One last chance to decarbonise or forgo the EU market

The die is cast. And SA has got a break, for now. But we should not let it go to waste. In July, the EU released its new climate policy package, which includes a mechanism aimed at taxing goods imported into the EU based on their climate credentials.

This has huge implications for SA, as the EU is a buyer of SA products, to the tune of R300bn an annum or 20% of the total export value.

For now the country has been given a reprieve, as a series of transitional arrangements give us the time to adapt, but the warning is there. SA should transition to a low-carbon economy before it is too late.

Dubbed “Fit for 55”, the EU policy package aims to trigger a reduction of greenhouse gases from the 27-member bloc by 55% by 2030 compared with 1990 levels, as a step towards a net-zero pathway by 2050. While many will (rightly) say the package is not compatible with climate goals (limiting global warming to 1.5˚C compared to the preindustrial era), it is officially the most ambitious policy.

Importantly, it sends a clear signal to the rest of the world: match the EU’s climate ambition or see access to the EU market being severely curtailed in future. A system known as a carbon border adjustment mechanism will progressively force exporters to the EU to pay the same carbon price as local producers, unless they are equally taxed in their home countries or have decarbonised.

CARBON ‘LEAKAGE’

The scheme strives to protect the investment of European industries into low-carbon technologies and reduce the risk of “carbon leakage’” — moving economic activities to countries with less stringent climate policies.

In its first phase, the mechanism will target European imports of electricity, aluminium, cement, steel and fertilisers. It will be rolled out from January 2023, less than 18 months from now.

No reprieve or specific support is planned for lowand middle-income countries, a point that will raise concerns in many corners of the world. Support for a just transition to a low-carbon economy here stops at the EU borders.

A few adjustments do, however, give some time to prepare. First, the scheme will in effect only start from 2026 due to the inclusion of a threeyear penalty-free period. Second, the carbon price will be ramped up progressively (in 10-percentage-point increments) over a period of 10 years from 2026. Third, the carbon border adjustment mechanism only covers a limited number of products, as listed earlier. Lastly, only direct emissions linked to the production process of such products are covered. Indirect emissions, primarily linked to electricity consumption, are excluded for now.

The exclusion of indirect emissions is a huge relief for countries like SA, which are yet to decarbonise their power supply. SA’s coalbased power supply positions it as a global outlier in terms of carbon intensity. SA manufacturing exports have a carbon content of about 2,250 tonnes of carbon dioxide equivalent per million dollars, while most countries sit between 300 and 1,100 tonnes of carbon dioxide equivalent per million dollars.

Despite these transitional clauses, a number of sectors will have to cope with the new system. In SA, the aluminium and steel value chains, which export to the EU, will be affected from the first phase. In 2020, 38% of SA exports (by value) of affected aluminium products (scrap and a few other products are exempted for now) went to the EU, totalling R9bn.

NO REPRIEVE OR SPECIFIC SUPPORT IS PLANNED FOR LOW- AND MIDDLEINCOME COUNTRIES, A POINT THAT WILL RAISE CONCERNS

In the same year, 16% of targeted iron and steel exports (ferroalloys and scrap are excluded for now) were directed to the EU, reaching close to R5bn. Looking at the continent, Mozambique (aluminium and steel), Ghana (aluminium), Cameroon (aluminium), Zimbabwe (steel), Zambia (steel), Nigeria (steel), Algeria (fertilisers), Libya (fertilisers), Egypt (fertilisers), Tunisia (fertilisers) and Morocco (electricity) are set to be affected as well.

The EU also makes it clear that it is looking at expanding the list of products covered by the scheme. The inclusion of indirect emissions (linked primarily to electricity supply) is also on the cards in future.

In addition, a number of other countries, such as Canada, the UK and US, have been looking at setting up their own carbon border adjustment mechanism. Many may also want to relook at it as a response to the EU plans.

The new dispensations provide one last, unique window of opportunity to adapt and reap the benefits — through an ambitious climate policy and decarbonisation plans — or face the consequences. We should do well to hear the sound of the alarm.