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Defusing CBAM

21st June 2024

By: Terence Creamer

Creamer Media Editor

     

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South Africa is strenuously opposing the European Union’s (EU’s) Carbon Border Adjustment Mechanism (CBAM) that, under its evolving design and coverage, could have a significant impact on the country’s trade with the bloc, which currently represents 19% of exports.

This impact will be amplified should other countries impose similar measures to address so-called ‘carbon leakage’, with the US, the UK, Japan and Canada all currently considering such.

A South African Reserve Bank paper says that under its current design and coverage, the CBAM, which will start having financial implications for EU importers from 2026, will be relatively small initially, reducing overall trade with the EU by 4% in 2030 and reducing GDP by 0.02% compared with the current baseline. This assuming a carbon price of $75/t.

What this relatively benign outlook for the scheme’s prevailing architecture masks, however, is the disproportionate impact the CBAM will have on specific domestic exporters, notably in the cement and iron and steel and aluminium sectors, with the former two sectors to experience declines of more than 30% in 2030, while aluminium trade would contract by 16%.

In a recent presentation made during an EE Business Intelligence webinar, Hulamin environmental sustainability head Hendrik de Villiers showed the threat posed to the export competitiveness of the group, which exports 22% of its yearly production to Europe.

Applying what he acknowledged to be ‘worst-case’ assumptions, De Villiers calculated that the CBAM levies on South African aluminium exports could be €1 440/t by 2034. The main reason is the carbon-heavy nature of South Africa’s electricity production, which raises Hulamin’s Scope 2 emissions to extreme levels, as it buys its metal from the Hillside aluminium smelter, which buys from Eskom.

Given the size of the potential impact, it is sensible for the South African government to oppose the CBAM’s implementation both diplomatically and legally. There are strong arguments regarding the fairness of a unilaterally imposed scheme that effectively shifts the decarbonisation burden to developing countries, which are simply unable to mitigate such emissions at the pace demanded.

However, those efforts are far from guaranteed and government and business, therefore, also need to be taking far more assertive steps to future-proof domestic manufacturing.

The quickest and least-regret solution lies in accelerating the transition away from coal, which would lower Scope 2 emissions for all enterprises, including the export-facing companies most exposed to measures such as the CBAM.

Already the slow pace at which South Africa has been building new renewables has added to the cost of domestic manufacturers as firms have been forced to integrate back-up power or curtail production to navigate loadshedding that could have been avoided through consistent new additions. Now the slow pace of the transition is threatening their export competitiveness.

In such a context, diplomatic interventions alone are akin to clearing an area under a bomb threat. To defuse the bomb, they must be coupled with visible transition progress at scale to create the conditions for lasting industrial competitiveness.

Edited by Terence Creamer
Creamer Media Editor

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