent climate policies.

SA’s industries, many of which are heavily dependent on coal-based energy, face obstacles in meeting CBAM requirements as the transition period, which began in May last year, afforded them little time for adaptation.

Think-tank Trade & Industrial Policy Strategies (TIPS) sustainable growth economist Seutame Maimele has highlighted the urgency and complexity of the situation, emphasising that industry and the government are not adequately prepared.

“SA industries and the SA government are not ready to comply with the EU CBAM during the transition period. Time is short for both the government and industries to adjust to the change,” Maimele said.

“SA firms, along with those in other emerging economies, will face substantial compliance costs, reduced market access and the need for significant investment in green technologies.”

The CBAM started a transitional phase from October 2023 to January 2026. During this phase, companies are obliged to report emissions. From January 2026, companies will need to purchase certificates to cover emissions, ushering the start of the permanent CBAM system.

Free allowances under the EU emissions trading system will be phased out by 2034. Until then, CBAM will only apply to emissions not covered by these free allowances, adhering to World Trade Organisation rules.

The lack of awareness about CBAM and the pace of its implementation have worsened the issue, according to Maimele, who has called for more time and collaboration among the government, industry, and labour unions to mitigate the socioeconomic effect of the changes.

“While climate action is warranted, pushing the climate responsibility on to the Global South is a huge concern. Implementation and understanding the reporting requirements of CBAM needs more time. CBAM is a complex paradigm shift. The Global South should be accorded space and time to transition and rules should not be unilaterally imposed by the Global North,” said Maimele.

Without sufficient preparation, SA exporters could face severe consequences, including firm closures, job losses and a drop in foreign and domestic investment. High administrative costs of monitoring and reporting greenhouse gas (GHG) emissions, particularly for smaller companies, were another challenge.

“Vulnerabilities include SA industries being late in complying with CBAM or incorrectly reporting or not reporting GHG emissions during the transition period. Business profitability will be reduced, mainly due to penalties to be passed down by EU importers to firms exporting to the EU to pay during the transition period due to noncompliance,” said Maimele.

“More time is what SA needs to transition at a pace that is not harmful to the SA socioeconomic set-up.”

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) said it recognises both the risks and potential opportunities presented by CBAM.

The organisation has argued that the financial burden of decarbonisation could undermine the sector’s competitiveness and called for leveraging green funding from developed countries to ease the transition costs.

Seifsa emphasised that SA’s reliance on a coal-intensive energy presents a barrier to reducing emissions. Even with energy efficiency improvements, the overall carbon intensity remains high.

Decarbonisation involves trade-offs. Seifsa said at the company level, the transition costs are substantial, while at the national level, the carbon intensity of the energy grid complicates emission reduction efforts.

Seifsa chief operations officer Tafadzwa Chibanguza said: “At a micro level, while the importance of reducing emissions is fully acknowledged, the costs associated with the transition in light of the extent of the necessary technological enhancements are steep and potentially prohibitive. That these costs will be borne by companies presents competitiveness risks for these companies.” 

The industry body said SA needed a robust policy framework, increased investment in research & development, and collaborative efforts between the government and industry to drive decarbonisation.

goban@businesslive.co.za