Carbon tariff will hit SA jobs, studies show
The EU’s carbon border adjustment mechanism (CBAM) could slash SA’s exports by a hefty 10% by 2050 — wiping out about 2.6million jobs in the process, warns the Reserve Bank.
CBAM — the EU’s tool to put a fair price on the carbon emitted during the production of carbonintensive goods that are entering the EU — is due to be phased in from 2026 to 2034 and will initially cover imports of iron and steel, cement, aluminium, fertiliser, hydrogen and electricity.
The Bank, in economic notes used for internal discussion and to stimulate debate, said that if CBAM expanded to other products it would have a devastating effect on SA jobs and unravel the fabric of the nation’s economy.
The EU is SA’s largest trading partner. The Reserve Bank — whose economic research notes also rely on studies conducted by other entities or experts — warned that the expansion of CBAM-like mechanisms to other jurisdictions will have a further impact on SA jobs.
“All export sectors experience declines as coverage of the CBAM extends to all sectors of the economy and all direct and indirect emissions from upstream value chains. Total exports fall by 10.1% in 2050 and GDP declines by 9.3% relative to the baseline,” said the Bank.
“The employment effects are large: 350,000 jobs are lost by 2050 if more countries adopt a CBAM. This number rises to 2.6million if all exports are subject to a CBAM.
“Poverty and inequality also rise, with negative consequences for household welfare. Under different assumptions the results are different. However, the costs will be large and negative in the absence of any mitigating action.”
The studies have the potential to pile pressure on policymakers to act fast to mitigate the impact of the looming reality and fuel the country’s green transition, turning a potential crisis into a springboard for growth.
The idea of a CBAM was proposed in December 2019 during an EU discussion on the European Green Deal.
The European Commission has left the door open that in the future “further products in these sectors as well as other sectors at risk of carbon leakage could be covered by the CBAM measure”.
It seems likely that the EU will not be the only region to impose a CBAM or similar regime, because the US, Japan, Canada and UK are also considering their own alternatives to the CBAM.
A study led by Tom Baker which assessed the likely impact of CBAM on African countries found that SA, followed by Egypt and Morocco, would be the most adversely affected on the continent, with iron and steel, followed by the aluminium and fertiliser sectors most affected.
In SA, according to the Trade & Industrial Policy Strategies (TIPS), a total of $2.8bn of exports (based on 2022 data) are at risk in the short term, with this number set to increase as the CBAM covers more and more products.
TIPS also said the iron and steel (including iron ore) and aluminium industries are in particular jeopardy in the short term.
The Bank’s notes said the combination of SA’s high carbon intensity and low effective carbon tax makes the country more vulnerable to CBAM.
“This combination exposes the country to import carbon adjustment mechanisms that can significantly reduce demand for SA exports. Even if SA manages to negotiate exemptions from the EU, changing consumer sentiments pose an additional risk to the country’s exports,” the Bank said.
“Other countries transitioning faster in response to the CBAM or having higher carbon prices may also put SA at a disadvantage in the medium term as they position themselves as green production destinations.
“Mitigating this risk requires a higher and more predictable carbon tax that will also generate significant financial resources to help the economy transition and possibly offset any negative impacts from having a higher carbon price.”
A joint study by the African Climate Foundation and the Firoz Lalji Institute for Africa at the London School of Economics and Political Science, released in April, said the impact of CBAM on African countries would be larger as a share of their GDP than on all other regions.
“This is because the EU is a particularly important export market for African countries, accounting for 26% of Africa’s exports of fertiliser, 16% of iron and steel, 12% of aluminium and 12% of cement, and because Africa’s exports of several important commodities to the EU are relatively more carbon intensive than Africa’s competitors,” the study found.
“The CBAM could cause a fall in exports from Africa to the EU of aluminium by up to 13.9%, iron and steel by 8.2%, fertiliser by 3.9% and cement by 3.1%.
“A reasonable share of those commodity exports would, however, shift to other destination markets, and especially China and India. The CBAM could also result in an increase in Africa’s agricultural exports to the EU as African countries adjust to changes in their relative comparative advantage.”
US, JAPAN, CANADA AND UK ARE CONSIDERING ALTERNATIVES TO THE EU’S CARBON BORDER ADJUSTMENT MECHANISM