DECARBONISATION AND CBAM

Decarbonisation and the introduction of the Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) can be defined as a carbon border tax on embedded greenhouse gas (GHG) emissions of carbon-intensive products imported into the EU. CBAM is a key policy tool that forms part of the European Green Deal (EGD) to decrease net greenhouse gas (GHG) emissions across Europe and abroad.

The EU has increased its climate ambitions, and if less stringent climate policies prevail in many non-EU countries, there is a risk of ‘carbon leakage’. A carbon leak occurs when companies in the EU move carbon-intensive production to countries with less stringent climate policies than the EU or when EU products are replaced by carbon-intensive imports.

The gradual introduction of the CBAM is associated with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of the EU industry. The CBAM will be used to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to promote cleaner industrial production in non-EU countries. The CBAM regulation officially entered into force the day following its publication in the Official Journal of the EU on 16 May 2023. There are two phases to the CBAM approach; the first phase will involve a transition period from 1 October 2023 – 31 December 2025, which will cover requirements for reporting and calculating emissions. From 1 January 2026 the second phase of full implementation will occur.

Through the CBAM, the carbon price of imports will be equal to the carbon price of domestic production, ensuring the EU’s climate objectives are not undermined. The CBAM is designed to be compatible with WTO-rules.

The EU CBAM is aimed at ensuring equal taxing of the carbon contained within products in its borders. Thus, in a South African context, in addition to the carbon intensity of the electricity used, South African suppliers will have to declare to European importers, how much carbon is contained in its products. Although South Africa has a carbon tax, it is at a lower price point than in the EU, thus the amount will be offset, and importers will pay less on the CBAM tariff. As South African steel and iron products are exported to the EU at a higher value, the steel and iron sector would be most affected by the CBAM. Other sectors covered by the CBAM include cement, fertilisers, aluminium and electricity.

Essentially, the CBAM balances the price of carbon paid abroad for foreign products and in the EU by levying a tariff on emissions embedded in goods produced outside the European Emissions Trading Systems. Global solutions are needed to address climate change, however the consequence of the introduction of the CBAM will increase the costs of South African exports in European markets, reducing their competitiveness and hence the likely value of future exports.