Carbon taxation in South Africa and the risks of carbon border adjustment mechanisms

South Africa has a high carbon intensity and a very low effective carbon price. This exposes the country to adverse economic shocks from carbon border adjustment mechanisms (CBAM) and changing consumer sentiments. Current impact assessments of the European Unions CBAM suggest small initial impacts, but these are likely to increase as (1) more goods and services become subject to the adjustment, (2) more countries implement such mechanisms, and (3) consumer choices shift away from carbon- intensive products. South Africa needs a higher, more predictable, and effective carbon price to drive the green transition and avoid revenue leakage. The additional government revenues can promote clean investment and reduce some of the negative impacts associated with carbon taxation. Economic and financial frictions to transitioning should be reduced by using a combination of price and non-price instruments. The focus of policy should be on how to position South Africa as a green production destination relative to other countries and consequently, reduce the exposure to CBAMs and changing consumer sentiments.