The European Union’s Carbon Border Adjustment Mechanism (CBAM) introduces a new hurdle for South African exporters, with projections suggesting a potential 10% decline in exports to Europe by 2050 if left unchecked.
Designed to curb carbon leakage, CBAM imposes a carbon cost on imported goods that compete with European industries under increasingly strict emissions regulations. For South Africa, the local carbon tax presents a strategic but temporary buffer against CBAM-related expenses until the end of 2027. Adjustments to this tax could allow South African industries to sustain export competitiveness while managing emissions domestically. However, navigating CBAM compliance beyond 2027 will require decisive steps from local authorities to maintain economic resilience in European markets.
In reaction to the findings of the SARB study, the Minister of the Department of Trade, Industry and Competition (dtic), Ebrahim Patel, said South Africa would challenge the CBAM as incompatible with World Trade Organization (WTO) rules. However, this could take years, if not decades and, in the case of CBAM, is simply not likely to succeed.
It may be more practical for the dtic to work with National Treasury on the South African carbon tax and associated offset regulations to mitigate the impact of CBAM and keep tax revenues in the country.
South Africa has a highly carbon intensive economy with significant trade exposure to Europe. For example, the country exported some ZAR30 billion worth of CBAM goods to the Union in 2019. South Africa’s GHG intensity, expressed per unit of economic output, is the second highest in the group of the 16 largest GHG emitters in the world.What is CBAM?
Recently enacted, the EU CBAM aims to protect European industry from carbon leakage. Carbon leakage occurs when a (significant) carbon cost in one country causes industry to relocate to another country with laxer greenhouse gas (GHG) emission constraints, or when less carbon intensive domestic production is substituted by more carbon intensive imports, which could result in an increase of overall emissions, especially in GHG-intensive industries.
The CBAM was introduced in response to the planned phase out of free allowances under the EU Emissions Trading System (EU ETS) – a cap-and-trade system that is the main policy tool for decarbonizing European industry. By 2026, the phasing out of free allocation of European Union Allowances (EUAs) will start, resulting in full auction of EUA for certain sectors by 2034. As a result, the costs of GHG emissions for European industry will go up drastically.
To counter carbon leakage, CBAM imposes an equivalent carbon cost on the import of selected goods in the following sectors: cement, electricity, fertilizer, iron and steel, aluminum and hydrogen.
CBAM will be implemented in two phases to allow companies enough time to get up to speed and to collection information:
⦁ Transitional phase (October 2023 – December 2025), when only reporting of direct and indirect embedded emissions is required. It’s a dry run and no CBAM certificates need to be bought and surrendered. CBAM certificates correspond to the average EUA auction price in the week before importation. This allows importers to get familiar with data submission requirements and the EU to collect sufficient data to fine-tune the system going forward.
⦁ Definitive phase (January 2026 – onwards), when importers will have to surrender CBAM certificates on the embedded emissions in their goods and selected precursors.
To ensure that the measure is WTO compliant, importers are allowed to deduct any effective carbon costs paid by installations in the country of origin from the overall CBAM tax bill.
The South African Carbon Tax
South Africa introduced a carbon tax in 2019. In terms of the CBAM regulations, the carbon tax should in principle count as a ‘carbon price’ per tonne of CO2, which can be deducted from the CBAM liability. As it concerns the effective carbon price, it excludes any allowances or rebates claimed during the tax year. The below diagram shows the South African carbon tax in terms of current allowances and legislated development of the headline tax rate overtime.
The allowance schedule contains an offset component whereby companies can purchase eligible carbon credits to offset between 5 – 10% of their taxable emissions, depending on the sector they are active in.
Start of effective CBAM payments
Although the definitive phase of the CBAM will start at the beginning of 2026, and importers will have to start purchasing CBAM certificates for embedded emissions, South African companies will effectively not start paying for the first two years.
This is because the carbon tax paid by South African companies every year is deductible from the CBAM to keep a level playing field. Taking into account the EAU price, the free allocation phase-out rate, and the current effective South African carbon tax (i.e. headline rate minus allowances), the diagrams below show that the carbon tax deduction is larger than the CBAM levy payable in 2026 and 2027. As the domestic carbon price outweighs the CBAM levy payable during these years, effectively no duty is due.
After 2027, the EU carbon price will start outweighing the SA domestic carbon price under current regulations, as the figure below illustrates. This is because the phase out of free allocation is gaining momentum and hence the EU effective carbon price will rise rapidly.
To counter this, the South African National Treasury could, for example, half the basic tax-free allowance, thereby increasing the effective tax rate and “buying” an additional year in 2028 during which no revenues would flow to Brussels. After this, the EU effective tax rate rises so significantly that more drastic measures would be needed to fully compensate for the CBAM.
Additionally, government could argue in Brussels that the offset allowance could count towards the domestic carbon price. So far little has been said on this, but it would be reasonable as it is a cost paid by companies for their carbon emissions.
In summary, instead (or in parallel) of engaging the WTO, a way to shield South African business from the sharpest edges of the CBAM for the time being lies in tweaking the South African carbon tax. This would not only benefit local exporters to the EU, but will also drive GHG mitigation within the carbon tax net and, via offset generation, outside of it.
