South African Reserve Bank sounds warning on EU’s carbon import tax

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  • The South African Reserve Bank (RB) has released a summary of several studies into the implications of the European Union’a new Carbon Border Adjustment Mechanism on South African exports. 
  • The EU’s Carbon Border Adjustment Mechanism is designed to protect the bloc’s competitiveness and place a fair price on emissions used on the production of goods that it imports.
  • The EU will start imposing payments from 2026.

South Africa has a high carbon intensity and a very low effective carbon price. This exposes the country to adverse economic shocks from carbon border adjustment mechanisms (CBAM) and changing consumer sentiments. Current impact assessments of the European Union’s CBAM suggest small initial impacts, but these are likely to increase as:

  • more goods and services become subject to the adjustment,
  • more countries implement such mechanisms, and
  • consumer choices shift away from carbon- intensive products.

South Africa needs a higher, more predictable, and effective carbon price to drive the green transition and avoid revenue leakage. The additional government revenues can promote clean investment and reduce some of the negative impacts associated with carbon taxation. Economic and financial frictions to transitioning should be reduced by using a combination of price and non-price instruments.

At the moment, the EU’s CBAM will mainly affect South Africa’s natural resource sectors including mining. The RB report finds that if it stays that way, exports to the EU will only fall 4% in 2030, lowering gross domestic product by just 0.02%. But the RB also looked at what would happen if the EU’s mechanism is extended to all South African exports and if it was adopted by other countries, noting the US, Canada and Japan were also considering such proposals. In this scenario, the RB determines that total exports fall by 10.1% in 2050 and GDP declines by 9.3% relative to the baseline. The impact on employment is severe with 350 000 jobs lost by 2050 if more countries adopt a CBAM. This number rises to 2.6 million if all exports are subject to a CBAM.

Even if South Africa negotiates exemptions, risks could still emerge from changing consumer sentiments or if other trade rivals adapt faster to border levies on carbon, the RB said.

The RB says that the focus of policy should be on how to position South Africa as a green production destination relative to other countries and consequently, reduce the exposure to CBAM’s and changing consumer sentiments.

Link to the full RB report HERE: carbon-taxation-in-south-africa-and-the-risks-of-carbon-border-adjustment-mechanisms- april-2024-01

Author: Bryan Groenendaal


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