The EU, by increasing the trade-competitiveness benefits of decarbonisation, has reinforced the economic rationale for South Africa’s energy reforms
This economic note was published in Business Day on 20 October 2026
South Africa has spent years worrying about the damage that a slow-growing, carbon-intensive economy is doing to its international competitiveness. Now the European Union has put a price on one of our biggest weaknesses.
Since 1 January this year, the EU’s Carbon Border Adjustment Mechanism (CBAM) has entered its definitive phase, requiring importers of specified goods to pay for the carbon emissions embedded in those products.
Our new study, recently published as an Economics Research Southern Africa (ERSA) working paper, suggests that its impact could be severe, particularly for two South African industries with significant EU exports – iron and steel (about R33,6bn worth of export a year), and aluminium (R12bn).
The study warns about the risks facing these industries and highlights the importance of getting South Africa’s energy and industrial policies to work in sync to help these exporters become more competitive. This means treating electricity-sector decarbonisation as both a climate and trade-competitiveness issue – something that will be crucial if border carbon adjustment mechanisms become widespread internationally, as seems likely.
For the iron, steel and aluminium products we study, the CBAM covers only direct emissions at this stage – those produced by the factory or production process itself. It does not yet cover indirect emissions from the electricity used in production. This distinction is particularly important for South Africa, where much of the electricity supply comes from ‘dirty’ coal-fired power stations.
Extending the CBAM to cover indirect emissions, as is currently under consideration, would place South African producers at an even greater disadvantage relative to producers in countries that use a higher share of clean, renewable energy.
The first noteworthy feature of our study is that the emissions associated with apparently similar products can vary enormously within a sector. So, while most older studies use sector averages to estimate CBAM costs per country, our paper uses much more granular product-level trade data. Even these differences can be understated, as emissions can vary substantially between individual firms producing similar products.
Second, we find that average total emissions expressed as tonnes of carbon dioxide equivalent per tonne of output (tCO₂e/t) vary considerably across countries, ranging from 0.6 (Switzerland) to 5 (India) for iron and steel, and from 0.5 (Switzerland) to 16.7 (South Africa) for aluminium.
The reason South Africa’s aluminium sector has the highest average total emissions intensity (direct and indirect emissions) of the 16 major countries sampled is mainly because production uses enormous amounts of electricity — and South Africa still generates much of its electricity from coal. The same holds for other high-emitting, middle-income economies including India, China, and Russia. In contrast, advanced economies like Switzerland, Norway and Iceland make more extensive use of renewable energy.
Unsurprisingly, in our iron and steel simulations, South Africa, India, Russia and Ukraine are among the countries facing the largest risk of reductions in their EU exports. But it is not simply because these countries are ‘dirty’ producers – the interaction between emissions intensity and the import price of the product is also important. Given that the carbon charge is a fixed cost per tonne of emissions, it represents a smaller percentage of the price of a high-value product than of a cheaper one. So, a relatively cheap product with high embedded emissions (a typical emerging-country combination) could face a larger percentage increase in its effective price in the EU market.
Previous studies have largely overlooked that products with identical embedded emissions can face different percentage price increases, with larger increases for lower-priced imports and, consequently, sharper reductions in EU import demand for those products. It suggests that the CBAM could impose larger adjustment costs on some emerging economies than justified solely by the carbon content of their imports. But it also implies there is another route to reducing exposure: moving towards higher-value products.
The implications for South Africa are striking. At an assumed carbon price of €80 tCO₂e, our model suggests that the average EU import price of South African aluminium would rise by about 32% and that of iron and steel by about 31%, when both direct and indirect emissions are included. These price effects are the highest of all the counties surveyed.
The simulated consequences for trade are even more dramatic. For South African iron and steel, our model estimates a roughly 48% decline in EU imports when only direct emissions are considered, rising to about 76% when indirect emissions are included.
For aluminium, the corresponding decline rises from about 7% to nearly 75%. These figures combine both the direct EU import-demand reduction and the anticipated trade-diversion effects (when importers switch between suppliers). Overall, the paper finds that the CBAM hurts exporters mainly because higher effective prices reduce EU demand, although trade diversion adds to the decline in South Africa’s case.
These findings should alarm policymakers. But as the most severe results for South Africa arise when indirect emissions are included, our findings are useful as a warning about the vulnerability of exporters to future changes in the system.
As such, the CBAM provides an important industrial-policy signal. Clearly, it would be a mistake to regard it simply as a new trade tax or a climate-policy problem. Responding to this serious threat is going to require our industrial and energy policies to work together to increase our export competitiveness.
The potential losses in iron, steel and aluminium – and the investments required to change to cleaner production technologies – are sufficiently large that government cannot reasonably leave exposed firms to absorb the additional costs and hope that they will decarbonise themselves. Government therefore has a role to play in easing the transition by, for instance, recycling carbon-tax revenue to incentivise decarbonisation, introducing investment tax credits, concessional finance or recapitalisation funds, and supporting reliable systems for measuring, reporting and independently verifying emissions.
Since South African firms’ international competitiveness will likely increasingly depend on the carbon intensity of our electricity system, we argue in favour of expanding low-carbon electricity generation, modernising the electricity network, improving grid reliability, and allowing companies to procure renewable electricity through power-purchase agreements.
So, is the CBAM a disaster-in-the-making for key South African exporters?
Certainly, there is no escaping that our carbon-intensive production is becoming a competitive disadvantage in an increasingly carbon-conscious world. But the CBAM also provides an opportunity in that it reinforces the economic rationale for South Africa’s energy reforms by increasing the trade-competitiveness benefits of decarbonisation.
Viewed this way, the EU has created a new reason for South Africa to fix problems it needed to fix anyway. We can allow the CBAM to dictate our competitive disadvantage, or we can use the pressure to accelerate investment in both cleaner production methods and cleaner forms of electricity.
