EU carbon price on imports ‘violates’ WTO rules, says Patel as SA heads for clash with bloc

19 May 2024

The European Union intends to introduce its carbon border adjustment mechanism in 2026 and insists it’s an environmental and not a trade measure. But Trade Minister Ebrahim Patel strongly disagrees.

The EU insists that its plan to put a price on the carbon emissions of some imports from 2026 is intended purely to counter global warming. But South Africa contends that, in reality, the EU’s carbon border adjustment mechanism (CBAM) is a unilateral and protectionist trade measure that will cost the South African economy more than R2-billion a year.

EU trade commissioner Valdis Dombrovskis says the CBAM is designed to help the EU to reach its ambitious target of carbon neutrality by 2050. The mechanism will not distort trade as the EU intends to put the same price on the carbon emissions of imports as it does on those of its own producers, so the CBAM is compliant with World Trade Organization (WTO) rules.

But Minister of Trade, Industry and Competition Ebrahim Patel retorts that the CBAM cannot be considered compliant because the WTO has not signed off on it, and South Africa is consulting other countries about a possible challenge to the mechanism at the WTO.

Dombrovskis and Patel have confirmed that they discussed the CBAM on the sidelines of the 13th WTO Ministerial Conference in Abu Dhabi in February.

Dombrovskis told foreign journalists in Brussels recently that the EU had committed to reducing greenhouse gas emissions by 55% by 2030 and becoming climate neutral by 2050. “And so, as of 2026, we will start putting a price for carbon on our energy-intensive industries, meaning steel, aluminium, fertilisers, electricity, hydrogen and cement,” he said.

This carbon price would be established by the market mechanism in the EU’s own “cap and trade” system. Once the EU started charging its own industries for their emissions of carbon, it would have to do the same for similar imported products to avoid “carbon leakage” – companies moving to other countries with no carbon taxes, which would mean “more global emissions, not less”, Dombrovskis said.

He insisted that the CBAM was WTO-compatible because it did not discriminate against importers. “So, the same price of carbon which we are going to put on our energy-intensive industries we will be putting on importers. And to be clear, that it’s an environmental measure, we will offset any price of carbon which importers are paying in their home countries.”

Read more in Daily Maverick: Climate Change Bill heads for final stretch, but the hard slog of implementation lies ahead

Dombrovskis stressed that the EU was actively engaging affected countries in both the design and implementation of the CBAM. “So, the aim is not just to minimise negative impacts on trade, but to create opportunities for third countries’ green economies to emerge and flourish,” he said.

In this regard, EU officials note that, with its $1-billion contribution to the $8.5-billion Just Energy Transition Partnership, the EU is helping it to move to a greener economy.

The CBAM is currently in transition, undergoing a trial period of monitoring and reporting that began on 1 October last year. Importers in the EU have been reporting to Brussels on the number of imports to the EU of the six listed categories of carbon-intensive products, the amount of greenhouse gas emissions generated in the production of each of these imported goods, and the applicable carbon tax levied on them in their countries of origin.

Phased-in carbon prices on imports

The EU is not yet charging any carbon price on these imports. The reports during the transition are designed merely to provide information that will be used to fine-tune the CBAM.

One of the important lessons will be about how to calibrate the greenhouse gas emissions on different products. This transition period will end on 1 January 2026, when the EU will begin phasing in carbon prices on the production of the imported products.

In parallel, the EU will begin phasing in the same carbon price on EU producers of the same products under its own internal emissions trading system (ETS). Both the ETS and the CBAM will be phased in gradually at the same rate over nine years. In 2026, EU producers and importers of the six products will each pay 2.5% of the carbon price, which will rise to 100% by the end of 2034.

The EU says the impact of the CBAM will be gradual and it will not have a large impact on South Africa in particular because the country does not export much of the affected products to the EU. But the EU also acknowledges that the list of imports subject to the CBAM could increase.

There is speculation that this could include the electricity used to make aluminium and the steel in composite products such as motor vehicles (though not the vehicles themselves).

This is because of a concern that imposing the CBAM on steel separately might give an incentive to vehicle manufacturers, for instance, to move their production outside the EU to avoid the CBAM. But the gain from doing so has been calculated to be so small that it would probably not be worth the effort.

Generally, the EU’s intention does not seem to be to extend the CBAM much – and certainly not to food and textiles. That should be reassuring to South Africa, which sells a lot of fruit and wine to the EU.

