The European Union’s Carbon Border Adjustment Mechanism (CBAM) entered a new phase on January 1, moving from a reporting and data gathering exercise to a system that now imposes a financial liability on imports of certain carbon-intensive products entering the European Union (EU), says Chris Yelland, Managing Director of EE Business Intelligence.
It should be noted that the financial liability of CBAM applies to importers of defined products into the EU rather than directly to producers in South Africa. While much attention has focused on compliance requirements and administrative obligations, the bigger story for South African business lies elsewhere. The real significance of CBAM is that it is reshaping the relationship between trade, industrial competitiveness and decarbonisation.
For South Africa’s export-oriented industries, the mechanism signals a future in which carbon intensity may increasingly influence market access alongside price, quality and reliability. Most importantly, future CBAM developments could place Eskom’s carbon-intensive electricity supply directly into the competitiveness equation for South African exporters.
CBAM was introduced to address “carbon leakage” – the risk that industrial production could move from Europe to countries with less stringent climate policies.
The mechanism effectively places a carbon price on imports equivalent to that faced by producers operating under the EU Emissions Trading System (EU ETS). It is based on the carbon emissions embedded in products and allows deductions for carbon prices already paid in the country of origin.
For exporters, the practical implication is straightforward: the lower the carbon intensity of production, the lower the potential CBAM liability.
South Africa’s current exposure remains limited
CBAM currently covers six sectors: iron and steel, aluminium, cement, fertiliser, electricity and hydrogen. Of these, only iron and steel and aluminium products are exported in significant volumes from South Africa to the EU.
According to figures presented by the European Commission, products currently covered by CBAM represented approximately 6% of South Africa’s exports to the EU in 2024. Iron and steel accounted for roughly 3.3% of exports to the bloc while aluminium represented about 2.8%.
Furthermore, only direct (Scope 1) emissions in the production of primary iron and steel and aluminium products are currently considered. Indirect (Scope 2) emissions associated with electricity consumption are not counted.
As a result, South Africa’s immediate exposure remains relatively limited. However, the longer-term significance of CBAM lies not in the value of exports currently affected but in how the mechanism may evolve and influence future investment, procurement and industrial location decisions.
Downstream products could be next
One of the most significant proposed changes to CBAM is the extension of its scope beyond the six primary materials currently covered.
In December 2025, the European Commission proposed adding approximately 180 downstream product categories containing significant iron, steel or aluminium content. These include machinery, fabricated metal products, vehicle components, construction equipment, electrical equipment, engines, motors and a range of industrial products.
Without extending CBAM downstream, European manufacturers could find themselves at a competitive disadvantage against imported products made using carbon-intensive materials.
For South Africa, this matters because the country is already a significant exporter of several affected downstream products to the EU. If adopted, the extension would move CBAM beyond basic commodities and deeper into manufacturing value chains.
The proposal remains under consideration but it provides a clear indication that CBAM is likely to expand rather than contract over time.
The carbon tax dilemma
South Africa faces another challenge in the form of its comparatively low carbon tax.
CBAM allows importers to deduct carbon costs already paid in the country where products are manufactured. Research by the Presidential Climate Commission indicates effective carbon prices in South Africa of between US$0.30/t CO₂e and US$2.60/t CO₂e compared with a global average of about US$6/t CO₂e and EU carbon prices that have frequently exceeded US$60/t CO₂e.
As a result, South African exporters are likely to receive only limited relief through CBAM’s deduction mechanism, reigniting debate about the future trajectory of domestic carbon pricing.
The indirect emissions threat
The most important issue for South Africa, however, may not be carbon taxation or downstream expansion. It may be the future treatment of indirect emissions.
During the CBAM transitional phase, importers were required to report direct and indirect emissions. Under the definitive regime that commenced in January 2026, indirect emissions currently attract a financial liability only for cement and fertiliser products.
For iron and steel, aluminium and hydrogen products, only direct emissions are presently included in the CBAM calculation.
This exemption is highly significant for South Africa. The country’s electricity system remains heavily dependent on coal-fired generation and has a carbon intensity substantially higher than many competing export jurisdictions. In sectors such as aluminium smelting, ferro-alloys, steelmaking and metal fabrication, electricity-related emissions can account for a substantial proportion of total production emissions.
As a result, the current exclusion of indirect emissions effectively shields South African exporters from a potentially much larger carbon cost burden.
That protection may prove temporary. The European Commission has indicated that a further review of CBAM will take place in 2027. Among the issues under consideration is whether indirect emissions should be extended to the remaining CBAM sectors, including iron and steel, aluminium and hydrogen.
If such a change is adopted, the implications for South Africa could be profound. The carbon intensity of Eskom’s electricity supply would become directly relevant to the competitiveness of exported products.
Companies dependent on grid electricity could face materially higher carbon costs than competitors supplied by lower-carbon electricity systems. For many South African exporters, this could become the defining CBAM issue.
Implications for the electricity sector
The prospect of future indirect emissions liability is already influencing corporate strategy.
Across the mining, metals and manufacturing sectors, companies are increasingly pursuing renewable-energy procurement, wheeling arrangements, private generation projects and battery storage investments. While these initiatives are often justified on the basis of energy security and cost management, they are also becoming important tools for managing future carbon exposure.
More broadly, CBAM reinforces a trend that is becoming increasingly evident across global markets: decarbonisation is evolving from an environmental issue into a core business and competitiveness issue.
The future competitiveness of South African exports will increasingly be influenced by progress in electricity sector reform, renewable energy deployment, industrial decarbonisation and carbon accounting systems.
Beyond compliance
Much of the discussion around CBAM has focused on compliance obligations and reporting requirements. These issues are important but they are not the central strategic question.
The more important question is how global trade is changing. For South Africa, the immediate exposure may be concentrated in iron and steel and aluminium exports. However, the combination of downstream expansion and the potential future inclusion of indirect emissions could substantially broaden its impact.
The greatest long-term risk may therefore lie not in today’s CBAM rules but in the possibility that the carbon intensity of Eskom’s electricity supply becomes directly embedded in the cost of exporting South African products to international markets.
For business leaders, the challenge is no longer whether carbon constraints will influence competitiveness but how quickly companies can adapt to a trading environment in which carbon intensity increasingly matters.
