Written by Suzaan Hobson
Would your company like to maintain competitiveness in anticipation for upcoming policy changes? Or do you export aluminium, steel, fertilizers, electrical energy, or cement to the EU?
The Carbon Border Adjustment Mechanism (CBAM), which comes into force on 1 October 2023, will have great implications for South African trade in the era of climate change. According to the policy brief, “the CBAM will impose significant compliance costs. Exporting firms will have to account for, report and verify the embedded emissions in their products” (1). The CBAM is the first in a likely wave of new environmental-fiscal measures.
So, what is the CBAM and how can you prepare? Let’s dive into how you can stay ahead of the game.
The CBAM explained
The CBAM is a border tax for carbon-intensive products imported into the EU. South African exporters will be expected to pay tariffs on carbon prices equivalent to EU manufacturers. October 2023 to 2026 is a transitional phase, during which importers will have reporting obligations but will not need to purchase CBAM certificates. 2027 marks the end of the transitional phase, and importers will have to pay a carbon tax (1).
While the existing EU Emissions Trading System (ETS) covers EU countries, the CBAM will apply to goods produced outside the EU (1). This ensures EU imports pay the full carbon cost faced by manufacturers in Europe and it invites the creation of domestic carbon markets in non-EU countries. The CBAM aims to address carbon leakage which occurs when there is an increase in greenhouse gas emissions in one country as a result of an emissions reduction by a second country with a strict climate policy (2). The policy also hopes to incentivize the adoption of low-carbon technologies by producers outside the EU.
Impact of CBAM on South Africa
The CBAM has the potential to reduce the value of South Africa’s future exports and the country’s competitiveness, with the iron, steel, and aluminium sectors at the highest risk (2). This is mainly due to South Africa’s heavy reliance on coal-based power generation, making it one of the largest carbon-intensive exporters to the EU. South Africa’s best response is to fast track the decarbonization of our economy.
Some have coined the CBAM as a competitive policy instead of an environmental policy (3). There is concern that the CBAM protects the European industry, whilst only widening the gap between developed and developing countries- making it more difficult for developing economies to finance a low carbon economy. Certain countries are questioning whether the CBAM tariffs violate WTO rules (2).
On the other hand, the CBAM can provide an opportunity for South Africa to shift towards a more sustainable and low-carbon economy by encouraging investments in renewable energy and cleaner technologies. CBAM can be seen as a climate tool to push countries to adopt more climate stringent measures, thereby improving competitiveness in the EU and global market in the long run.
How can a company prepare?
As the EU plans to further expand the sectors covered by the CBAM, a range of industries will be at risk. Other markets (Canada, United Kingdom, Japan) (1) are planning to implement their own border carbon taxes. Aside from CBAM, additional policies are also coming into play that have been included in the Green Deal (Farm to Fork strategy, Circular Economy Action Plan) (4).
Therefore, it is essential that a business prepares accordingly for the market risks related to a shifting regulatory environment and changing consumer preferences, irrespective of a company’s stance on CBAM. Here are some steps a company can take:
1. Conduct a carbon footprint analysis:
Collecting reliable company-wide emissions data can help companies evaluate their carbon footprint and identify areas for emission reduction. By conducting this analysis, companies can assess how CBAM can affect their profit and loss and take necessary steps to mitigate its impact. It's also advisable to encourage suppliers to start tracking their carbon footprint.
2. Life Cycle Analysis:
LCA is a science-based method for assessing the environmental impacts associated with a given product, over its entire life cycle. An LCA on products being exported is relevant as it is expected that soon the carbon footprint will need to be specific on the product being exported to the EU. Have a look at DigitMint (https://www.digitmint.eu/) for a scalable software solution for life-cycle assessments of your products to report to customers.
3. Engage with EU buyers and regulators:
Engaging with EU buyers and regulators can help companies understand their requirements and expectations regarding CBAM. This will allow companies to adjust their operations and products to meet these requirements.
4. Adopt sustainable practices:
Companies should adopt sustainable practices such as using energy-efficient technologies and renewable energy sources to decrease emissions. South Africa’s high carbon intensity in the electricity supply points to the need for much more sun and wind energy input.
The proactive advantage
Preparing for CBAM now will help businesses stay ahead of the curve as similar measures are likely to be implemented more broadly. Reach out to BrightWolves if you have questions on the approaches recommended or are seeking to better understand the implications of CBAM. We would love to help you develop an appropriate response strategy to align your business model with a low-carbon future. 2023 is the perfect opportunity to get geared up for CBAM; don’t wait till 2027.
(1) Maimele,S., Monaisa,L (2023). The European Union’s Carbon Border Adjustment Mechanism and implications for South African exports. Trade and Industrial Policy Strategies (TIPS) Policy Brief. Available at https://www.tips.org.za/policy-briefs/item/4500-the-european-union-s-carbon-border-adjustment-mechanism-and-implications-for-south-african-exports (Accessed 13 March 2023)
(2) Ward, J (2023). Carbon Border Adjustment Mechanisms and Implications for South Africa. Presidential Climate Commission’s (PCC’s) Climate Finance and Innovation Working Paper. Available at https://pccommissionflow.imgix.net/uploads/images/PCC-CBAM-PAPER.pdf (Accessed 14 March 2023).
(3) Ward, J., Ismael, F., Molotsoane, R., Montmasson-Clair., Luke, D (2023). Webinar and Launch: Carbon Border Adjustment Mechanisms and their Implications for South Africa [Webinar]. Presidential Climate Commission. Available at https://www.climatecommission.org.za/events/cbam-paper-launch (Accessed 13 March).
(4) Wood, C (2021). Sustainable complexity: Managing export regulations in the European Green Deal. Trade and Industrial Policy Strategies (TIPS) Policy Brief. Available at https://www.tips.org.za/policy-briefs/item/4292-sustainable-complexity-managing-export-regulations-in-the-european-green-deal (Accessed 13 March 2023).