Dombrovskis noted that CBAM charges would be applied not to countries but to companies, at specific production facilities, considering the carbon content of their products and their decarbonisation efforts. That would allow individual companies to mitigate their CBAM charges by, for example, using electric furnaces that emit less carbon, rather than old-fashioned blast furnaces, for the production of steel.

South Africa’s carbon tax

South Africa has had its own carbon tax since 2019. However, so far it seems unlikely to enjoy much of an offset from the CBAM as it has a low effective carbon tax rate because of generous tax-free thresholds and allowances, as the International Monetary Fund (IMF) said in a report last year.

The official carbon tax rate was set at R120 per tonne of CO2e (carbon dioxide equivalent) when it was introduced in 2019. It has been increased steadily, the last time from R159 to R190 from 1 January.

However, not much tax is actually being collected, according to the IMF, which said in the report that, “based on the carbon tax revenue collected, the estimated effective rate was less than R7 per tonne of CO2e during the fiscal year 2021/22”. And with the transition phase of the carbon tax extended from the end of 2022 to the end of 2025, it expected the effective carbon tax rate to remain low.

Potential trade impact for South Africa

Patel rejected Dombrovskis’s assurances that the CBAM was a purely environmental measure and not a trade measure. He compared it with the WTO’s health standards on food, such as those that apply, for example, to bird flu.

“It’s not a trade matter. It’s a health and safety matter. But it has a trade impact because it could be a reason to block chicken imports into your country. Because it has a trade impact, we have sanitary and phytosanitary agreements that are reached at the WTO.”

Likewise, carbon emissions were not a trade matter, but they did have a trade impact if one imposed a carbon tax on them, as the CBAM did, and so it should be discussed and agreed at the WTO.

Patel said CBAM would distort – “because it will impose costs on trading partners that are not currently there” – even if it put the same price on imported carbon as it did on locally generated carbon.

He also didn’t buy Dombrovskis’s argument that the EU needed to put the same carbon price on imports as it did on EU producers to discourage carbon leakage. “I guess you could say that about everything,” he said. For example, South Africa might have policies intended to ensure that communities which historically had been excluded were given an opportunity to participate in the economic mainstream, Patel explained. “Can we now say we will block any country that doesn’t have similar rules? It’s not consistent with WTO rules.”

He said the CBAM was unilateral and thus it violated WTO rules, which stipulate that trade rules must be agreed multilaterally. It was also protectionist because it was trying to avoid global competition from countries with different carbon standards.

The CBAM was also inconsistent with the 2015 Paris climate agreement’s principle of “common but differentiated responsibilities”, which requires all countries to contribute to tackling climate change – but in accordance with their different capacities. “The CBAM imposes a one-size-fits-all,” he argued. “It puts the same carbon standard on a product that is made in a developing country with very different capabilities and capacities, including public resources to assist companies to decarbonise.”

Patel added that the CBAM was also potentially open-ended. It was now limited to only the six products listed by the EU, “but they’ve reserved the right to add to it, so there is a significant risk of a growing number of SA exports falling foul of CBAM”.

He said CBAM would have “a chilling effect on South African steel and other exports to the EU” and therefore “impact very, very negatively on the South African economy”.

Read more in Daily Maverick: Global carbon tax urgently needed to manage worsening climate crisis

A study by UN Trade and Development has estimated a real loss in national income to South Africa of $1.4-billion annually if CBAM duty were to be implemented at $88 per tonne. Patel’s ministry said other studies had estimated a loss in export revenue for the South African iron, steel and aluminium industries of nearly $200-million per year from the implementation of CBAM duty at $100 per tonne.

Patel said South Africa was not opposed in principle to trade measures being taken to help lower carbon emissions. But these would inevitably have a trade impact and so they should be agreed at the WTO. Discussion should include all the steps that could be taken to reduce carbon emissions. For example, a country might be able to achieve the same carbon reduction by shifting from petrol-driven cars to electric vehicles as it could achieve by decarbonising its cement, fertiliser or steel industries. DM

This article is partly based on a fact-finding visit to Brussels sponsored by the EU.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

Categories:

Tags:

DM is much better if you are signed in...

Business Maverick

Phased-in carbon prices on imports

South Africa’s carbon tax

Potential trade impact for South Africa