As of 2026, the European Union’s Carbon Border Adjustment Mechanism (“CBAM”) will take effect, in an ostensible effort to reach the EU carbon emissions goal set for 2050. While the CBAM will certainly aid in the decarbonisation of industries and inhibition of carbon leakage in relation to the EU, it may have deleterious effects on the South African raw mineral exports market. With the CBAM hampering the export of a not-so-insignificant 26% of South Africa’s total exports into the EU, the somewhat protectionist stance taken by the EU in this regard, certainly stands to be scrutinized by all those involved. In addition, the EU’s decision not to take into account special and differential treatment, a discretion outlined in Article 1 of the WTO principles remains unclear.
Every year, South Africa exports approximately ZAR 27 billion in steel, iron and aluminium to the EU. Subseqeunt to the implementation of the CBAM, however, the volume of exports that will be accepted into the EU, is likely to be much less. What the CBAM aims to achieve, more specifically, is to decrease how often and easily companies may shift their production from countries with strict to countries with lax policies. By inhibiting the ease with which companies may make such shifts, the CBAM should decrease greenhouse gas emissions. The consequence this may have on South African trade, is that South African exporters will be forced to cough up tariffs which equate with the carbon prices that are paid by the European manufacturers. Additionally, these tariffs are likely to have snowball effect of increasing costs for exporters and decreasing the competitiveness of their offering.
A recent policy brief by trade and industrial policy strategy economists Valentia Lerato Monaisa and Seutame Maimele (“Economists”) proferrs that industries that rely heavily on exports to the EU, such as raw minerals, fertilizer, electricity and hydrogen, will likely face a number of hurdles relatively soon. These concerns are aggravated by the expansion of the scope of the CBAM, which initially included only direct emissions from 29 product categories in fertilizer, cement, iron, steel, aluminiu, as well as electricity, to include indirect hydrogen emissions with particular inputs necessary to produce the products listed in CBAM, as well as certain downstream goods.
According to the Economists, the various goods included in the CBAM accounted for approximately 4% of the total exports from South Africa in 2021, leaving a relatively high margin for harm on the relevant industries. The export of iron and steel will likely face the most backlash and said industries are likely to suffer concomitant harm, due to the carbon sensitivity involved in the production of these goods. In a recent address by John Ward of the Presidential Climate Commission, it was argued that although the CBAM would decrease the amount of exports from Africa to the EU by 30-35%, the CBAM’s inclusion of green hydrogen may aid South Africa in its endeavours flowing from the Just Energy Transition Investment Plan.
In short, John Ward noted two possible responses from South Africa on the CBAM, namely, taking a hard line against the CBAM and attempting to undermine it in its entirety by lodging a challenge against it with the WTO, or opting to negotiate with the relevant EU policymakers to reach consensus as to the relevant features of the CBAM as it pertains to the concerns of South African exporters.
From a practical perspective, the Economists suggested a carbon reporting system to be seated in the Department of Forestry, Fisheries and the Environment, which may enable South African companies to avoid certain costly burdens placed on them by the CBAM, such as third-party verifiable carbon audits.
The full brief is available here.