The case for decarbonising exports

Developed countries increasingly penalise carbon-intensive trading partners in developing economies. By Anna Mouton

“The carbon budget of the world — the total amount of carbon we can emit if we want to limit global warming to 1.5 °C — is almost depleted,” said André de Ruyter, former CEO of Eskom. “We need significant reductions in global emissions, and rich countries are starting to tackle this through various regulatory interventions.”

He elaborated that the European Union implemented an emissions trading system in 2005, and the United States has cap-and-trade schemes in various states. The problem is that carbon prices in developed countries tend to be far higher than in developing countries.

“This causes capital to flow to jurisdictions where investors face the least resistance,” said De Ruyter. “The European Union and the United States are concerned that manufacturers and other carbon emitters will relocate their carbon-intensive operations to other countries.”

These businesses will export their products back to the European Union and the United States, resulting in so-called carbon leakage — emissions shift from one country to another while global emissions continue unabated.

Trade impacts of carbon intensity

To prevent carbon leakage and protect their industries, the European Union recently introduced the Carbon Border Adjustment Mechanism (CBAM), by which a carbon price will be imposed on certain imports to equalise the carbon tax of the importing and exporting countries.

According to De Ruyter, the United States is considering similar legislation. “This can be enormously costly for countries that cannot accelerate the decarbonisation of their economies,” he said.

Figures for 2022 compiled by Our World in Data show that South Africa is the world’s 12^th biggest energy consumer in terms of kilowatt-hours used per dollar GDP. Shockingly, South Africa is the world’s second-largest carbon emitter per unit of energy produced. About a third of our carbon emissions are linked to our exports.

De Ruyter shared the results of a South African Reserve Bank analysis that concluded the CBAM could cost South Africa 350 000 jobs and reduce our GDP by 0.9% by 2050. The CBAM currently only applies to specific sectors. Should similar measures be adopted by all countries over all industries, South African job losses could reach nearly 4 million by 2050, with a GDP reduction of 9.3%.

Fortunately, agriculture is not currently covered by the European CBAM or similar mechanisms in the United States and the United Kingdom. This may change as countries struggle to meet climate commitments — our export-based fruit industries must be prepared.